Nordea Private Banking Investment Review

Driven by strong results

The main reason for this year's good returns has been companies’ unexpectedly strong earnings performance. In the spring, concerns about tariffs challenged investors' expectations, but this uncertainty has, at least for now, been overcome surprisingly well. A similar development can be seen in the economic outlook and, for example, in business confidence indicators. At present, it seems that corporate results are growing internationally this year at a slightly more robust pace than usual.

Next year's forecasts have also been raised somewhat over the course of the year as tariff-related uncertainty has partially dissipated. Company guidance has also pointed in the same direction. Whereas this year American technology companies have driven international profit growth, in the coming years, more sectors and regions are expected to contribute. If next year's profit growth matches the current fairly positive forecasts, the stock market is likely to face an excellent year. However, it is wise for investors to prepare for results not reaching such optimistic figures. We expect profits to grow next year at a pace somewhat faster than the normal eight percent rate.

Artificial intelligence – threat and opportunity

In November, investors’ doubts about the profitability of investments related to artificial intelligence and concerns about the elevated valuation multiples of technology companies led the stock market, overall, to a fairly moderate and healthy correction. Occasional scepticism among investors regarding the outlook for the technology sector is in fact positive, as it prevents expectations from running out of control and makes it less likely that valuations reach bubble levels.

AI development is likely to be one of the largest sources of productivity improvements in decades and, therefore, improves the long-term return prospects for equities. There will continue to be a need for investments in AI, and we consider it likely that many of these will pay off. However, not everyone can win in this race. For this reason, it is just as likely that the share prices of some companies will rise sharply while others will fall significantly.

Technology companies’ valuation multiples are quite high, and it is very likely that investors will continue to periodically question the sector’s growth prospects and the profitability of AI investments. As a result, it is wise for investors to prepare for heightened market volatility next year as well. Occasional declines are a natural part of bull markets, and there is no reason to be alarmed by them as long as the fundamentals, especially profit outlooks, remain intact. Therefore, we still believe it is justified to keep equities overweight in investment portfolios.

Those concerned about the volatility of technology companies’ share prices might consider emphasising dividend or value stocks slightly more than usual in their portfolios. If the technology sector continues on its winning streak, these companies may lag somewhat behind the broader stock market. On the other hand, the ride will be smoother and returns likely substantially better than for fixed income investments. From Nordea’s funds, Global Dividend, for example, invests in such companies.

Tech boom or bubble?

The sharp rise in the US equity market over the past three years has been heavily tech-driven, pushing US technology firms to dominate both US and global indices. Nvidia, the world’s most valuable company and a leader in AI chips, now has a market capitalisation comparable to Japan’s annual GDP – despite employing just 30,000 people, while Japan's GDP measures the output of a population of 124 million. 

No wonder valuations are causing concern among some investors, even as the technology sector continues to grow strongly. Is this a boom or a bubble? That’s likely to be a key question next year. Technology has a significant index weight in the US, Korea, Taiwan, China and Japan, while other sectors dominate in Europe and India. Tech stocks will remain an attractive investment opportunity, but they are unlikely to lead returns indefinitely. Next year’s winners may well come from more traditional sectors.

Growth in Europe accelerates

The European equity markets have performed well this year, despite a temporary drop in the spring caused by tariff concerns. Economic growth is gradually recovering, driven by a pick-up in Southern and Eastern Europe. Next year, the largest economy in the euro zone, Germany, will likely lead the way with multi-year investments in defence, infrastructure and digitalisation. 

Earnings growth for Europe’s largest companies is expected to accelerate significantly as the economy rebounds. Major improvements are anticipated in the automotive and materials sectors, which have suffered from tariffs and weak demand. The strengthening of Europe’s defence capabilities, AI adoption and the energy transition are creating new opportunities for companies across multiple sectors. These are the type of companies that the Nordea Empower Europe Fund, among others, invests in. We continue to overweight Europe in our regional recommendations. In addition to improving earnings growth, the valuations of European stocks remain more moderate than in the US.

We maintain a neutral weight in the US and the emerging markets. In the US, earnings growth is expected to accelerate particularly in sectors outside technology, reducing the sector’s dominance over others. Large tech companies account for about a quarter of S&P 500 earnings but nearly 40% of the index’s market capitalisation. 

