• The latest jobs data continued to show mixed readings. Payrolls showed weakness relative to expectations but continued to expand, while unemployment rates continue to show tight labor markets and surprised to the upside.

• Demographic shifts, in the form of lower participation rates, continue to weigh on labor market growth, as reflected in the household survey. Meanwhile, the establishment survey continues to reflect strong business cycle conditions.

• Our synthesis remains that these divergences in labor market data continue to come from deviations between the secular and cyclical drivers. We continue to see the labor market as one challenged by falling participation, but supported by a strong economic cycle.

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We work through the data driving this synthesis. We start with the latest payroll numbers, which showed a minimal increase, which also disappointed consensus expectations:

While the latest print did not show strong job gains, it also did not stop the recent momentum:

As shown, recent nonfarm payrolls have shown signs of acceleration. These signs of acceleration have come alongside improving labor market breadth:

Importantly, this improving breadth has come with a nascent recovery in business services, a large segment of the labor market which has been under pressure. This sector’s employment has been inversely correlated with tech capex, i.e., companies have invested more and hired less. However, we are seeing the initial signs of hiring resuming:

Additionally, we see another integral driver of the business cycle experiencing rising employment: manufacturing.

Thus, while the latest month-on-month data was slow, broad-based indications from the payrolls survey continue to suggest improving conditions.

Meanwhile, the household survey continues to paint a weaker picture:

As we have noted for more than a year now, the weakness in the household survey continues to emanate from participation rates falling. We show our decomposition of labor markets into participation, changes in population, and labor market tightening:

We isolate the effect of labor force weakness on employment growth, which we can see is a material downward pressure on employment:

It is crucial to recognize that while this labor force dynamic is a weight on employment growth, it is not indicative of underlying business cycle conditions. We show how over time, employment rates are the driver of cyclical variation in the labor market:

When we zoom in on unemployment conditions, we continue to see a tight labor market. Given the secular tightness, there is little room for further acceleration, but we see no signs of deterioration:

Mirroring these unemployment dynamics, we see the latest claims data continuing to suggest a tight labor market:

These readings remain well-removed from recessionary conditions:

Scanning across the broad range of labor data, we see a labor market limited by demographic shifts driving down participation rates. However, from a business cycle perspective, we continue to see a strong labor market, consistent with business activity.

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We share our latest note from The Observatory: ISM Manufacturing Monitor.

Synthesis: The latest ISM manufacturing data continue to show expansionary readings. While the latest print showed a deceleration in the recent trend, PMI internals continue to signal potential for accelerating future prints. This dynamic modestly supports GDP but continues to provide material support to industrial equity earnings.

Read all the data driving this assessment below:

The Observatory, Ism Manufacturing Monitor

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Until next time.

Synthesis: Strong consumer spending and business investment continue to push the economy forward. These forces are also driving a strong profit impulse to the technology sector. While we find technology profit expectations to largely be justified, we see some potential for re-rating. Much of the risk of this re-rating can be mitigated through a careful watch of earnings momentum, which we demonstrate systematically.

Read all the data driving this assessment below:

Month In Macro: June 2026

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We share our latest note from The Observatory: Treasury Monitor.

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We show the latest readings from our CPI Nowcast below:

Now, while these conditions improve the near-term outlook for fixed income, we think it is essential to recognize that this disinflationary regime is likely to be transient without continued downside in oil prices, as core inflationary pressures remain in place. Thus, these shifting dynamics bring us from a negative stance on fixed income to a neutral one, rather than a positive one. For us to become materially positive on fixed income, we will require significant further weakness in the oil complex, along with signs of deteriorating economic activity. Nonetheless, the dynamics will likely provide near-term relief and support to fixed income.

Until next time.

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We share our latest note from The Observatory: CPI Inflation Monitor.

Synthesis: The latest CPI data offered little new information, simply confirming that inflationary pressures remain persistent. While core CPI offered some reprieve, with used vehicles weighing on the measure. With nominal motor vehicle sales running steady and the US remaining in a secular automobile shortage, we don’t expect transportation to be a consistent downward pressure on inflation. Finally, regardless of the marginal changes here, inflation remains very far from the Fed’s objectives, keeping us on the path to a hiking cycle.

Read all the data driving this assessment below:

The Observatory, Cpi Monitor

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Synthesis: The surge in global energy prices, coupled with resilient US nominal activity, is likely to put material pressure on the Fed to begin a monetary policy hiking cycle. These pressures will continue to weigh on US Treasuries until we see clear signs of inflation -induced demand destruction.

