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An Eventful Summer
There has been no shortage of news headlines this year, as US President Donald Trump has continued to stir the pot in global politics on many fronts. The summer is also set to be full of suspense, as the geopolitical environment remains unstable and the end of the pause in the tariffs approaches. Despite all this, global economic growth has continued at a moderate pace and shows no significant signs of slowing down. Nonetheless, the rather high valuation level of equities limits their return potential in the short term. In the midst of uncertainty, fixed income investments are a viable alternative to equities. We recommend a neutral weight for both asset classes.
The flood of news continues in the summer
In early April, President Donald Trump imposed substantial import tariffs on US trading partners, but soon delayed their entry into force by 90 days, allowing time for negotiations. This pause will end on 9 July and, if no new trade deals have been concluded by then, high tariffs may come into force. For China, the pause in the tariffs will end on 12 August. Trade negotiations are usually long and complex, and even with the straightforward negotiation tactics of Trump’s team, it seems unlikely that many trade deals would be finalised in time. It’s therefore possible that the lack of trade deals will cause jitters in the markets. However, Treasury Secretary Scott Bessent has already implied that the pause in negotiations may be extended with the parties who are negotiating in good faith. The market currently expects the final tariffs to be at around 10% on average, so anything higher than this would be a negative surprise.
During the summer, updates are also expected on the fate of Trump’s ‘Big Beautiful’ tax bill. Trump would like to have the legislative package passed by Congress by July 4. All the details are not yet clear, but at the moment it seems that the effects of the bill on economic growth and the budget deficit would eventually be quite small, despite the controversy surrounding it. Most of the tax cuts included in the bill are already in force, and the primary goal is to make the 2017 fixed-term tax cuts permanent. Among new additions are tax exemptions for overtime and tips. The missing details won’t change the fact that the budget deficit will remain high for the next few years and the federal debt-to-GDP ratio will continue to rise. However, the deficit could have increased by a lot more if all of Trump’s election promises had been fulfilled. From the perspective of a European investor, the most concerning part of the legislative package is section 899, which would allow the US to impose retaliatory tax on foreign companies or investors. If this act enters into force in its current form, it could encourage foreign investors to shift away from the US market. The Senate version of the bill proposes that the act would enter into force at the beginning of 2027, which is a year later than in the House of Representatives version.
In addition to economic news, the markets will also be following developments in the Middle East conflict throughout the summer. Will the ceasefire between Israel and Iran hold or will hostilities escalate again? The turbulence in the Middle East is worrying, but its impact on the global economy will remain minor as long as the supply of oil and gas is not disrupted. Any significant disruptions in supply are unlikely but cannot be completely ruled out, either.
The equity markets recovered quickly from the correction in early April, relying on Trump’s tendency to back down from decisions that negatively affect the economy. However, investors’ carefree attitude in a challenging geopolitical environment and ahead of major economic news increases the risk of market volatility in the summer. We are therefore keeping equities and bonds in neutral weight.
Economic growth continues at a moderate pace
Global economic growth is expected to remain moderate, although growth forecasts have been cut slightly due to the trade war. The biggest cuts have been made to the growth forecasts in the US, which were quite high at the start of the year. As an example, the US Federal Reserve projected last December that the US economy would grow by 2.1% this year, but by June the forecast had been downgraded to just 1.4%. Nevertheless, growth is expected to pick up gradually again in 2026 and 2027.
Europe’s recovery is expected to slowly gain momentum, as the halving of interest rates boosts investment and household purchasing power improves. Nordea’s economists predict that the eurozone economy will grow at a rate of up to 2% next year, slightly outpacing the growth forecast for the US. In the longer term, economic growth will also be boosted by strategic drivers, as Europe increases investments in the defence industry, the green transition and the reshoring of industrial production.
