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After tapping the brakes, tech stocks remain in the fast lane. The S&P 500 Index snapped a four-day losing streak on Friday and closed higher for the week, buoyed by Federal Reserve Chair Jerome Powell's dovish speech at the Fed's annual Jackson Hole symposium. Tech- and growth-oriented sectors like communication services and information technology, which for most of the week had fallen sharply and driven the index lower, rebounded decisively following Powell's comments and continue to outperform for the year.
While the artificial intelligence (AI) trade is still a powerful force behind market bullishness, investors are reckoning with potentially bearish signals. The CEO and cofounder of OpenAI (creator of the generative AI tool ChatGPT) recently voiced concern about a potential AI bubble, with elevated valuations approaching levels seen during the dot.com era (Figure 1). And shares of one of today’s fastest-growing AI-related names tumbled into correction territory (down 10% or more from its most recent peak) on 19 August after a short seller report said the firm’s valuations looked indefensible.
Tiptoe through the tariffs. Concerns about the impact of higher tariffs on inflation and corporate earnings haven't gone away. Several consumer companies that reported second-quarter earnings last week confirmed that some prices would soon have to rise due to tariffs. As for tariff-fueled inflation more broadly, Powell's speech acknowledged "the effects of tariffs on consumer prices are now clearly visible" but implied the impact could be "relatively short lived." Meanwhile, further labor market weakening suggests the balance of risks has shifted from inflation to employment and "may warrant adjusting our policy stance."Even with a September rate cut likely on the way, investors still face the challenge of balancing optimism about the impacts of AI on corporate earnings with the potential downside risks of tariffs, inflation and economic slowing. We expect equity market volatility will persist, especially if this week’s release of the Personal Consumption Expenditures (PCE) Price Index for July reveals evidence of reaccelerating inflation. Core PCE is the Fed’s preferred inflation gauge and will be the focus of intense scrutiny, particularly in light of Powell’s Jackson Hole speech.
One idea to help smooth what could be a rocky road ahead for equities is to allocate some assets to select areas of fixed income, including municipal bonds, where we are seeing attractive investment opportunities.
Equities are balancing bullish and bearish factors, suggesting stock market volatility may remain elevated.
Wide spreads, a steep yield curve and high quality make municipal bonds one of our most favored asset classes.
Portfolio considerations
Municipal bond performance has lagged so far in 2025, largely due to unprecedented levels of supply. Through the end of July, muni issuance for 2025 was already at $333 billion, approaching the $381 billion average annual supply over the previous decade. The supply surge has caused municipal spreads to widen, with the ICE BofA U.S. Municipal Securities Index spread now in the 82nd percentile compared to its 10-year average. Although municipal bond total returns typically derive primarily from income, we believe today's wider spreads offer the potential for meaningful capital appreciation going forward.
Additionally, the municipal yield curve is quite steep (Figure 2), as intermediate and longer-dated yields have risen significantly. On a taxable-equivalent yield basis, the AAA municipal curve outyields the U.S. Treasury curve starting at the 2-year point. BBB rated municipals, the lowest investment grade tier, offer taxable-equivalent yields between 7.0% and 9.6%, beginning with the 10-year tenor. Over time, we expect longer-term yields to decline, providing a potential source of price appreciation.
Despite some negative headlines focusing on idiosyncratic concerns related to specific issuers, the broad muni market remains fundamentally sound: Tax collections are strong, rainy day funds are near all-time highs and revenue growth is robust. Moreover, credit rating upgrades have continued to outpace downgrades. The favorable quality profile for both investment grade and high yield municipals makes their taxable-equivalent yields all the more compelling: 8.1% for short duration (as measured by the ICE BofA 1-12 Year Broad High Yield Crossover Municipal Index) and 9.2% for long duration (ICE BofA U.S. Municipal High Yield Securities Index), as of 19 August. These yield levels are in the 81st and 74th percentile, respectively, over the past 10 years.
Wide spreads, a steep yield curve and high quality make municipal bonds one of our most favored asset classes, especially for those seeking to diversify portfolios amid ongoing uncertainty.
Nuveen's Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
- macro and asset class views that gain consensus among our investors
- insights from thematic "deep dive" discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
- guidance on how to turn our insights into action via regular commentary and communications
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Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk, active management risk, and growth stock risk; dividends are not guaranteed. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets.. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Credit risk refers to an issuer’s ability to make interest payments when due. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Below investment grade or high yield debt securities are subject to heightened credit risk, liquidity risk and potential for default. The issuer of a debt security may be able to repay principal prior to the security’s maturity, known as prepayment (call) risk, because of an improvement in its credit quality or falling interest rates. In this event, this principal may have to be reinvested in securities with lower interest rates than the original securities, reducing the potential for income.
This information should not replace an investor’s consultation with a financial professional regarding their tax situation. Nuveen is not a tax advisor. Investors should contact a tax professional regarding the appropriateness of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Nuveen, LLC provides investment services through its investment specialists.
Nuveen, LLC provides investment services through its investment specialists.
This information does not constitute investment research as defined under MiFID.
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