Read all the data driving this assessment below:

Month In Macro: May 2026

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This report is one of many only shared only with clients of Prometheus Institutional. If you are a professional investor and would like access to our real-time signals and analysis, email us at info@prometheus-research.com for more information.

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Read the full systematic update here:

The Observatory, Permits, Starts & Completions

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Read the full systematic update here:

The Observatory, Jobless Claims Monitor

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Read the data here:

The Observatory, Monthly Gdp Monitor

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Stage I- Cross-Asset Price Shifts: Global equity and fixed-income markets respond to the spike in energy prices. These shifts are near-immediate, reflecting correlations and relative-value trading.

Stage II- Inflation Shock: Energy prices shift, if sustained, begin to make their way to the consumer, and to measured inflation (CPI, PPI, PCE, etc.). This pass-through occurs relatively quickly, with energy prices passed through to consumers within approximately one month.

Stage III- Demand Response: As consumer prices and measured inflation trends become sustained, real demand responds. This process takes several months as the economy digests higher prices and consumers and businesses adjust their activity based on their current financial conditions and expectations of the future.

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Stages I and II are still ongoing. Stage III is potentially ahead of us. We see some of the first signs of Stage III in our latest estimates for real employee incomes:

Our latest estimates for March showed real employee income decreased by -1.05%. Now, these estimates are subject to a significant margin of error. As such, they may overestimate the extent of weakness. The last time we experienced such a significant move in our estimates was in January 2022, which we find somewhat analogous to today. Regardless of the accuracy on the magnitude, our estimates are consistent with the direction of the pressures. Extrapolating the current rate of weakness, the future path of real incomes may well be recessionary:

For now, a recession is not our expectation. But the risks have risen significantly. We write this so readers can prepare their portfolios for that potential outcome. If you would like to leverage our process for doing so, you can find what we offer linked below.

Until next time.

Before we dive into today’s note, we want to flag our latest milestone: 15,000 readers. Prometheus continues to grow and remains committed to bringing institutional-grade systematic investment strategies and research to everyday investors. To welcome you all, we’re offering a discount to new subscribers for the next year:

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This update will be brief. For our longer-form views on managing energy exposure, we recommend our recent note on the topic, linked below. This note will serve as an update to the same.

The case we’ve outlined for a month now has come to pass— we’ve got the speculative unwind of energy positions following a de-escalation announcement from Trump. Energy tanked as expected. We hope you’ve applied our near-constant guidance to use sizing/stops to mitigate this and have come out with strong performance.

Given this exogenous change, we need to pause and assess conditions, as we have undergone a regime shift. Fortunately, this exogenous regime shift aligns with our proprietary short-term regime signals. As a refresher:

The Prometheus Energy Program uses short-term signals to forecast the energy market in the near term. Leveraging the programs’ underlying signals, we can classify periods into Bullish, Bearish, or Neutral regimes. The objective is to identify the highest signal periods for energy markets, not every signal. These signals offer a roadmap for navigating the short-term backdrop for energy markets.

Our latest regime signals place us in a neutral energy regime, which, per the expected return profiles visualized above on the right, suggests a much less positive energy backdrop than the recent past. Of course, these signals may shift quickly, and we will keep you abreast of these changes.

Fundamentally, we remain a regime of significant oil shortage. This shortage is a strong and consistent support for the entire oil complex. However, we are currently still working through a well-telegraphed unwind of speculative positioning. There is still potential for an extremely strong energy backdrop— but we need time for markets and the economy to digest before we look to play this again.

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We scan through:

• Expected Returns

• Positioning Risks

• Short-Term Regimes

To chart a course for managing energy exposure.

Let’s dive in.

We begin with the Expected Returns. For those unfamiliar with our approach to expected-returns investing, you can find a complete breakdown here:

Energy market term structures continue to offer the most attractive risk premiums we have seen in the Russia-Ukraine War in 2022. We visualize this risk-premium below:

We can translate these expected returns into Naive Expected Sharpe Ratios, which are commensurately elevated:

We show that the distribution of these expected returns is uniform amongst the energy complex (ex-industrials):

For many investors who are native to equity and bond markets, these pro-cyclical expected returns (expected returns that rise with price rises) are unintuitive. In commodities, supply shocks drive up the spot price, while hedging pressures create a backwardated term structure. The combination of these dynamics creates a time-varying risk premium for those willing to buy the commodities into price increases. This dynamic opposes the mechanics in equities and bonds, where investors are largely rewarded for buying assets on weakness.

