As we write these lines, the US market is approaching its historical peak, last reached in February 2025, and most asset classes have posted positive returns in local currency since the start of the year. [1]
Is the reality of financial markets disconnected from investors' perception of risk ? Time and again, investors express skepticism about the upward trend in equity markets, while economic and political reality seems to present mounting uncertainties. This disconnect can be explained. Uncertainty triggers negative emotions and can bias investors' perceptions, while markets reflect the aggregated decisions of millions of investors and thus appear more reliable, representing the decisions of millions of investors...
Since the start of the year, we have been in an extreme version of this divergence. The social contract is unraveling, and a form of “law of the strongest” seems to be taking hold... The political, social and economic order is being reshaped, making projections difficult on any horizon. What are the rational implications of this transformation for financial markets? How can portfolios be positioned to take measured risks?
Who Will Emerge as the Strongest Economically ?
Ultimately, economic prospects are largely shaped by decisions from US authorities. In our central scenario, we expect a global economic slowdown driven by a significant change in the effective US tariff rate (above 10%).
The United States is unlikely to escape unscathed - economic growth could fall below 2%. While a recession should be avoided, the risk could increase if further negative shocks (such as ongoing armed conflicts) materialise. The impact on global trade could also result in a temporary increase in inflationary pressures. The Fed's mission will be all the more complex as the context becomes "stagflationary". We therefore expect a first rate cut in December, followed by two to three additional cuts in early 2026. Fiscal support will remain marginal, far from being "big" or "Beautiful" as claimed. Still, the US private sector remains healthy, with near-record profit margins, no excessive debt level and no major financing issues.
In Europe, US trade policy poses a significant challenge and is likely to continue weighing on economic activity, particularly by delaying corporate investment decisions. Inflation in the euro area is now under control, and wage growth is clearly slowing. This Gives the ECB room to ease monetary policy, cushioning the economic deceleration. Germany's fiscal shift marks a major turning point for Europe, while the gradual rollout of defense and infrastructure investment plans should help offset the negative impact of tariffs.
In China, authorities are implementing countercyclical policies in an attempt to stabilize growth. We expect growth to decelerate to just below the 5% target set for 2025.
Economic leadership remains at the heart of the ongoing global realignment. Artificial intelligence applications should continue to expand in the coming months, improving efficiency and productivity. The battle for dominance between the United States and China is well underway on the medium term.
Will the US Maintain its eExceptionalism in Financial Markets ?
In January 2025, investor surveys reflected a broadly positive consensus in favor of US equities, the US technology sector, and the dollar.
The sudden questioning of America’s "exceptionalism" has come as a surprise. It has awakened non-US investors seeking diversification. Investors are starting to diversify their allocations, while portfolios are still heavily tilted towards US equities. Geographic, sectoral and factor diversification can now offer improved risk hedging, without sacrificing performance.
Nevertheless, American exceptionalism is not a bubble because it is supported by superior corporate earnings growth. After the 2008 global financial crisis, the United States recovered much faster than the rest of the world by implementing appropriate monetary and fiscal policies. The strong growth of the technology sector and the appreciation of the US dollar created a virtuous circle for both domestic and international investors, for whom diversification became less relevant, leading to the current extreme concentration in equity markets.
The evolution of financial flows and the search for diversification in the coming months will depend above all on the United States’ ability to maintain its relative attractiveness. This includes the appeal of "megacap" stocks and their technological leadership, the attractiveness of government bonds, and most importantly the stabilization of the dollar - since currency risk is a key factor in any international allocation.
The US dollar has dropped more than 10% since the beginning of the year, one of its worst historical performances.
This trend is set to continue into the second half of 2025. The US economic slowdown and the anticipated rate cuts by the Federal Reserve should contribute to the dollar's relative weakening, while the widening budget deficit undermines confidence in the sustainability of public finances. At the same time, international central banks are continuing to diversify their reserves, reducing their exposure to the dollar.
What Allocation should you Favor in the second half of the year ?
Equities : Seeking growth in a World Without Drive
In this environment, we are adopting a neutral and well-diversified stance on equities. We avoid regional biases and favor diversification by sectors and styles, with a focus on sectors and companies with strong earnings momentum, such as technology, as well as sectors supported by fiscal policies, like infrastructure, industry and defense in Europe. In the absence of clear catalysts for a broader market rally, we maintain a balanced approach.
