Investment Traffic Lights

1.1  Markets in April showed more pain than even MAGA supporters were willing to endure

In a rally in Michigan, Donald Trump called the first 100 days of his second presidency “the most successful first 100 days of any administration in the history of our country.” Markets didn’t agree. During his first 100 days their performance was as follows: S&P 500: -7%; Nasdaq-100: -9%; Dollar Index: -9%; Gold: +22%; Volatility Index of S&P 500 (VIX): +53%; U.S. high-yield (HY) spread: +124bps. And finally, the Conference Board Consumer Expectations index fell by 23% to its lowest level since 2011.^[1]

It is fair to assume that, whatever their political background, investors won’t have fond memories of these 100 days. And foreign investors of U.S. assets even less so, as data has shown that European investors especially have taken money out of the U.S., although still only a tiny fraction of what they have poured in over the past couple of years.^[2] Underlying the unusual trend of European outperformance (while the S&P 500 fell 5% in the first four months of 2025, the Euro Stoxx 50 rose by more than 5%) are the recently published 1Q25 gross-domestic-product (GDP) growth figures: the U.S. shrank by 0.3% quarter on quarter while the Eurozone (EUZ) was up 0.4%.  

Nothing shaped April’s markets more than Trump’s tariff tantrum on April 2, where a global base tariff of 10% for all goods from all countries (except Russia and North Korea amongst a few exceptions) were announced as well as additional “reciprocal” tariffs ranging predominantly between 15% and 45% for 180 countries. In a tit-for-tat exchange with China, tariffs subsequently spiraled up to 145% for imports from China. But the subsequent meltdown of equity, bond and currency markets seems to have been too much for the U.S. administration to take and April saw a lot of backtracking, of which a 90-day pause on the application of reciprocal tariffs was the most important part. Markets appreciated Trump’s backtracking on tariffs and on U.S. Federal Reserve (Fed) Chair Jerome Powell, who Trump said he doesn’t intend to fire after having earlier called for Powell’s “termination.”

Notwithstanding the markets’ frightened reaction to extreme U.S. policies, a major lesson learned in April was that, especially in relation to China, the U.S. does not seem to have the stronger hand in the tariff poker. China, too, has cards to play. Other countries also figured out that it might soon be that trade deals were more urgent for the U.S. than for them, not least because of the weakening economic data. Another problem for the U.S. is rising inflation expectations: The University of Michigan index for inflation expectations over 5-10 years hit a historic high of 4.4% in April -- the previous record high was 3.4% in 2008.

What April’s tariff tantrum did to global growth prospects is well summed up in the International Monetary Fund’s (IMF’s) latest projections, published on April 14: “The new projection for 2025 economic growth is 2.8%, down from January’s estimate of 3.3%. Next year’s estimate is down 0.3% to 3.0%. If 2025’s estimate of 2.8% growth materializes, that would be the second worst expansion since 2009, and the slowest since Covid-19’s induced weakness of 2020.”

1.2 While full-month performance was muted, April’s first ten days broke many records

Optimists will point to the fact that the volatility of the S&P 500 as measured by the VIX peaked at over 60 and closed at over 50 on April 7, which it has done only twice this century. But by the end of the month it had halved. And if peak volatility means peak uncertainty and peak risk discounts in markets, one might see this as positive. But this positivity may prove only short-term should we see corporate earnings fall as a result of the new U.S. policies. 

Other striking market data from the first days of April were that the S&P 500 suffered its fifth-worst two-day decline since the 1950s and its worst day since 2020, but also recorded its best day since October 2008. The dollar’s decline continued and 30-year U.S. Treasury yields at one point jumped above 5% intraday. Gold and even Bitcoin were sought after, as were European bonds- the latter being perceived by investors as “safe haven of the month.”^[3]  The transatlantic rift led to the biggest weekly widening in the spread between 10-year U.S. Treasuries and German Bunds since German reunification in 1990.

The truly remarkable month may leave investors hoping that this was the “Trumpiest” things can get. But while this is far from certain, the repercussions of the stormy April are likely to keep investors occupied.  