It is the systematic recognition of these mechanics that has allowed the Prometheus Expected Return Program to perform strongly in this environment:

Thus, we think that if there is a time to own commodities, it is in this type of backdrop. However, we need guardrails against a sudden turn in these conditions. Much of today’s regime’s dynamics are contingent upon the policy actions of the US administration and Iran's reaction function. A quick de-escalation of the military conflict will unwind speculative positioning in energy, but is unlikely to fully restore global supply in the near term or to remove the geopolitical risk premium now priced into global energy markets. As such, the biggest threat to energy exposure today is a military de-escalation-induced unwind in positioning.

To help navigate these dynamics, we share our positioning gauge (updated daily for Prometheus Institutional clients), which helps us determine whether prices are being driven by speculators or hedgers. A Speculative-Dominant oil market is more fragile than a Hedging-Dominant market:

Today, we’re in a Speculative-Dominant environment, with risk of a big positioning unwind. However, in the background, we also see a good amount of hedging from commercials. As such, we are in a positive, but not optimal, backdrop for energy positions. A modest unwind of speculative positioning, while negative in the short-term, may be the ideal backdrop for the energy complex over the medium-term— a dynamic we will continue to be on the lookout for. Until then, positioning risk abounds and should temper sizing.

Finally, we share our proprietary short-term regime recognition from the Prometheus Energy Program. To help our subscribers navigate these uncertain times, we continue to share the positions from the program via the Substack chat feature:

Based on the program's underlying signals, we can classify regimes as Bullish, Bearish, or Neutral. The objective is to identify the highest-signal periods for energy markets, not every signal:

As we can see above, our short-term regimes are good guides for the short-term price regime. Currently, these signals suggest we are in a Neutral Short-Term Regime, after being in a Bullish Short-Term Regime over the last month. This is not a bearish or bullish sign, but just an indication that short-term forward returns are less predictable than they have been recently.

Looking across Expected Returns, Positioning Risks, and Short-Term Regimes— we think energy exposure continues to make sense in the current backdrop. However, being prepared for a speculative unwind in sizing and drawdown controls remains imperative for navigating this environment optimally. If Expected Returns, Positioning, and Short-Term Regimes all align, conditions will be in place for significant long exposure. Until then, a more cautious approach is warranted. Clients of Prometheus Institutional can track the evolution of these conditions daily. Email us at info@prometheus-research.com for access.

Until next time.

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We visualize this below:

In this note, we discuss the principles driving the signal visualized above. We aim to provide a simple, actionable framework for thinking about Treasury exposure during this period of macroeconomic and geopolitical volatility.

The primary effect of the pressures in Iran has been surging energy prices across the oil complex. This surge in energy prices has two effects on the global economy and, in turn, Treasury markets:

• Inflation Shock: Energy is a core input to every economy. Energy price shocks reverberate through an economy’s cost structure, and this is reflected in inflation calculations. These shifts in inflation rates are incremental pressure on central banks worldwide to hike policy rates. This incremental pressure is reflected in Treasuries through some mix of higher real rates, breakeven inflation, or policy expectations. Regardless of the composition of the yield changes, the inflation shock mechanically drives yields higher. The inflation shock is a headwind for Treasuries.

• Demand Destruction: Inflation shocks are self-defeating. As prices spike relative to potential nominal demand, output begins to fall as real demand and output enter a downward spiral, nominal spending declines, and prices eventually fall to meet demand. The threshold at which this occurs is not knowable in advance, at least with systematic rigour; however, the signs of the turning point are apparent: deteriorating activity measures coupled with declining prices signal demand destruction and deflation. Demand destruction is a tailwind for Treasuries.

Today, market participants in fixed income are mixed on which outcome to position for: An Inflation Shock Or Demand Destruction? As quantitative systematic investors, our answer would be: Why not both, dynamically? We think our Inflation Nowcast can help us do so. As a refresher on our Inflation Nowcast:

As part of our systematic macro process, we track US CPI conditions promptly. Using market-based estimates, we can closely track the evolution of inflation pressures as reflected in the reported CPI. Our daily estimates for headline CPI closely track the official data, without the reporting delay inherent in official statistics. We find these measures particularly relevant for assessing ongoing pressures on fixed-income markets.