Asian tech companies have performed strongly this year as international investors have sought cheaper alternatives to US peers. Chinese tech companies are clear alternatives for US companies, having developed their own AI models and applications. The largest Korean and Taiwanese companies, on the other hand, are key partners of Nvidia and depend on its success. India’s stock market has lagged during this year’s AI boom but could benefit from investors potentially reducing their exposure to Asian tech stocks.

We are keeping Japan underweight. The country’s new Prime Minister, Sanae Takaichi, announced a 135 billion dollar stimulus package in November to boost growth and strengthen defence. Defence stocks reacted positively to the decision. Uncertainty over the yen’s trajectory is the main reason for our underweight recommendation, as a significant yen appreciation would hurt exporters’ earnings.

Health care overweight

We are upgrading health care to overweight in our sector recommendations. Health care is a growing sector largely unaffected by economic cycles. However, this year has shown that political developments can have an impact on it. President Donald Trump’s administration has aimed to lower drug prices and pressured pharmaceutical companies through tariff threats to relocate production to the US. These factors have weighed on share price performance, making valuations attractive. We believe the biggest challenges are now behind us, as import tariffs have mostly settled at around 15% and price negotiations have concluded.

Figure: Health care sector performance has been muted this year, but the biggest concerns are likely behind us.

We are also maintaining an overweight in the financial sector. European banks have performed strongly this year, and a macroeconomic recovery continues to support a positive outlook. In the US, the banking sector’s performance has been average compared to the broader market, but regulatory easing – which is on the administration’s agenda – could provide a tailwind next year. We are keeping the defensive consumer staples sector underweight due to weaker growth prospects.

Finland’s economic growth continues to face challenges

Finland’s economic growth has fallen slightly short of forecasts this year, as the economic recovery has not kicked off as expected, despite significantly lower interest rates. According to preliminary data released in late October, Finland’s GDP contracted by 0.1% in July–September compared to the previous quarter, a weaker-than-expected figure. Full-year economic growth looks to be nearly zero.

There are no clear signs of the long-awaited recovery in private consumption, despite consumer purchasing power continuing to improve over the year. Nordea’s card transaction data indicates that consumption was slightly lower in the third quarter than a year ago. High unemployment has kept consumer spending low, which has resulted in a higher household savings ratio.  On the other hand, there have been positive signs in the manufacturing sector. New orders have come in this year at a good clip, promising future growth in manufacturing output. As for the construction sector, the situation remains difficult. 

Both Europe and the US are seeing signs of recovery in the outlook for manufacturing, a key sector on the Helsinki Stock Exchange. Uncertainty over a recovery in the economic cycle led to earnings forecast cuts on the Finnish stock market, especially in the first half of the year. Despite this, stocks have performed strongly. The robust third-quarter earnings raised stock prices and reinforced confidence in current forecasts. On the other hand, valuation multiples have already risen above their historical average on the Helsinki Stock Exchange. As a whole, the outlook for manufacturing is more important than the outlook for the service sectors to the cyclically sensitive Helsinki Stock Exchange. 

Among the large caps, Outokumpu, Nokian Tyres and QT Group saw the biggest cuts to their earnings forecasts over the past three months. Year-to-date, the poorest returns have come from QT Group, UPM and Huhtamäki, which are suffering from a weak outlook. On the other hand, the top performers this year have been cyclical companies that are enjoying a recovery in the manufacturing sector. The best returns, topping 50%, have come from Wärtsilä, Metso and SSAB. 

Earnings season beat expectations

Investors in Finland began the third-quarter earnings season with anticipation, as uncertainty over earnings forecasts was higher than usual due to unpredictable global trade policies. When all was said and done, the figures reported in the earnings season were better than expected. Among individual companies, Neste and Nokia served up the biggest positive surprises. Among sectors, engineering companies were a bright spot with strong earnings reports and order books, whereas the forest industry performed poorly as expected. The financial sector sent a strong message during the earnings season, with Nordea and Sampo reporting good results.

Earnings season beat expectations

Investors in Finland began the third-quarter earnings season with anticipation, as uncertainty over earnings forecasts was higher than usual due to unpredictable global trade policies. When all was said and done, the figures reported in the earnings season were better than expected. Among individual companies, Neste and Nokia served up the biggest positive surprises. Among sectors, engineering companies were a bright spot with strong earnings reports and order books, whereas the forest industry performed poorly as expected. The financial sector sent a strong message during the earnings season, with Nordea and Sampo reporting good results. 

