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Goldilocks and the Bears: No Way Around US Equities?

Spotlight October 2025

Banner ETF Investment Insights

Investors face a dilemma: downside risks loom, yet U.S. equities show signs of a “Goldilocks” environment — strong earnings, easing monetary policy, and resilient macro data[1]. After a weak first half of 2025, flows and performance have rebounded sharply over the past three months[2]. With fundamentals turning more constructive, U.S. equities may continue to play catch up. The key question now is how to position US exposure to balance risk and seize emerging opportunities.

Join our investment expert Jennifer Schmitz in this month’s Xtrackers Spotlight where we shine a light on a current investment topic for you and share insights into the latest trends in the ETF market.

Why May US Equities Be “just right” for Goldilocks?

1
Earnings Momentum Is Accelerating

The recent US earnings revisions have been unusually positive so late in the cycle and relatively broad-based, while most other regions’ estimates are more muted. This breadth has historically aligned with strong forward returns[3].

2
The Fed Has Pivoted

September’s rate cut marks a shift to accommodative policy, with markets expecting 4-5 more cuts over the next year. Historically, rate cuts amid solid growth boost equities by increasing liquidity and lowering discount rates[4]. 

 

3
Macro Backdrop Remains Resilient

Gross Domestic Product (GDP) growth is expected to accelerate slightly in 2026, supported by expanding ISM new orders and easing core inflation. This creates a “Goldilocks” environment[5].

4
Flows and Sentiment Are Turning Again

Institutional equity allocations are rising. U.S. equities remain underweight by 14% (but are down from 16% in August)[6]. While valuations are elevated (~22x forward P/E[7]), earnings upgrades and liquidity could support them.

Any pullbacks in autumn may therefore provide attractive entry points.

 

Regional Equities NNA (30-day rolling window, in € Mn) show a reacceleration in US equities flows since the summer after muted investor demand in H1

Source: Xtrackers by DWS. Based on ETFBook data and Xtrackers classification. As of 12/09/2025. 30-day rolling NNA: At any given point, you calculate the total net inflows or outflows for the past month (e.g., from September 1 to September 30). Each day, the window moves forward by one day. This smooths out short-term volatility and highlights underlying trends.

But What About the Bears?

Despite the favorable signals, many fundamental investors remain cautious and on the sidelines[6], pointing to concerns such as delayed tariff impacts, stretched valuations, potential tech disappointments, and high long-dated US yields. The U.S.’s >70% weight in MSCI World[8] and dollar weakness[9] also temper enthusiasm, especially for international investors. We believe the pressing question at hand is less about whether to allocate —but how to do so effectively.

So, which US Exposure to Choose?[10]

Let’s take a look at three of the most important themes and scenarios which may drive markets in the near term and the respective strategies to consider for each:

Scenario 1: Fed Pivot Trumps All Else

The Fed continues cutting and everything else remains largely unchanged (“goldilocks” scenario), supporting liquidity and equity valuations.

Strategy: Stick with Broad US “Core” Exposures and Go Cheap and Synthetic.

Synthetic replicating ETFs provide low-cost, transparent exposure to major US indices (i.e. S&P 500, MSCI USA, Nasdaq 100) with minimal tracking error.  For U.S. equities, synthetic replication may offer structural advantages, including the potential for reduced U.S. dividend withholding tax under certain conditions defined by regulation 871(m), which can contribute to improved net returns compared to physical ETFs in some cases[11].

Scenario 2: Market Leadership Broadens

If the rally expands beyond mega-cap tech, broader market participation could drive returns. 

Strategy: To Play a Broadening of Market Leadership, Consider Equal-weight and Small Cap Indices.

If concentration and valuation are the main concern, equal-weight indices (e.g., S&P 500 Equal-Weight) and small caps (e.g., Russell 2000) may offer diversification, lower valuations, and greater sensitivity to domestic growth and interest rates[12].

Scenario 3: Volatility from Macro Headwinds

If tariffs, inflation, or geopolitical risks trigger volatility, markets may experience temporary pullbacks.

Strategy: From Goldilocks to Gold as a Macro Hedge

If downside risk is the main concern, consider adding gold as a beta hedge to the portfolio to mitigate drawdown risks. Gold has low correlation with equities[13] and tends to track policy uncertainty (see below). Although most recently it has diverged, suggesting that investors doubt the policy uncertainty index’s calmer outlook since April. Despite recent gold gains, fund manager allocations remain low—suggesting room for increased exposure[6].

Gold as a Safe-haven Asset and Diversifier

Source: Bloomberg, DWS Investment GmbH, as of June 2025.

In Summary

In summary, while risks persist, the structural strengths of the U.S. market and a potential “Goldilocks” environment argue against an underweight position. When allocating to US equities efficient implementation could include broad core exposures via synthetic ETFs, diversifying with equal-weight and small caps, and adding gold as a volatility hedge. Any pullbacks could present compelling entry points.

Risks to the view:


Higher tariffs and a deteriorating economic environment would weigh on earnings and a sustained rise in yields above 4.5% would likely pressure valuations.

Risks for investing into U.S. equities:

  • The value of an investment may go down as well as up and past performance does not predict future returns. Investor capital may be at risk up to a total loss.
  • The value of an investment exposed to the currency markets which may be highly volatile. Large price swings can occur in such markets within very short periods and may result in your investment suffering a loss.
  • The value of an investment in shares will depend on a number of factors including, but not limited to, market and economic conditions, sector, geographical region and political events.
  • The value of an investment is exposed to market movements in a single country or region which may be adversely affected by political or economic developments, government action or natural events that do not affect a fund investing in broader markets.