As noted previously, energy price spikes translate into inflation shocks that weigh on Treasuries. Our latest inflation nowcasts suggest material upward pressure on the CPI. Our latest readings suggest an annualized CPI rate of 6.1%, which is dramatically at odds with the Fed’s 2% inflation objective. Of course, we don’t expect year-over-year numbers to approach this pace, but it is nonetheless a sign of the times: we are in an inflation shock. This inflation shock will persist so long as the ongoing pace of inflation remains at odds with the Fed’s objective. Demand destruction will only take place once output contracts. Most importantly, demand destruction will be apparent as energy prices reverse, weighing on our timely CPI reads.

Combining the features of these dynamics, we expect our inflation nowcast to serve as a strong gauge of the market regime for Treasuries. The greater our latest readings exceed the Fed’s objective, the further we are into an inflation shock regime. The closer our gauges are to disinflationary or deflationary, the further we are into demand destruction. Furthermore, given our relatively short one-month window for calculating CPI, we will capture shifts in the energy components of CPI fairly quickly.

As such, we can construct a simple rule set for owning Treasuries: If our annualized CPI estimate is below 2%, we own fixed income. If not, we stay in cash. We’re not building a comprehensive trading system for treasuries using all the factors we track. Instead, we’re offering a simple, actionable roadmap for investors on how to think about their Treasury exposure during an inflation shock, which could lead to demand destruction. We show that the simulated performance of using the simple but defensible approach has been strong versus a buy-and-hold strategy:

We think that this approach, while simple, offers investors a clear guidepost to navigate treasury markets. Of course, the daily updates of our CPI Nowcast are available to Prometheus Institutional clients. However, we will also provide timely updates on this gauge here to help investors navigate these turbulent times.

Until next time.

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For the latest data through December, our systems place Real GDP growth at 2.88% versus one year prior. Below, we show our monthly estimates of Real GDP relative to the official data:

In December, GDP came in at -0.11% versus the prior month. Below, we show the weighted contributions to the most recent one-month change in real GDP, along with the recent history of month-on-month GDP. Additionally, we show the contribution by sector to monthly GDP in the table below:

The domestic engines of growth continue to hold steady and remain additive to real output, though we see some signs of slowing. We scan through the individual components, with a focus on domestic activity.

Consumption

In December, real consumption spending increased by 0.05%. Over the last year, consumption has added 1.2% to the GDP growth of 2.88%.

Under the aggregate data, services spending continues to support ongoing consumer spending, while goods have become a meaningful drag:

Even though aggregate consumption remains positive, some slowing is apparent, and is reflected in a narrowing of consumer spending breadth:

This narrowing breadth of consumer spending is largely coming from weak cyclical consumer spending:

In past cycles, this weakness in cyclical spending would, in itself, have been a cause of recession. However, the shifting structure of the economy towards a services-dominated one continues to keep the economy steady. Nonetheless, this is something to monitor closely.

Investment

In December, real gross investment remained flat. Over the last year, investment has added 0.65% to GDP growth of 2.88%.

Business investment remains weak, with construction and transportation spending continuing to weigh on fixed investment:

While these classically cyclical areas of the economy continue to show weakness, technology and related areas continue to show steady growth:

Finally, and most notably, industrial equipment investment has turned upwards:

Importantly, this upturn has been a broad-based one:

Much like consumer spending, business fixed investment shows readings that in past cycles have looked consistent with recessionary pressures, with declining residential construction and transportation equipment spending. However, the revival of industrial equipment investment and the stability of technology investment continue to deter recessionary downturn.

Government

In December, real government expenditures increased by 0%. Over the last year, government spending has added 0.09% to real GDP growth of 2.88%.

Government output has moderated meaningfully per the official data and diverged from our estimates. However, we find this to be a feature of the BEA's treatment of the government shutdown rather than an indication of a major shift in government output. This is because furloughed federal employees received back pay; the shutdown had no impact on nominal federal compensation and was reflected as a temporary increase in the prices paid for federal employee compensation. Below, we show how nominal spending continued despite a modest downtick:

With the resumption of regular operations of the government, we expect government spending to converge with our estimates over the next quarter.

Trade

In December, real export revenues decreased by -0.17%. Over the last year, exports have added 0.78% to GDP growth of 2.88%.

In December, real import expenditures increased by 0.02%. Over the last year, imports have added 0.13% to GDP growth of 2.88%.

The key takeaway is that trade is no longer a major incremental tailwind, but it is not exerting material drag either. The impulse from global demand has moderated, yet it remains broadly consistent with steady expansion rather than contraction.

At present, the domestic economy continues to carry this cycle. Trade is neutral-to-slightly supportive, not a source of stress.

