LIVE MARKETS-Risk-on has been sailing along, but might investors soon need a bigger boat?

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RISK-ON HAS BEEN SAILING ALONG, BUT MIGHT INVESTORS SOON NEED A BIGGER BOAT?

As Bob Doll, chief investment officer at Crossmark Global Investments, sees it, the abundant liquidity that has helped float both risk assets and momentum plays will continue to be underpinned for some time by accommodative monetary and fiscal policies.

However, he cautions that the sharp precious metals selloff, continued cryptocurrency instability, and even recent volatility in AI stocks are reminders that investment strategy is best structured on fundamentals rather than liquidity.

According to Doll, there is no imminent catalyst to end the liquidity-driven risk-on cruise, but he says that pervasive investor complacency and elevated valuations caution against full-on pro-risk positioning.

"Potential threats to the rampant optimism include a pronounced rise in global bond yields, worse-than-expected U.S. and G-7 inflation, a significant hiccup in the AI theme, an adverse credit event, or a material increase in the geopolitical risk premia," writes Doll in his latest "Deliberations."

Although he says that financial conditions remain highly accommodative for risk assets, he argues that conditions are typically only this easy during or shortly after periods of very weak or weakening global earnings growth momentum.

Doll's bottom line is that the top-down macro environment favors further outperformance of equities vs. bonds. "But equity outperformance will be more muted than last year, and the odds of a correction are significant."

(Terence Gabriel)

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