Summary
In this Investment Talks we explore recent moves in financial markets and possible explanations, alongside our expectations and investment implications.
Key points
The Trump trades are over, and market rotation outside the US mega tech continues: Rising uncertainty regarding Trump’s policies, particularly the economic impact of tariffs, has increased in recent weeks. This, coupled with weak economic data, has led to further weakening in US equities, with the Nasdaq Index down almost 10% since the start of the year. In contrast, European stocks have outperformed in 2025 thanks to improving sentiment due to a possible ceasefire in the Russia-Ukraine conflict. The European plan for increased defence spending has recently triggered an extreme move in the euro (at its highest value versus the dollar since Trump’s re-election) and European bonds, which have surged in recent weeks at a time when Treasury yields have decreased amid rising concerns over US growth.
US economic slowdown: The US economy is slowing more rapidly than expected, as companies have been frontloading imports to discount higher tariffs, and policy uncertainty has dented consumer confidence. While we do not anticipate a recession in 2025, fears may increase if policy remains unstable. We believe that tariffs will primarily be a threat to growth rather than have an impact on inflation that, in any case, would be temporary. Hence, we maintain the view that the Fed will cut interest rates in Q2 this year.
Investment convictions: Despite the recent selloff, we believe the awaited correction in areas of excessive valuations in the US equity market may continue, leading to a continuation of the recent rotation in favour of Europe and China. In bonds, it’s key to maintain an active duration approach. Since the start of the year, we have first become more constructive on European duration and, most recently, we have started to move towards neutrality. We also moved to a neutral view on US duration, and we expect the US 2-10 year yield curve to steepen. In credit, we remain cautious on US high-yield bonds and favour European investment-grade credit. As our original target for the EUR/USD of 1.10 approaches, we expect volatility to remain high and believe there is still room for a further correction for the dollar. Overall, we believe it’s key to maintain a balanced and diversified allocation, including gold and hedges to address the rising risk of downside for equities.
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