GDP: Synthesis

Additionally, we show the composition of the monthly estimates of nominal GDP, broken into real GDP growth and inflation. Our latest estimates place nominal GDP at 5.86% versus one year prior, with real GDP growth of 2.88% and inflation of 2.98%:

For further insight into whether GDP conditions are consistent with recessionary pressures, we aggregate macroeconomic indicators, consistent with the NBER methodology of recession classification, into a recession probability monitor. This gauge gives us a real-time understanding of developing recessionary pressures. Currently, recession probabilities are at 29%:

Finally, we zoom out to offer what the mosaic of economic data says about the pervasiveness of GDP growth. Our GDP Nowcast economic data across 75 measures of real growth conditions to understand the economic conditions in a timely manner. We share both the current level of the nowcast in blue, along with a diffusion index of the underlying components in red. Currently, 51% of subcomponents are rising, consistent with early indications of a recession:

Below, we visualize the prospective paths of real GDP growth over the next twelve months using our data trajectory monitor. We share two processes. First, we extrapolate the current trend in the data to visualize the prospective trajectory of GDP based on the current trend. Additionally, we share our forward-looking estimates for real GDP growth:

GDP conditions remain mixed. Classical cyclical and rate-sensitive parts of the economy continue to show weakness, while non-cyclical areas add stability. Given these conditions, GDP growth will likely peak in the next 3 to 6 months, driven by time-series effects. A mixed, but positive outlook for the economy persists.

Equity Strategy

We translate these fundamental macro dynamics into systematic investment views for the equity market. When approaching equity markets, we think there are four major perspectives from which to take market views:

• Expected Returns

• Cyclical Regime

• Earnings Mispricing

• Tactical Positioning

These views span the spectrum of timeframes we can express our equity views on. We offer our systematic readings for each.

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Below, we visualize the systematic application of these principles of expected returns to a diversified portfolio of equities, fixed income, commodities, and currencies across developed markets:

Above, we visualize returns by systematically adjusting our exposure to the expected returns of a developed-market (DM) asset basket. This DM basket contains the equities, sovereign bonds, and currencies of the US, Canada, UK, Japan, Germany, and Australia, along with global commodity exposures in WTI Crude, Brent Crude, Heating Oil, Gasoil, Copper, and Aluminium.

In this note, we outline the framework for our portfolio construction process and describe what it reveals about the global cross-asset expected-return landscape.

The Framework

In this section, we will outline the framework for systematically constructing our portfolio. The purpose of this section is not to give a step-by-step process for replicating this portfolio, but rather to offer the mechanical framework used in portfolio construction in an intuitive fashion. We visualize our portfolio construction process below:

Expected Return Measures: While conceptually expected returns are uniform across asset classes, in practice, their definitions vary. We use a combination of earnings yields (equities), bond yields (fixed income), the term structure (commodities), and rate differentials (currencies) to define expected returns. We treat gold as a currency and use a mix of the long-term realized return and real yields to measure expected returns. These measures are intentionally simple but defensible to align with discretionary intuition.

Naive Expected Sharpe Ratios: Using our expected return measures, we compute naive expected Sharpe Ratios based on local volatility levels. Our preference here is for shorter-horizon volatility lookbacks, as they better account for volatility clustering. These naive expected Sharpe Ratios are not intended as short-term timing signals, but rather as structurally grounded measures of forward risk-adjusted return.

Portfolio Allocations: Portfolio allocations are scaled proportionally to our naive Sharpe Ratios. All assets in the portfolio trade in large, liquid futures markets. As a result, the program is not subject to structural leverage constraints and is unconstrained in expressing long or short exposures.

Dynamic Volatility Targeting: The program maintains a maximum risk budget of 10% annualized volatility. The aggregate naive expected Sharpe Ratio scales portfolio-level exposure. A higher expected risk-adjusted return increases utilization of the risk budget, while a lower expected risk-adjusted return reduces exposure.

Combining these measures creates the Prometheus Expected Return Program for DM Markets. Let’s dive into the empirics and what they tell us about the global macro landscape today.

Equities: Anywhere But The US

We begin our exploration with DM equity markets. Below, we visualize the equal-weighted expected return profile of DM equity markets:

Above, we show that a DM equity basket offers positive excess returns relative to local cash rates. While positive and attractive, these expected returns are not particularly elevated relative to history, largely because realized returns in global equity markets have been high (recall that expected returns fall as realized returns rise). This basket of expected returns has been materially weighed down by US expected returns, which are effectively at zero. Meanwhile, economies with less tech-centric indexes like the UK and EU (Germany) show far more attractive return-to-risk characteristics.

