Thomas Poullaouec, Head of Global Investment Solutions (Asia Pacific) and Portfolio Manager at T. Rowe Price, along with the T. Rowe Price Asia Investment Committee, released their latest views on global asset allocation. They pointed out that aside from the negative economic impact of a prolonged U.S. government shutdown, the lack of official data will pose ongoing challenges for the already pressured and data-dependent Federal Reserve. Additionally, the Fed's recent rate cuts have reignited market focus on small-cap stocks. However, inflation may keep interest rates high, and recent weakness in the job market could lead to slower growth, warranting a balanced view on small-caps.

The views noted that the Fed's first rate cut since pausing hikes late last year has increased market attention on the labor market. August data showed employment resumed growth, with the unemployment rate hitting a four-year high of 4.3%. Investors are closely watching September data, but its release will be delayed. Revisions last month showed a reduction of 911,000 jobs in employment growth between April 2024 and March 2025, increasing investor concerns and raising doubts about data reliability.

In the absence of official data, market data has become more critical. The ADP September report showed a loss of 32,000 jobs in the private sector, further deepening market worries about the labor market. In this context, with data releases taking longer, there is a higher likelihood of more concerning data emerging.

In recent years, expectations of rate cuts have repeatedly driven rallies in small-cap stocks, causing them to temporarily outperform large-caps, but unfortunately, these gains were not sustained. The Fed's recent rate cuts have renewed market focus on small-caps, which have outperformed large-caps by nearly 4% since their April lows, with most gains occurring in August. Although relative valuations remain attractive and small-cap earnings expectations have improved, inflation may keep interest rates high, and recent labor market weakness could lead to slower growth. Therefore, maintaining a balanced economic view may be appropriate.

Based on expectations of Fed rate cuts, increased M&A activity, and prospects for deregulation, T. Rowe Price has increased its allocation to U.S. small- and mid-cap stocks to neutral. This adjustment shifts T. Rowe Price's allocation to U.S. large-cap stocks (relative to U.S. small- and mid-caps) to neutral and raises the overall equity allocation to an overweight level. T. Rowe Price favors growth stocks (relative to value stocks) as the macro environment continues to favor the AI/tech sector, especially in the U.S. market.

T. Rowe Price maintains an underweight in bonds, as inflation and the financing needs for U.S. fiscal stimulus may keep pressure on interest rates, particularly at the long end. It remains underweight in long-term U.S. Treasuries, as the long end of the yield curve is more susceptible to upward pressure from the U.S. government's fiscal financing needs. Additionally, the allocation to cash is diluted to neutral to fund the allocation to U.S. small- and mid-cap stocks. Cash provides liquidity to seize opportunities arising from market dislocations.