Five charts that matter for investors

The demise of King Dollar? 

As fears of a US economic recession grow, recent price moves in the bond and currency markets have been unusual. Indeed, the search for safe havens in the current macroeconomic and geopolitical storms typically causes US government bond yields to drop, while the US dollar appreciates. In April, however, this correlation broke down with the dollar plummeting while yields skyrocketed (see chart). 

This is something that is usually seen in emerging markets, not in the world’s largest economy. The market reaction – which is similar to that experienced in the UK after Liz Truss’ “mini-budget” debacle – suggests that a confidence crisis in the American administration is pushing investors to liquidate US assets. 

The decoupling between yields and currency is unlikely to last for long, as monetary or political intervention is very likely and there are few alternatives to King Dollar (see below). That said, it should serve as a strong reminder to investors that i) correlations aren’t fixed, ii) they tend to break at the worst possible time (such as when investors need diversification the most), and iii) it’s never good to have all your eggs in one basket (such as the US). 

US currency and bond yields decouple 

The trend in the US dollar index and Treasury yields suddenly violently decoupled in April as the American administration unveiled many new tariffs   

Finding a new home 

For all the talk about the “end of the US dollar”, the reality is that there is no real alternative for the time being. The European Union, China and Japan are running significant current account surpluses. In other words, their national (both public and private) savings far exceed investments. As such, they need to invest this ‘excess capital’. 

Meanwhile, the US has a current account deficit that tops $1 trillion. This is 13-times larger than in the UK, the country with second biggest deficit in our chart. As such, the US is the only major market that offers a possible home for all these euros, yuan and yen. However, that could change. 

Indeed, whether it’s German fiscal expansion or China’s latest stimulus measures, the trend is for excess savings to be redirected domestically. This could cut demand for international – and therefore US – assets. The likely consequence? A still relevant, but lower, US dollar. 

America’s current account deficit dwarfs others 

The trend in the US dollar index and Treasury yields violently decoupled in April, as the American administration unveiled a barrage of trade tariffs   

It’s not all bad news 

The recent US dollar weakness could  be a red flag for investors. That said, a weaker currency has its perks. Two of main benefits are the gains in trade competitiveness and the tailwind to earnings, in the form of currency translation.   

For example, S&P 500 companies generate about 40% of their revenues outside the US (see pie chart). While this might not be a statistic to publicise much, when a global trade war is raging, it still matters. Of course, a weaker currency may compound inflationary pressures. However, taking a glass-half-full view, this could also be a significant boost for some companies.  

Here, investors may want to focus on services companies (no impact from tariffs), with strong balance sheets (no impact from higher yields) and sizeable overseas exposure (tailwind from a weaker US dollar). Companies exhibiting these characteristics tend to be over-represented in the software industry. 

The clash of the data 

Rarely has the discrepancy between what the economic numbers tell us and what transpires from sentiment been so large. This hard versus soft data disconnect is unusual, but not unheard of. Indeed, similar disconnects were seen in 2023 and 2024 (see chart).

One simple explanation is that sentiment, whether of the investor, consumer or business variety, quickly catches up with the most recent headlines. Meanwhile, the real economy has much more inertia, so is slower to respond.

The good news is that, usually, this disconnect is resolved as the soft data catches up with reality. In plain English: more often than not, things turn out to be better than initially feared. It remains to be seen if this will apply to in the current episode: the changes being seen in 2025 could be significant enough to alter the course of the global economy. But even if tomorrow is worse than yesterday, it most likely won’t be the as terrible as people expect.

The clash of the hard and soft data

The difference between forward-looking US business sentiment surprise indexes (positive reading is a better one than expected, negative reading, worse than  expected) and that between whether the actual economic data is beating or underperforming forecasts, has widened sharply in 2025  

No broad-based support from earnings 

Analyst consensus now expects S&P 500 companies to generate about $266 in earnings per share for 2025, down from almost $280 nine months ago. This worrying trend in earnings revisions is worth watching, as valuations alone won’t be able to provide much upside over the medium term. 

In line with our view that this year “beta is expensive, but alpha is cheap”, there is much divergence at the sector level. Not all US equity sectors have seen negative earnings revision in the past nine months (see chart). Earnings forecasts for communication services, financials and technology have moved higher. On the other hand, the energy, materials and industrials sectors have been hardest hit by lowered expectations.  

With so much in flux at the moment and with a very fluid news flow, the picture might be very different in a few months. That said, if the trend persists: 2025 earnings expectations will be weaker than seen at the end of last year, and dispersion between sectors will likely continue.  

Weaker EPS forecasts 

The change in earnings per share expectations for the S&P 500 and US equity sectors over the past nine months