Importantly, this dispersion is somewhat structural rather than cyclical. US equities have experienced a multi-year valuation expansion concentrated in a narrow group of high-growth, high-duration technology companies. As valuations rise, forward earnings yields compress mechanically, reducing embedded expected returns even if growth expectations remain strong. In contrast, UK and European indices are more heavily weighted toward financials, industrials, energy, and materials—sectors that trade at lower multiples and whose valuations have not expanded as much. As a result, their forward earnings yields remain elevated, producing higher mechanically derived expected returns.

We visualize this uneven distribution of Naive Expected Sharpe Ratios below:

Correlations across these equity markets are fairly strong; combining these assets into a portfolio offers only a mild improvement in expected risk-adjusted returns. Nonetheless, owning a basket of these equities offers a better exposure than owning any single one. Below, we show the naive expected Sharpe ratio of our portfolio of these equities:

We note three important features here. First, a global equity portfolio offers higher expected returns than a US-only portfolio— a crucial observation for US investors. Second, a mix of assets is likely to outperform any one particular asset. Finally, a mix of global equities, while more attractive than owning any individual country, offers only modest expected returns relative to history.

Fixed Income: The Most Attractive Asset Class

We next turn to developed market sovereign bond markets. Below, we visualize the equal-weighted expected return profile of DM fixed income markets.

Above, we show that a DM bond basket offers modest positive excess returns relative to local cash rates. While the opportunity set has improved materially from the deeply negative expected returns observed during the global post-COVID monetary policy hiking cycle, current expected returns remain moderate relative to history.

Importantly, dispersion across countries is again material. Markets such as Japan and Canada offer yields much more attractive than those in the US. These yield differentials largely reflect much more significant inflationary pressures in these regions relative to the US, resulting in weak realized returns. However, these weak realized returns potentiate future returns. Therefore, if these countries do not experience further inflationary acceleration, bondholders will be materially rewarded relative to US bondholders.

We visualize the distribution of Naive Expected Sharpe Ratios below:

Correlations across developed bond markets are also relatively strong, though generally lower than in equities. Combining these markets into a portfolio provides some diversification benefit, but the improvement in expected risk-adjusted return is again incremental. Nonetheless, a basket of developed sovereign bonds offers a more balanced exposure than any single market, smoothing country-specific policy and inflation risk.

Below, we show the naive expected Sharpe ratio of our portfolio of these bonds:

We note three important features here. First, a global bond portfolio currently offers a meaningfully higher expected return profile than we have seen in the post-COVID era. Second, cross-country diversification modestly improves risk-adjusted return relative to holding any individual bond market. Finally, fixed income offers a higher expected return than equities on a risk-matched basis, while offering a hedge to weaker growth conditions, which makes an expected return weighted portfolio of fixed income assets a compelling addition to our equity basket.

Currencies: Broadly Long USD

We next turn to developed market currency markets. Below, we visualize the equal-weighted expected-return profile of DM currencies through a dollar-centric lens:

Above, we show that our non-USD currency basket currently offers a modestly negative expected return profile. However, unlike equities and bonds, we find much more dispersion in currency expected returns. This is primarily driven by the variation in monetary policy measures across global central banks. In practice, short-rate differentials are the dominant driver of this dispersion. The wide gap between US and Japanese policy rates continues to embed a meaningful carry advantage for USD over JPY, reflecting the Bank of Japan’s comparatively accommodative stance relative to the Federal Reserve. In contrast, both Canada and the Euro Area have policy rates that are closer to US levels, though meaningful differentials persist. In the case of gold, real yields remain elevated relative to history, offering modest expected returns compared with cash. These varying dynamics create a healthy amount of dispersion in the distribution of Naive Expected Sharpe Ratios :

Correlations across developed currency pairs are meaningful but structurally lower than in equities or sovereign bonds. As a result, combining currencies into a portfolio offers somewhat greater diversification benefits than within-region equity or bond baskets. Nonetheless, the improvement in expected risk-adjusted return remains incremental. A diversified currency basket primarily smooths idiosyncratic policy and rate-cycle exposure rather than dramatically increasing expected Sharpe. Below, we show the naive expected Sharpe ratio of our portfolio of these currencies:

We note that the naive expected Sharpe ratio for a portfolio of currencies yields returns similar to those of equities today, while adding diversification.