US equities currently appear well valued in our opinion, with markets pricing in a favorable scenario regarding trade and fiscal policy, which limits their upside potential and may increase the risk of disappointment. Current consensus forecasts expect earnings growth of 9-10%, while fundamentals (orders, GDP growth) suggest a figure closer to 5%. In this context, we remain selective, with a preference for technology stocks, driven by structural growth linked to artificial intelligence. Despite political uncertainties, US companies have shown resilience, with earnings growth of 12% ahead of Liberation Day and an outlook that remains above consensus expectations. However, in an environment of sluggish growth and persistently high interest rates, the market scenario could resemble that of 2023-2024: excessive concentration of performance on a small number of stocks.
The structural under-exposure of global portfolios outside the United States, combined with a gradual weakening of the dollar, makes international markets attractive. Contrary to the belief that the rotation towards international equities has already largely occurred, data show that it has, in fact, barely begun.
The eurozone stands at a crossroads, facing a trade-off between much-needed higher spending on defense and infrastructure, and a response to pressure from US tariffs. Despite these trade tensions, European companies benefit from more active fiscal responses and more attractive valuations, which have contributed to their recent performance. After the rebound, valuations in some domestic sectors (banks, utilities) appear to be in line with their historical averages. The euro's appreciation could also weigh on earnings.
In emerging markets, the evolution of the US dollar is a key factor. Valuations appear attractive, with a forecast price/earnings (P/E) ratio of 12x earnings, compared to 19x[2] for developed markets, while overall investor positioning, particularly in China, remains low. The easing of trade uncertainties between the US and China is a positive factor, as is China's renewed willingness to support the private economy, with the potential for further stimulus measures. However, domestic activity in China has been sluggish for some time, and investors remain generally cautious. Any improvement in consumption would thus come as a pleasant surprise. We remain positive on Chinese technology, viewing recent weakness as an opportunity to increase exposure, with a likelihood of broader participation in the Chinese market.
Bonds : Defensive Positioning with Selective Carry Pockets
We maintain a long duration position in the eurozone and remain neutral on US Treasuries. In a diversified portfolio, duration continues to offer effective protection, particularly in a slowing economic environment with moderate inflation. In Europe, the European Central Bank appears to us close to the end of its easing cycle, although two further rate cuts are still anticipated by year-end. This dynamic, combined with a still sluggish macroeconomic backdrop and well-anchored inflation, supports our constructive view on European sovereign debt.
In the United States, our stance on interest rates remains neutral as we await a more attractive entry point. We expect a slight decline in yields in the second half of 2025, driven by a gradual weakening of economic activity and expected rate cuts from the Federal Reserve. Inflation is likely to remain erratic, with upward pressures from tariffs and expansionary fiscal policy offset by a weaker macroeconomic backdrop.
On the credit side, we reaffirm our preference for investment grade bonds, with a favorable bias toward European credit, which benefits from solid fundamentals and greater resilience in an uncertain environment. On the other hand, we remain more cautious overall on high yield.
Emerging market debt is regaining interest on the back of positive real yields, a weakening dollar and de-escalation in the trade war. These factors are improving the relative attractiveness of emerging assets, despite investors still maintaining a modest overall positioning.
Gold and alternatives to support portfolios
Gold retains a strategic role in portfolios, acting as an effective hedge against geopolitical uncertainties, real rate volatility and extreme macroeconomic risks. Despite high nominal yields, demand remains strong, driven by continued central bank purchases, the replenishment of international reserves and renewed interest from individual investors and ETFs.
Given the persistent volatility and asymmetrical risks in markets, we maintain an allocation to liquid alternative strategies. These approaches offer portfolio stabilization and complement more traditional and directional exposures by providing uncorrelated returns.
Navigating Uncertainty, Investing with Discernment
In a rapidly evolving environment marked by economic, geopolitical and technological dynamics, the law of the strongest seems to prevail - not only in international relations but also in market balances. More than ever, investors will need to reconcile agility and selectivity in managing their portfolios.
[1] Past performance is no guarantee of future results and is not constant over time
[2] Source: Bloomberg
