How to invest as the stock market exits ideal ‘Goldilocks’ era: BMO

You can say goodbye to the days of everything being just right for markets, one Wall Street bank says.

BMO says the market has entered a new era beyond its previous “Goldilocks” regime, which was an idyllic state defined by strong economic growth and relatively tempered inflation. Under those conditions, the economy was running just hot enough to fuel robust stock gains.

Although investors have benefitted from that setup for the past several years, those days now look like they’re ending, Mark McCormick, the chief FX strategist at BMO, wrote in a note to clients on Monday.

McCormick says he’s now eyeing a new “policy order” that could impact markets — one defined by higher rates, stubborn inflation pressures, and tighter liquidity.

The result is a market less defined by headline volatility and more defined by shifts in economic policy, McCormick wrote. It’s also provided a strong backdrop for the US dollar and the yen carry trade, he said, referring to a popular trade in which investors borrow foreign currency at low rates to deploy in US markets.

“In short: this is no longer a Goldilocks market, and it is not a clean risk-off market either. It is a policy-led, carry-led, USD-supportive regime,” McCormick said.

Markets are already flashing some signs that a new order is underway. Recently, investors have taken profits in some of the market’s highest-flying sectors, like mega-cap tech stocks, and rotated into areas that stand to benefit from the AI buildout.

Here are the investing allocations the bank recommends for the new investing climate:

Overweight equities

Stocks are the focal point in the new economic environment, McCormick said, pointing to recent strength in the tech-heavy Nasdaq as well as Japan’s stock market.

The Nasdaq 100 has surged 16% year-to-date. Japan’s Nikkei 225 Index is up 34% from levels at the start of the year.

“Equities remain the asset class to beat,” McCormick wrote. “Japan has taken the baton while the Nasdaq continues to outperform, showing equity leadership is broadening rather than fading.”

Focus on growth stocks

Growth stocks have already started to outperform since the start of the year, another facet of the new investing regime. The iShares S&P 500 Growth ETF is up nearly 10% for the year, edging ahead of the 9% gain in the broader index.

“Investors continue to reward earnings growth and cyclical exposure over traditional defensive assets. AI remains the common global equity theme,” BMO said.

Lean away from safe havens

Safe-haven assets look to be underperforming as investors redirect their attention to other areas of the market.

US Treasurys, which trade inversely to rates, have been falling as investors anticipate higher interest rates from the Fed to control inflation. The 10-year US Treasury yield, for instance, traded around 4.46% on Monday, up 31 basis points from levels at the start of the year.

Gold, a star performer in 2025, has also started to lose its luster. The metal is down 23% form its peak in January as higher rate expectations have made alternative stores of wealth, like cash, more attractive.

Bitcoin, another alternative asset that some investors see as a hedge against inflation and the traditional financial system, has cratered 29% from levels at the start of the year.

“Traditional safe havens are losing leadership,” McCormick said. “Gold and Treasuries have fallen down the ranking as investors rotate toward growth-sensitive assets and real economic momentum.”

Commodities

Commodities now appear solidly embedded in the market’s pool of winners, with the gains being concentrated in areas that “sit at the intersection of geopolitics, electrification, and global supply constraints,” McCormick said.

The iShares GSCI Commodity Dynamic Roll Strategy ETF is up 21% year-to-date.

Here are some of the market’s best-performing commodities lately, and why they’ve zipped higher: