Investment Strategy

How to use alternatives to weather policy uncertainty

The significant reversals in U.S. trade policy have rattled the financial markets so far in April. Concerned with the economic impacts of the initial reciprocal tariff announcement, global stock indexes declined sharply, and the stock market’s implied volatility,¹ as well as credit spreads, surged notably.

Even perceived safe haven assets, including U.S. Treasury bonds and the U.S. dollar, were spooked by the announced tariffs. The 10-year Treasury yield rose to over 4.5%, and the U.S. dollar depreciated against other major currencies over multiple trading days, indicating selling across U.S. assets. Although the markets showed a sense of relief after a subsequent pause and some exemption of the reciprocal tariffs, the prospect of materially higher tariffs relative to past decades and a lack of clarity around future paths continues to pose challenges to global trade, company earnings, and the financial markets.

We believe higher tariffs can increase the price for imported goods. The resulting higher inflation and lower company profitability have the potential to further strain lower-income consumers and smaller companies, who are already pressured as indicated in their rising loan delinquencies over recent quarters (Chart 1).

Chart 1. Both consumer and business loan delinquencies have increased in recent quartersSources: The Federal Reserve and Wells Fargo Investment Institute. Data as of December 31, 2024.

For private equity, elevated policy uncertainty and public price volatility can delay any recovery in the already slowed pace in exiting existing holdings and realizing returns. Venture capital, in particular, which has seen multiple quarters of flat-to-negative returns, relies heavily on public listings to return capital to investors.

According to Pitchbook, an unprecedented 64% of unicorn² startups raised their first venture capital funding over seven years ago, with total unicorn valuation swelling to $3 trillion by the end of 2024 (Chart 2). Many unicorns had to pause their public listing plans in light of policy uncertainties. We believe the combination of lower valuations, a lack of economic clarity, and cautious corporate leaders could continue to dampen exit and dealmaking activities across public listings and mergers and acquisitions.

Chart 2. The list of unicorn startups has expanded significantly in recent yearsSources: Pitchbook and Wells Fargo Investment Institute. Data as of December 31, 2024.

We believe investors should focus on portfolio diversification, income generation, and consider alternative strategies that seek to capitalize on market dislocations and the sluggish exit environment:

• Hedge funds have the potential to add diversification to traditional stock/bond portfolios. Many strategies, such as directional equity and long/short credit, offer limited market exposure while focusing on security-specific trading opportunities.
• Infrastructure and private debt have the potential to generate attractive yields. Moreover, infrastructure can offer inflation-protected returns that are also less sensitive to economic softness. For private debt, we believe investors should focus on direct loans to higher-quality upper middle market companies, which have more resources to navigate changes in economic conditions.
• Secondaries and distressed credit strategies are uniquely positioned for the current environment, in our view. Secondaries can source quality deals and negotiate pricing discounts given the significant needs for liquidity and distributions by fund managers and investors alike, whereas distressed credit strategies can capitalize on opportunities arising in market dislocations when over-levered companies encounter financial stress.
• Qualified investors should only use alternative investments for long-term investing. Alternative investments are not traded on public markets and only allow limited or no liquidity. Additionally, alternative-investment funds may only disclose limited information of underlying holdings, and some utilize leverage, which may result in amplified losses in the event of market drawdowns.

Alternative investments, such as hedge funds, private equity, private debt and private real estate funds are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.

¹ Represented by the VIX index.

² Unicorns are referred to private startup companies with a valuation at or above $1 billion.

First-quarter earnings likely grew at a solid pace

Equity markets have been extremely volatile to start the year as investors assess the impact of the Trump administration’s trade policy on the economy and earnings. However, first-quarter earnings likely will show no material impact from tariffs. Bloomberg consensus estimates call for approximately 4% in revenue growth and 7% in earnings growth for the S&P 500 Index.

Six of eleven sectors are expected to post earnings growth with the Health Care, Information Technology, and Utilities sectors leading the way. The Energy sector likely will be the biggest laggard, as oil prices sank early in the year. Company outlooks about capital spending and consumer trends for the remainder of the year will be key.

The banks started off on a high note with most companies beating expectations and reaffirming guidance. Technology-related companies report later in the month, and we believe investors will look for guidance on artificial intelligence capital expenditures. In addition, we will want to know how they are going to navigate the different tariffs and if they are making wholesale changes or taking a wait-and-see approach.

In response to the policy uncertainty and expectations for weaker economic growth, we recently lowered our 2025 S&P 500 Index earnings target to $260 from $275, which implies about a 5% growth rate. In this environment, our guidance prioritizes quality and profitability. We favor U.S. equities over international, and among the U.S. markets, we favor U.S. Large and Mid Cap Equities over low-quality U.S. Small Cap Equities.

Bloomberg consensus expects solid S&P 500 Index earnings growth in the first quarterSources: Bloomberg and Wells Fargo Investment Institute. Earnings-per-share (EPS) growth measures the earnings growth of the S&P 500 Index and each of its sectors, as of April 14, 2025, versus first-quarter 2024 EPS.

10-year U.S. Treasury yield — A look back

10-year U.S. Treasury yields have experienced significant volatility since we first established a year-end 2025 target over 12 months ago. In our view, there are three clear and distinct periods over this timeframe.

