Asset Allocation Under Rising Yields, Inflation, and Dollar Weakness

A Six-Month Outlook as of September 2025

September 2025, By AlternativeSoft

Introduction

This paper evaluates the expected performance of major asset classes from Sep 2025 to the end of Feb 2026 under a macro environment of rising US long-term yields, accelerating inflation, a weaker US dollar, falling oil prices, and wider corporate credit spreads. The results highlight that gold and unhedged international equities are likely to perform well, while long-duration Treasuries are expected to experience significant losses. Hedge funds show a split outcome: systematic CTA strategies would thrive in persistent trends, while discretionary global macro funds could face challenges.

Market Dynamics and Expected Performance

Rising long-term yields directly harm long-duration Treasuries as higher discount rates reduce bond prices. Cash offers stability but fails to keep up with inflation, delivering negative real returns. Gold benefits from both elevated inflation and a weakening US dollar, which raises its value in non-USD terms. A depreciating dollar also supports unhedged international equities by boosting foreign earnings in dollar terms, although falling oil prices could weigh on certain sectors abroad.

US value and financial equities are mixed: banks initially benefit from higher rates, improving net interest margins, but tightening credit conditions and widening spreads increase default risk and weigh on earnings.

The broader S&P 500 index is expected to deliver a moderate return over the six-month horizon. Gains in value-oriented and internationally exposed sectors benefit from a weaker US dollar and falling oil prices. However, rising yields continue to pressure growth-oriented stocks, leaving the overall index only slightly positive despite supportive currency trends.

Hedge funds diverge: CTA funds, which follow systematic trend-based models, are well positioned to capture sustained moves in interest rates and inflation, while global macro funds may struggle as falling oil prices increase uncertainty in energy markets, making discretionary positioning more difficult and potentially leading to rapid reversals in trades.

The table below summarizes the expected six-month nominal returns for key asset classes, including the S&P 500, highlighting how different segments are likely to perform under this macroeconomic scenario.

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