Commodities: Energy Looks Attractive

We next turn to global commodity markets. Below, we visualize the equal-weighted expected return profile of major commodity contracts across energy and industrial metals.

Above, we show that the commodity basket currently offers a modestly positive expected return profile, though with significant cross-asset dispersion. Unlike equities and bonds, where valuation metrics evolve gradually, commodity expected returns are largely driven by term structure dynamics and inventory conditions. Periods of backwardation embed positive roll yield and therefore positive expected returns, while contango environments mechanically compress forward return potential.

Importantly, dispersion across individual commodities is pronounced. Energy contracts—particularly refined products such as heating oil and gasoline—exhibit stronger expected Sharpe Ratios, reflecting tighter physical markets and supportive term structures. By contrast, industrial metals such as copper and aluminum display weaker or even slightly negative expected return profiles, consistent with softer demand dynamics and flatter or contangoed curves. We visualize the distribution of Naive Expected Sharpe Ratios below:

Correlations across commodities are lower than within regional equity or bond markets, though still influenced by broad macro cycles. Combining commodities into a basket provides diversification benefits and smooths idiosyncratic supply shocks, but dispersion remains an important feature of the opportunity set. Below, we show the naive expected Sharpe ratio of our commodity sub-portfolio:

Unlike equities and fixed income, the carry embedded in the term structure of the commodities curve is not as mechanically linked to forward returns, and does not offer a persistently positive risk premium. Furthermore, after accounting for asset volatilities, our naive expected Sharpe ratios are not as compelling as a simple look at the term structure may imply. Nonetheless, a portfolio of commodities is undoubtedly value-additive to a global expected return portfolio.

Prometheus Expected-Return Program

So far, we have examined each asset class within our DM basket individually. We now combine these sub-portfolios to form the Prometheus Expected-Return Program. Below, we visualize portfolio risk allocation across the 24-asset universe:

Above, portfolio risk allocation refers to the notional exposure of each position scaled by its expected volatility. Capital is directed toward assets offering the highest expected return per unit of risk, while total portfolio risk is moderated through diversification.

We offer two perspectives to quantify this diversification benefit. First, we compare the aggregate naive expected portfolio Sharpe Ratio (blue) to the simple average Sharpe Ratio of the underlying asset classes (red):

Diversification does not change expected return; it reduces volatility. If all asset classes were perfectly correlated, there would be no diversification benefit, and the blue and red lines would coincide. The greater the gap between the aggregate Sharpe and the average Sharpe, the larger the diversification benefit.

Second, we measure diversification through the portfolio’s effective number of bets. While the program spans 24 assets, correlations across markets reduce the true number of independent return streams. The chart below shows how the effective number of bets evolves over time. When correlations rise, breadth compresses. When cross-asset opportunities become more dispersed, breadth expands. This increase in independent exposures lowers portfolio volatility relative to expected return and strengthens aggregate risk-adjusted performance.

The program currently exhibits a meaningful level of effective breadth relative to history. The combination of cross-asset dispersion and diversification benefits supports a healthy utilization of the portfolio risk budget, as shown below.

Thus, after systematically scanning across the global expected return landscape, we observe that current opportunities are concentrated primarily in global fixed income and long dollar exposures. Within both equities and fixed income, US assets offer comparatively limited expected return relative to their global peers. A dynamic expected return portfolio applied across developed markets currently exhibits a naive expected Sharpe Ratio of approximately 1.02, supported by meaningful cross-asset breadth. This breadth allows the portfolio to assume material risk while maintaining expected compensation per unit of volatility.

So, to answer the question posed in the title of this note — Where Are the Expected Returns?

Not in the US.

Until next time.

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The latest data for January showed Nonfarm Payrolls increased, coming in at 0.08%. This print surprised consensus expectations of 0.04% and contributed to an acceleration in the three-month trend relative to the twelve-month trend. We show the sequential evolution of the data below:

These changes were a material shift in the three-month trend, nudging employment growth into positive territory. We show this modest increase below:

Non-cyclical employment continues to lead the pack. Nonetheless, it is worth noting that employment breadth (the number of sectors seeing higher vs lower employment) continues to show weakness:

Furthermore, cyclical job growth (manufacturing, construction, and trade) remains weak:

Weakness in cyclical job growth has typically indicated slower credit cycle activity. However, changing population and demographic conditions may potentially be muddying this picture. While job growth in cyclical sectors has remained weak, it is worth noting that the aggregate measures of cyclical conditions (unemployment) have remained contained:

Unemployment remains contained. As such, the weakness in employment is coming not from a tightening of cyclical conditions via unemployment rates, but rather from changes in the labor force.