Among the emerging markets, Trump’s trade policy has so far hit China the hardest, as the average tariff on Chinese imports has risen to as much as 55%. Moreover, the previous exemption applied to packages containing goods worth less than 800 dollars has now ended. This has left many Chinese exporters in trouble, especially if their negotiating partner is a large US retail chain. Nevertheless, China is decisively supporting its economy through both monetary and fiscal policy, so the Chinese economy does not seem poised for a hard landing this time either.
Fed in wait-and-see mode
The US Federal Reserve has not cut its policy rate even once this year, despite inflation falling to a level between 2% and 3%. The Fed intends to remain in wait-and-see mode until the effects of Trump’s tariff policy on economic growth and inflation materialise. The fixed income market is pricing in two rate cuts for the rest of the year, which is in line with the median forecast of the Fed’s bankers. At present, the upper limit of the policy rate range is 4.5%.
In the eurozone, rate cuts may have already ended after the European Central Bank reduced its deposit rate to exactly 2% in June. Inflation has already reached the ECB’s 2% target, and the stronger euro contributes to reducing inflationary pressures through cheaper imported goods. If economic growth does not recover as expected or if the euro continues to strengthen, we could see further rate cuts. The Swiss National Bank cut its policy rate to zero in June in response to the appreciation of the franc and zero inflation.
Earnings season is approaching
In mid-July, investors will shift their focus to the Q2 earnings season. In the US, S&P 500 companies are expecting earnings growth of about 5% year-on-year, which would be the most modest growth rate since the last quarter of 2023. These expectations may potentially be too low, but tariffs, the weaker dollar and the replenishment of inventories at the beginning of the year make forecasting difficult. For the full year, earnings growth is expected to reach 9%, which could be achievable thanks to the strong first quarter.
The forward P/E ratio for the S&P 500 has risen on the back of the rebound in the equity markets to 22, which is higher than the average of the last 5 or 10 years. At the moment, the upside potential of equities is primarily based on earnings growth and not on higher valuation multiples.
Investors increase equity investments
After the correction in April, investors have quickly returned to the equity market. US retail investors, in particular, have increased their equity investments, while institutional investors have been slightly more cautious. The VIX index, which is also known as the market fear index, has returned to normal levels as share price volatility has subsided. It’s possible that volatility will intensify again over the course of the summer, but we do not expect the turbulence of April to recur.
Europe still overweighted
We continue to overweight Europe in our regional recommendations, as we expect corporate earnings growth to accelerate as a result of economic recovery and deregulation. Equity valuations have risen somewhat as a result of the rally, but we also believe that the brighter long-term outlook allows for higher valuation multiples than before. Some investors have started to pull out of the US as a result of political uncertainty, which has benefited the European equity market. The strengthening of the euro against the dollar is therefore a consequence of this reversal in capital flows. We consider it possible that the trend will continue.
However, the US stock market is the largest in the world and should not be forgotten. Even in neutral weight, we recommend allocating half of your equity investments to the US. The Japanese stock market remains underweight and the emerging markets in neutral weight. The outlook for the emerging markets is overshadowed by uncertainty about the final tariffs, which, according to Trump’s original plan, would be particularly high for many emerging markets. In this context, India appears to be a slightly more defensive market than others, as it’s not very dependent on goods exports and the most important drivers of its economic growth are domestic.
Overweight in the financial sector
In our global sector allocation, we are maintaining an overweight in the financial sector despite positive share price performance. We expect the sector to continue to be supported by reasonably high interest rates, growing loan volumes, deregulation and positive development in capital market operations. We continue to underweight the defensive consumer staples sector.
Overweight in corporate bonds
We are keeping European corporate bonds overweight and government bonds underweight. The credit spread on corporate bonds has tightened to a fairly low level, but a significant widening is unlikely as the economy recovers. For this reason, the expected return on corporate bonds is still higher than that of government bonds. In the first half of the year, riskier high-yield corporate bonds and emerging market government bonds have yielded the best returns. Investment flows into bonds denominated in the currencies of emerging markets have finally started to grow after a long slump, as bond investors aim to diversify their portfolios across various regions.