10-Year U.S. Treasury yield vs. year-end 2025 midpoint targetSources: Bloomberg and Wells Fargo Investment Institute as of April 15, 2025. Past performance is no guarantee of future results. Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

• 10-year Treasury yields continued to trend lower through mid-September 2024 given economic growth concerns while actual inflation readings continued to fall. The Federal Reserve (Fed) remained on a pause for much of 2024, until it cut interest rates by 0.50% on September 18, 2024.
• Although the Fed continued to cut its benchmark interest rate, long-term yields moved higher through the fall of 2024. The results of the 2024 elections reinforced the economy's quickening pace while forward-looking inflation expectations remained fairly anchored. During this period, 10-year Treasury yields peaked at almost 4.79% on January 14, 2025.
• Year to date, 10-year Treasury yields have been on a volatile path, and the trend has tilted mostly to the downside. As new policies, especially around tariffs, began to get enacted, market expectations around economic growth began to turn more pessimistic. In addition, near-term inflation expectations started to increase.

On April 4, 2025, we reduced our year-end 2025 interest-rate targets across the board by 50 basis points (0.50%) as concerns of an economic slowdown continued to mount, which, in our view, would give the Fed some leeway to cut interest rates. Then on April 9, 2025, President Trump announced a 90-day pause on most reciprocal tariffs, which we believe prompted bond markets to sell off.

Our current interest-rate targets remain susceptible to change. If economic data continue to show growth holding up, while short-term inflation expectations remain elevated around tariff uncertainty, the Fed may be more inclined to watch and wait on further rate cuts. We favor maintaining a neutral allocation toward the intermediate portion of the yield curve (three- to seven-year maturities), which provides an attractive yield, in our view, and remains less sensitive should interest rates increase further above our targets.

Gold keeps shining amid geopolitical uncertainties

Following a brief pullback, gold resumed its rally with prices achieving a new all-time high of $3,237 per troy ounce on April 11, even surpassing our new 2025 year-end target of $3,000 – $3,200 per troy ounce. So far, a host of fundamental and macro tailwinds have fueled gold’s rally, such as ongoing purchases by central banks, U.S. dollar weakness, and heightened geopolitical tensions.

Recently, however, stronger exchange-traded fund (ETF) flows among North American investors have become a strong driver of performance. As seen in the chart, ETF flows during February and March were especially strong and the highest since March 2022. Notably, the higher flows into gold coincided with weaker performance among risk assets, such as U.S. equities, as well as a weaker U.S. dollar. In a sense, it marked a shift toward perceived safe-haven assets like gold as uncertainties around tariffs and economic growth arose.

We remain favorable on the Precious Metals sector as a potential hedge against concerns around U.S. economic conditions and geopolitics. Gold has experienced a rally so far, but it is important to note that it has not been a straight shot higher, and short-term pullbacks in prices have been common. We believe the U.S. dollar - the main competitor to gold - is oversold and that gold sentiment appears correspondingly excessive, which leads us to believe that gold could soon need a breather. Therefore, for those looking to add exposure, we emphasize patience and view pullbacks as attractive buying opportunities, which may provide a more attractive return for the level of risk being taken.

North American gold exchange-traded fund (ETF) flows highest since 2022Sources: World Gold Council, Bloomberg, and Wells Fargo Investment Institute. Monthly data is from January 2022 – March 2025. Past performance is no guarantee of future results.

Cash Alternatives and Fixed Income

Equities

Real Assets

Alternative Investments**

Source: Wells Fargo Investment Institute, April 21, 2025.

*Tactical horizon is 6-18 months

**Alternative investments are not appropriate for all investors. They are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. Please see end of report for important definitions and disclosures.

Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Investments in gold and gold-related investments tend to be more volatile than investments in traditional equity or debt securities. Such investments increase their vulnerability to international economic, monetary and political developments. They are also exposed to the risk of severe price fluctuations in the price of gold bullion. Investments in currencies involve certain risks, including credit risk, interest rate fluctuations, fluctuations in currency exchange rates, derivative investment risk and the effect of political and economic conditions. The use of currency transactions to seek to achieve gains in the portfolio could result in significant losses to the portfolio which exceeds the amount invested in the currency instruments. In addition, exchange rate movement between the U.S. dollar and foreign currencies may cause the value of the fund’s investments to decline.

Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.

Exchange-traded funds are subject to risks similar to those of stocks. Investment returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed, or sold, may be worth more or less than their original cost. ETFs seek investment results that, before expenses, generally correspond to the price and yield of a particular index. There is no assurance that the price and yield performance of the index can be fully matched.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Communication Services companies are vulnerable to their products and services becoming outdated because of technological advancement and the innovation of competitors. Companies in the Communication Services sector may also be affected by rapid technology changes, pricing competition, large equipment upgrades, substantial capital requirements and government regulation and approval of products and services. In addition, companies within the industry may invest heavily in research and development which is not guaranteed to lead to successful implementation of the proposed product. Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players, reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment. Consumer Staples industries can be significantly affected by competitive pricing particularly with respect to the growth of low-cost emerging market production, government regulation, the performance of the overall economy, interest rates, and consumer confidence. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. Some of the risks associated with investment in the Health Care sector include competition on branded products, sales erosion due to cheaper alternatives, research and development risk, government regulations and government approval of products anticipated to enter the market. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance. Materials industries can be significantly affected by the volatility of commodity prices, the exchange rate between foreign currency and the dollar, export/import concerns, worldwide competition, procurement and manufacturing and cost containment issues. Real estate investments have special risks, including possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market. Utilities are sensitive to changes in interest rates, and the securities within the sector can be volatile and may underperform in a slow economy.

Alternative investments, such as hedge funds, private equity/private debt and private real estate funds, are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents should be carefully reviewed prior to investing.

Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage which can magnify volatility and may entail other risks such as market, interest rate, credit, counterparty and management risks. Arbitrage strategies expose a fund to the risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund.

An index is unmanaged and not available for direct investment.

Bloomberg Commodity Index is comprised of 22 exchange-traded futures on physical commodities and represents 20 commodities weighted to account for economic significance and market liquidity.

CBOE Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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