The U.S. President's policies have forced us to revise our 12-month growth and market forecasts downwards in the second half of April. This is why we will focus more on our strategic than our tactical outlook in this month’s edition of the traffic lights. Regardless of how U.S. tariff policy develops, enough confidence has already been destroyed to make consumers, investors and companies more cautious. We expect markets to remain volatile in the short term but in our core scenario anticipate declining uncertainty and positive equity returns for the 12 months to come. Having said that, we assume to have seen peak uncertainty in the first half of April; since then Trump has mainly backtracked. Some might call this the Trump put, but the position remains uncomfortable for investors. It took a huge international backlash, including the threat of retaliatory tariffs, and an equity-market collapse and, probably the main trigger, sell-off of Treasuries and the U.S. dollar – potentially undermining the entire U.S. financial system – to push Trump into a still quite partial retreat.

Another point investors need to keep in mind in our view is that global market risk has increased. Should a global crisis occur it is now less likely that there will be a globally coordinated response under U.S. leadership, as in previous major crises. We have therefore reduced our target price-to-earnings (P/E) multiples, although only slightly for now. On the shorter-term outlook, one has to bear in mind that 1Q25 reporting by companies might be positively distorted by front loading, as companies and consumers tried to pre-empt the tariff increases.

2.1 Fixed Income

The tariff tantrums have put global government bonds through the wringer with U.S. yields torn between rising, on account of higher risk and an increased term premium, and declining because of lower growth. We see volatile sideways trading ahead for the coming months. In corporate bonds we believe that both the increased economic and idiosyncratic risks call for investors to consider carefully the relative merits of investment-grade (IG) and high-yield (HY) bonds.

Government Bonds

EUZ: Additional rate cuts by the European Central Bank (ECB) in combination with lower inflation and growth forecasts should be supportive of European government bonds in general. We expect a steepening (Bund) yield curve and no major spread compression of Italian Government Bonds (BTPs) versus Bunds. We revise our forecast for 2-year Japanese Government Bond (JGBs) yields to 1% and remain cautious on 10-year JGBs where we expect 1.7% yield.

U.S.: The recent Treasury-curve steepening amidst an uncertain, negative growth backdrop is unsettling. Real yields higher than 2% and nominal rates higher than 4.5% are harmful to the U.S. economy and the administration's agenda in our view. We hope for new deals on tariffs and an improvement in fundamentals.

Corporate Bonds

EUZ: Based on our macroeconomic assumptions we are still positive on EUR investment-grade (IG) credit. The continued net inflow into the asset class is a strong technical support. We are more cautious on HY as spreads tightened again in the second half of April and reflect the current risk environment.

U.S.: We are slightly more cautious on IG as policy uncertainty may damage consumer and business investment / capital decisions (hiring and capex). Heavy maturities over the next few months should provide technical support with new-issuance demand intact & net issuance negative. HY spreads are too tight for the current risk environment we believe, but yields are compelling vs. U.S. equities.

Emerging Markets

We believe emerging-market (EM) sovereigns yield spreads could move wider on an index level. While the carry remains attractive in our view, we prefer EUR vs USD EM sovereigns.

Currencies

The economic outperformance of the Eurozone and Japan should lead to some appreciation of the euro and the yen. Other European currencies should benefit as well. We do not expect a classical “confidence crisis” in the U.S. – the shift is likely to be less dramatic. Commodity and emerging-market currencies would be unlikely to benefit as weaker global growth is negative for them and China is weighing heavily. Our base-case forecast is for a softening dollar so that EUR/USD reaches 1.18 by March 2026 and USD/JPY reaches 135.

2.2 Equities

We hope “peak fear,” at a VIX of 50 in early April, may already have passed. Diversifying equity investments into Europe or EM has clearly benefited investors in recent weeks, especially when returns are measured in the common European currency, which has been appreciating.

