Tightening not frightening

Investors should take modest profits from equities, lower-quality credit and duration while retaining long-term exposure to growth and using short-dated bonds to preserve flexibility.

• Equities have rallied since the unveiling of ChatGPT in November 2022, while the S&P 500’s Shiller CAPE ratio has reached 41x, a level historically associated with lower subsequent ten-year returns.
• Corporate fundamentals remain broadly healthy after the US second-quarter earnings season, with Microsoft and Alphabet reporting significant cloud-computing order backlogs.
• Credit compensation is limited: the Bloomberg US Liquid Investment Grade average spread was just 0.9% on 18 August, supporting a modest reduction in lower-quality credit exposure.
• Higher bond yields and persistent rate volatility make duration vulnerable to renewed inflation or policy uncertainty, while the fourth quarter could be unsettled by the Iran war, high oil prices, a reactive Federal Reserve and questions over AI returns.
• Short-dated bonds offer yields of 3.7% for US-dollar investors and 3.9% for sterling investors, both above inflation, while the S&P 500 recovered from the spring 2025 tariff announcements in barely two months.

Takeaway: Multi-asset investors should tighten portfolio risk incrementally rather than turn structurally bearish, reallocating part of equity, credit and duration gains into high-quality short-maturity bonds so they can preserve capital and re-enter equities after a deeper setback.