Thus, we continue to see a labor market frozen by a declining labor force rather than a deteriorating cyclical dynamic. Furthermore, we see the lack of cyclical deterioration in the fact that the sector with the weakest job growth today (professional services) is seeing the largest income gains. Below, we see how professional and business services employment is seeing a broad-based and consistent decline:

Meanwhile, the category continues to be the sector with the strongest income growth across sectors:

This is driven by an increase in real wages alongside a structural decline in temporary help services employment, potentially accelerated by the proliferation of artificial intelligence tools. A business cycle downturn driven by declining employment in professional services is highly unlikely to be accompanied by rising real wages and incomes in the sector, which we find is the case today. These conditions, coupled with evidence of a falling labor force, continue to suggest that the labor market is undergoing a secular shift rather than a cyclical weakening.

Market Implications

We work through the implications of this data for equity and bond markets. We begin with the fixed-income markets as the linkages are more direct. Cyclical conditions in labor markets directly affect the Fed’s inclination to ease or tighten monetary policy. While employment growth may be anemic, the absence of cyclical weakness (rising unemployment) limits how much the Fed needs to react at this time. This dynamic continues to keep our monetary policy pressures gauge positive:

Our gauges suggest that, despite the weakness in the labor market, the Fed will be more likely to hike than to cut based on the data. This theme has paid off well since September 2025, following which markets have moved to discount significantly less easing:

While the opportunity set is now smaller, we continue to see nominal activity, which is inconsistent with a significant easing environment from the Fed. For this to shift, we would need to see a material loosening of the labor market. This may come, but we do not see it yet.

Turning to equities. The linkages from labor to equities are less direct than those from labor to treasuries. Equities benefit from strong labor growth when that labor growth turns into strong spending. Currently, while labor growth is limited, income growth remains persistent and continues to feed into consumer spending. We visualize this flow to corporate profits below:

Therefore, even though labor markets continue to weaken, income flows continue to support corporate profits. These dynamics, along with sustained business investment, continue to support corporate profits and their expectations:

Therefore, the latest labor data, while still showing weak trends, does not directly conflict with positive earnings. Therefore, we think today the question is not whether equity earnings should be positive, but how positive they should be.

Today, our measures suggest that consensus expectations are modestly rich. This opens the equity markets to corrections, but not necessarily recessionary dynamics.

Overall, our assessment of the labor market is that there is undoubtedly weakness. However, the broad-based evidence suggests it is not cyclical weakness, but structural change. This limits the need for the Fed to react and has not had a material impact on corporate profits. These conditions continue to support equities and weigh on fixed income.

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Mathematically, the single biggest factor that impacts nominal bonds is changes in discount rate expectations. Over the last month, short-term interest rate markets have remained unchanged. Over the last year, these markets have remained unchanged. We show the evolution of these expectations below:

To better contextualize these recent changes in policy expectations, we show the latest discount rate path priced over the next eighteen months. Short-term interest rate markets are expecting a peak in policy rates on Feb 26 at 3.64%, followed by a trough on Jan 2027 at 3.18%. This implies approximately 2 interest rate cuts cumulatively over the next eighteen months. We show this path below:

These cuts are directionally inconsistent with the latest readings from our monetary policy pressures gauge. Our monetary policy gauge measures the pressures on the Federal Reserve to move monetary policy, based on the trade-off between growth and inflation data. The higher our readings, the greater the pressure to hike policy rates. The lower the gauge, the more pressure there is to cut policy rates:

Having examined the pricing of discount rates, we turn to the shape of the yield curve. We compare the curve to positioning to assess bond attractiveness. When the curve offers more carry than positioning reflects, positioning typically catches up via increased duration exposure. When positioning exceeds what the curve justifies, trades become crowded and vulnerable to reversal. Currently, US yield curves show modest vulnerabilities for 10-year Treasuries:

These measures reflect two independent views on US Treasuries: a policy view, which can be expressed in the short end of the treasury curve, and a positioning bet, which can be reflected in the long end of the curve. We show how these views are mechanically and empirically uncorrelated:

Further, given that these independent views are effectively isolated views on bond yields, they can be combined for a comprehensive view on US Treasuries:

Currently, these measures suggest marginal downside pressure on Treasuries from positioning; however, the pressure on policy rates to rise from strong economic activity remains meaningful. Headwinds for Treasuries persist.

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Until next time.