We expect several trade deals to be negotiated over the coming months. They should moderate the huge tariff burden imposed by the “Liberation Day” announcements. Potentially, non-tariff barriers will be addressed, too. The costs of re-shoring the production of drugs, cars and semiconductors to the U.S. is, however, likely to become visible in the current quarterly reporting season. This will probably result in a period of economic stagnation as the global economy is afflicted by greater uncertainty, inefficiencies in manufacturing, the difficulty of adjusting supply chains and higher prices in the U.S.

As a result, we have cut our earnings estimates by 3-5% globally, which sets our earnings-per-share (EPS) estimates below current consensus estimates. We expect U.S. tech earnings to remain the backbone for the S&P 500 with mid-teens growth in 2025 and 2026. We have reduced S&P multiples by one P/E point to reflect our expectation of permanently higher risk on U.S. assets. We have left valuation multiples for ex-U.S. equities mostly unchanged as their relative attractiveness has increased in a more uncertain world. Our updated March 2026 index targets are S&P: 5,800; Dax: 23,500; Stoxx Europe 600: 550 and MSCI Emerging Markets Index (MSCI EM Index) 1,160.  

It is clear that there is a risk of substantial further deterioration if the global trade war escalates, with the world heading straight into recession. It is also possible that we have not yet sufficiently factored in the damage that has already been done to consumption and investment spending. In a worst case the U.S. dollar and Treasuries could lose their global perceived safe-haven status.

For the time being we stick to our base-case view that the “Trump put” will still apply and that he will pull back from the most damaging policies. We expect continued elevated volatility and will certainly have to review our strategic forecasts regularly. We believe equities outside the U.S. still have a good chance of continuing to outperform, especially if our call for further U.S. dollar weakening materializes. In a portfolio context, European equities are adding diversification and better valuation, and European small- & mid-caps are adding cyclical European exposure. Within Emerging Markets we believe Chinese equities should stand out due to expected favorable profit upgrades for the tech sector and stabilizing macro indicators (although tariff repercussions could still be a negative here). Global healthcare remains our preferred defensive sector, and we like European telecoms as an additional space in which to take cover.

2.3 Alternatives

Real estate

Lending margins in Europe and Asia Pacific are unchanged, and there are few reports of transactions being paused or cancelled. The sentiment towards core and residential real estate has improved due to lower bond yields and their safe-haven status. Liquidity may be held back by uncertainty, but lower bond yields and robust occupier fundamentals are supportive, particularly if macro uncertainty calms.

In the first quarter of 2025 the U.S. real-estate market was on an upswing, reflected in strengthening fundamentals, increasing values, and rising transaction activity. It is too early to gauge the impact of the tariff announcements. The near-term outlook for U.S. real estate has dimmed. Weaker economic growth and higher borrowing rates may quell tenant and investor demand, although low supply and an independent post-COVID recovery cycle (e.g., workers returning to office space) should help to cushion the blow.

Infrastructure

Infrastructure has outperformed in the year to date. The sector was also a relative outperformer during the tariff sell-off. Companies in Japan, UK and Europe outperformed on a relative basis, as did European Utilities and Communications. Single jurisdiction, characteristics that mean inflation can be passed on, and necessity-based assets provide a level of insulation from tariff impacts in the asset class.  

Gold

We raise our gold forecast yet again, though we see modest downside in the short term. Gold surged past our previous $3,200/oz 2026 target and exceeded $3,400/oz at one point. Elevated geopolitical trade uncertainty, a rapid deterioration in U.S. dollar confidence, persistent deficits, and a surge in global liquidity have all led us to raise our forecasts further. Strong demand from central banks is expected to continue. We see continued upside into 2026 and raise our March 2026 forecast to $3,600/oz.

Oil

Our revised forecast reflects weaker market fundamentals and elevated inventory projections through 2025. While OPEC+ is expected to continue phasing out voluntary cuts, the return of curtailed supply, in combination with lower-than-expected demand growth, particularly in China, is likely to keep the market oversupplied and cap near-term price gains. Our 12-month forecast for Brent crude is $63 per barrel.