With share prices up, valuation of Helsinki Stock Exchange is now above average 

The valuation level of the Helsinki Stock Exchange is above its historical average following the strong rise in share prices. However, the anticipated recovery of the economy and especially manufacturing in Europe is set to underpin earnings growth prospects on the Helsinki Stock Exchange, which makes the higher valuation level justifiable.

Moderate progress in fixed income markets

Bond markets have seen moderate changes over October and November. The yield on Germany’s 10-year government bond stayed within a narrow range, rising to 2.7% in November. Eurozone government bonds returned 0.9%, while corporate bonds brought in 0.5% over the same period. Corporate bond spreads have moved slightly but remain low. Demand for corporate bonds has been strong, even when stock markets have been volatile. In uncertain times, government bonds have benefited from investors seeking safe havens.

In the US, interest rates have edged down this autumn, with the 10-year Treasury yield dropping to 4%. The Fed’s expected rate cuts have helped push rates lower, and easier monetary policy has kept corporate risk margins tight.

Fed poised to ease monetary policy

Attention is now on the US Federal Reserve, which is widely expected to cut its key interest rate in the coming months. Market expectations have changed rapidly lately, reflecting uncertainty about the economic outlook. At the moment, most expect the Fed to lower its rate by 0.25 percentage points at its December meeting. The Fed’s key rate currently sits between 3.75% and 4.00%. Looking ahead to 2026, markets expect further cuts, with the rate possibly falling to around 3%. The Fed’s move towards easier policy is being driven by slightly weaker economic data in the US. The labour market has cooled since spring, and consumer confidence has also slipped.

The European Central Bank (ECB) is keeping a close watch on the economy and is unlikely to change its policy for now. Inflation in the eurozone has dropped to the ECB’s 2% target, and there’s cautious optimism about growth next year. The ECB has already eased policy quite a bit, with its deposit rate for banks falling to 2.0% from a peak of 4.0%. Euribor rates are now around 2%. Investors don’t expect the ECB to make any moves in the coming months.

Corporate credit spreads remain low

Corporate credit spreads have moved up slightly from their lows earlier in the year, but they’re still low by historical standards. The recent ups and downs in spreads have mostly been driven by volatility in technology stocks. 

In picture: Eurozone investment grade and high yield bonds have low spreads.

In an environment of moderate economic growth, corporate credit quality is expected to stay stable, and spreads aren’t likely to widen much unless the economy slows down. On the flip side, investors shouldn’t expect big gains from spreads narrowing further. For investment grade corporate bonds, attention is now on how much new debt will be issued next year, especially for AI investments and possible acquisitions. The default rate in the high yield bond market is currently low and is expected to stay low to moderate next year.

Diversified bond portfolios offer attractive yields

If you’re looking for stability in your portfolio to offset possible swings in the stock market, bonds are worth considering. We recommend a neutral weighting across all bond types in a fixed income portfolio. With a diversified bond portfolio, investors can currently access yields of around 3.5%, which is clearly better than the roughly 2% available in the money market. Among Nordea’s funds, Säästö Korko, for example, invests broadly across the fixed income market. In Nordea’s investment view, money market investments are currently underweighted.

Asset classes

Bond markets

Equity markets

Returns by asset class

Asset class returns for the past 12 months: Global equities 8,3 %, Eurozone high yield bonds 5,1 %, Eurozone corporate bonds 3,2 %, Eurozone government bonds 0,5 %.

Asset class returns for the past 12 months: North America 5,0 %, Europe 17,4 %, Japan 13,9 %, Emerging markets 18,1 %, Finland 29,1 %.

Responsible editor
Antti Saari, Wealth Management, Nordea Bank Abp
antti.saari@nordea.com

Content production
Hertta Alava, Ville Korhonen, Antti Saari, Teemu Mäkelä

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Investment services are provided by Nordea Bank Abp. The issuer of the products described in this message is Nordea Funds Oy. The information provided in this message is intended as general product information only. This information is not an exhaustive description of the products or the risks related to them and does not constitute investment advice or recommendations. Remember that investing always involves risks. The return on your investment may fluctuate, and you may lose some or all of your capital. Past performance is not a guarantee of future results. Before making any investment decisions, you should read the relevant prospectus and key investor information documents for more details about the investment product.

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