Key Takeaways
- • Manulife Investment Management's Multi-Asset Solutions team argues that three risks—government spending, inflation, and elevated valuations—warrant greater use of liquid alternatives in portfolios.
- • The Congressional Budget Office projects U.S. federal spending of $7.02 trillion in 2025 (23.3% of GDP), rising to nearly $11 trillion by 2035, with the One Big Beautiful Bill Act expected to add $3.4 trillion to deficits by 2034.
- • The forward 12-month P/E ratio for the S&P 500 reached 22.5 as of September 12, 2025, approaching the 24.1 peak of December 1999, while investment grade and high yield credit spreads sit near their tightest levels since the late 1990s.
- • The article contends core CPI at 3.1% and a shift toward monetary and fiscal stimulus mark a structurally higher inflation regime, during which equities and bonds can decline together.
- • Liquid alternatives, including long/short equity, market neutral, and merger arbitrage strategies, are presented as a diversification tool to reduce equity and interest rate exposure and limit drawdowns.
Summary
Manulife Investment Management's Multi-Asset Solutions team, writing under the John Hancock Investments banner, notes that 2025 has been strong for both equities and bonds, with stocks rallying since April and bonds delivering mid-single-digit returns year to date. The authors nonetheless identify three concerns likely to shape markets in the coming months: government spending, inflation, and valuations.
On spending, the Congressional Budget Office projects U.S. government outlays of $7.02 trillion in 2025, or 23.3% of GDP, climbing to nearly $11 trillion by 2035. The One Big Beautiful Bill Act, signed by the Trump administration on July 4, is expected to add $3.4 trillion to deficits by 2034. The debt-to-GDP ratio now exceeds 120%, above the World War II peak. The authors warn that heavier issuance and soft demand could push yields higher and depress existing bond values, a dynamic already visible in rising longer-term U.S. Treasury yields. If it persists, investors may reconsider the role of bonds in diversified portfolios.
On inflation, the article argues that the postpandemic period has introduced a new regime in which inflation risks are structurally higher than the sub-2% environment investors assumed for over a decade. Cited drivers include monetary easing alongside accelerating fiscal spending, a Federal Reserve preparing to pivot toward stimulus with inflation already above its 2.0% target, and core CPI at 3.1%. Deglobalization, tariffs, reshoring, AI infrastructure buildout, and higher defense spending are also described as inflationary. The authors note that equities and bonds fell together during 2021–2022, when global equities dropped over 26% and global bonds over 22%, citing the MSCI World Index and Bloomberg Aggregate Bond Index as of September 12, 2025.
On valuations, the authors state that the S&P 500's forward 12-month P/E of 22.5 as of September 12 is edging toward the 24.1 peak of December 1999. They add that investment grade and high yield credit spreads sit near their tightest levels since the late 1990s, limiting room for further gains even if yields remain attractive. The article cautions that valuation is not a reliable timing tool but that elevated multiples reduce the potential for capital appreciation.
From these concerns the article draws its recommendation: liquid alternatives, which apply hedge fund-like techniques within the accessibility and liquidity of mutual funds and ETFs. The authors say these strategies are designed to reduce equity and interest rate exposure, may be less sensitive to rising rates, inflation, and elevated valuations, and offer potentially uncorrelated returns. They advise maintaining diversified exposure across alternative strategies such as long/short equity, market neutral, and merger arbitrage, since their characteristics vary relative to each other and over time. The piece is labeled as informational and carries standard disclosures that past performance does not guarantee future results and that diversification does not eliminate the risk of loss.
On spending, the Congressional Budget Office projects U.S. government outlays of $7.02 trillion in 2025, or 23.3% of GDP, climbing to nearly $11 trillion by 2035. The One Big Beautiful Bill Act, signed by the Trump administration on July 4, is expected to add $3.4 trillion to deficits by 2034. The debt-to-GDP ratio now exceeds 120%, above the World War II peak. The authors warn that heavier issuance and soft demand could push yields higher and depress existing bond values, a dynamic already visible in rising longer-term U.S. Treasury yields. If it persists, investors may reconsider the role of bonds in diversified portfolios.
On inflation, the article argues that the postpandemic period has introduced a new regime in which inflation risks are structurally higher than the sub-2% environment investors assumed for over a decade. Cited drivers include monetary easing alongside accelerating fiscal spending, a Federal Reserve preparing to pivot toward stimulus with inflation already above its 2.0% target, and core CPI at 3.1%. Deglobalization, tariffs, reshoring, AI infrastructure buildout, and higher defense spending are also described as inflationary. The authors note that equities and bonds fell together during 2021–2022, when global equities dropped over 26% and global bonds over 22%, citing the MSCI World Index and Bloomberg Aggregate Bond Index as of September 12, 2025.
On valuations, the authors state that the S&P 500's forward 12-month P/E of 22.5 as of September 12 is edging toward the 24.1 peak of December 1999. They add that investment grade and high yield credit spreads sit near their tightest levels since the late 1990s, limiting room for further gains even if yields remain attractive. The article cautions that valuation is not a reliable timing tool but that elevated multiples reduce the potential for capital appreciation.
From these concerns the article draws its recommendation: liquid alternatives, which apply hedge fund-like techniques within the accessibility and liquidity of mutual funds and ETFs. The authors say these strategies are designed to reduce equity and interest rate exposure, may be less sensitive to rising rates, inflation, and elevated valuations, and offer potentially uncorrelated returns. They advise maintaining diversified exposure across alternative strategies such as long/short equity, market neutral, and merger arbitrage, since their characteristics vary relative to each other and over time. The piece is labeled as informational and carries standard disclosures that past performance does not guarantee future results and that diversification does not eliminate the risk of loss.
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