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3/6/2025
The U.S. government is likely to keep the markets on their toes but investors are now better equipped to cope. Although the economic outlook has deteriorated, we still see upside in many asset classes.
Vincenzo Vedda
Chief Investment Officer
"Better than the worst case” is the new “better than expected.” Even though the growth outlook for the U.S., for example, has deteriorated since Donald Trump took office, many stock markets and corporate bond indices are trading close to their highs. It might have been worse, the market thinks. And perhaps things will get worse than the market is currently pricing in. Ultimately, however, it is corporate earnings that count. And, in our core scenario, these should continue to grow"
Vincenzo Vedda, Chief Investment Officer
A positive investment outlook at a time when the global security order and trade architecture are being redefined may appear bold. Our market outlook is based, as always, on our core scenario and we expect there will be no shortage of disruptive factors that could shake or even undermine that core scenario. First and foremost, the hyperactive U.S. president remains the biggest source of surprises, and not only negative ones. We believe that there was evidence of what the market calls the “Trump put” – a willingness to change course if markets fall too much -- in April and May. Trump backtracked on initiatives that were particularly troubling for the capital markets. However, we also believe that it is still impossible to predict how the higher tariffs and deliberate isolationism of the U.S. will eventually be reflected in corporate earnings. Where these policies are already reflected is in our growth forecasts. After 2.8% gross domestic product (GDP) growth last year, we now expect only 1.2% growth in the U.S. in the current year and 1.3% in 2026. For Germany, we see the opposite dynamic, with growth improving. We believe that the figure of minus 0.2% in 2024 will turn into 1.6% in 2026.
Based on this macro backdrop we have a positive 12-month outlook for equities – although we do expect temporary setbacks -- for five reasons:
The bond market will therefore be a key risk indicator over the next twelve months. If the sharp rise in Japanese government bond yields and concerns about the persistently high U.S. fiscal deficit were to lead to a sell-off at the long end of the yield curve, with foreign investors pulling back from U.S. assets, we would have to revise all our market forecasts. However, we do not expect this risk scenario to unfold despite the pressures on the U.S. budget. Our belief is that “de-dollarization” will be a very gradual process; and we also assume that the U.S. Federal Reserve (Fed) will intervene if 10- and 30-year Treasury yields rise well above five percent. Conversely, this means that we continue to view bonds as attractive. Whether short- or medium-term government bonds or investment-grade corporate bonds, their high current yields speak in favor of this segment. The weak U.S. dollar will also play a role in the coming year. The appreciation we expect for the euro, yen and some other Asian currencies would mean that the expected investment returns from global assets look most attractive in dollar terms.
Overall, therefore, our investment outlook is once again quite optimistic, even if return expectations are slightly below average. It is quite possible that equities and bond yields will not be far from their current levels in twelve months' time, after perhaps undergoing another significant correction or reaching new highs in the meantime. To take account of the increased uncertainty caused by the growing multipolarization of the world, we are once again focusing on a broadly diversified investment portfolio.
Based on this macro backdrop we have a positive 12-month outlook for equities – although we do expect temporary setbacks -- for five reasons. First, stock prices are driven by earnings in the long term. And we expect global earnings to continue growing in 2025 and 2026. Second, the S&P 500 in particular is benefiting disproportionately from artificial intelligence (AI) excitement and other digital growth. Third, companies have learned to adapt more quickly to external shocks over the past ten years. Fourth, in Europe, the prospect that fiscal policy will become more expansive is firing up growth and investment prospects. Fifth, should inflation rear its head again, equities, gold and some segments of the real estate and infrastructure sectors may offer relatively better risk management than cash or bonds.
The bond market will therefore be a key risk indicator over the next twelve months. If the sharp rise in Japanese government bond yields and concerns about the persistently high U.S. fiscal deficit were to lead to a sell-off at the long end of the yield curve, with foreign investors pulling back from U.S. assets, we would have to revise all our market forecasts. However, we do not expect this risk scenario to unfold despite the pressures on the U.S. budget. Our belief is that “de-dollarization” will be a very gradual process; and we also assume that the U.S. Federal Reserve (Fed) will intervene if 10- and 30-year Treasury yields rise well above five percent. Conversely, this means that we continue to view bonds as attractive. Whether short- or medium-term government bonds or investment-grade corporate bonds, their high current yields speak in favor of this segment. The weak U.S. dollar will also play a role in the coming year. The appreciation we expect for the euro, yen and some other Asian currencies would mean that the expected investment returns from global assets look most attractive in dollar terms.
Overall, therefore, our investment outlook is once again quite optimistic, even if return expectations are slightly below average. It is quite possible that equities and bond yields will not be far from their current levels in twelve months' time, after perhaps undergoing another significant correction or reaching new highs in the meantime. To take account of the increased uncertainty caused by the growing multipolarization of the world, we are once again focusing on a broadly diversified investment portfolio.
Market Outlook Q2 2025
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