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3/21/2025
Nothing is all that certain in Washington these days. This was the backdrop against which we developed the latest update to our strategic 12-month outlook.
Since Donald Trump took office, U.S. equities have plunged - his tariff policy has many worried. More recently, there have been doubts about U.S. growth, but hopes for higher growth in Europe. We are leaning in that direction as well. Our Chart of the Week shows our growth return forecasts for the next 12 months, based on our latest strategic outlook.
Our core scenario remains that pressure, including from markets, may eventually lead to U.S. policy adjustments that make recent declines on Wall Street look excessive. In particular, we do not expect the level of punitive tariffs announced so far to be maintained. However, the picture is likely to remain mixed at best. For example, the very concept of reciprocal bilateral tariffs on certain goods from certain countries is likely to create a lot of uncertainty in the short term and new administrative burdens and other headaches in the long term.
Few market participants expected this to happen. The trade threats were thought to be mainly a negotiating tactic, while corporate tax cuts and deregulation would fuel "animal spirits" and drive U.S. equity markets, already buoyed by "American exceptionalism," to new heights. Instead, Trump and several members of his cabinet have signalled their willingness to potentially push the U.S. into a recession in the name of a desired rebalancing of the U.S. economy. Unpredictable policies are already dampening sentiment among U.S. businesses and consumers. The poor sentiment has even been reflected in U.S. credit ratings and risk premiums on corporate bonds.
*Gross Domestic Product (GDP) and inflation forecasts are for calendar year 2025. **Total return forecasts are through the end of March 2026. Gilts = 10-year U.K. sovereign bonds; Bunds = 10-year German sovereign bonds; S&P 500 = S&P 500 Index; Dax = Dax 40 index; Stoxx 50 = Euro Stoxx 50 Index; FTSE 100 = FTSE 100 Index; Oil = Brent Crude Oil; Gold = XAU Currency Index
Sources: Bloomberg Finance L.P.; DWS Investment GmbH; as of: 03/13/25
In the rest of the world, the picture is more nuanced, although we remain fairly supportive on our gold view as a potential counterweight to geopolitical uncertainty. Traditional U.S. allies are distancing themselves from Washington. For investors, this may strengthen the case for globally diversified portfolios. Already, U.S. institutional investors appear to be showing increased interest in European equities for the first time in many years. However, in our view, Europe is no longer cheap by its own historical standards, which is why our return forecasts here are also quite muted.
All of this leaves central banks and bond investors torn between inflation and growth concerns. We expect the Federal Reserve to cut rates twice more during the forecast period. We expect the European Central Bank to cut rates only once. This contributes to our expectation of a weaker dollar at $1.15 per euro by March 2026. U.S. government bonds should continue to trade in a relatively narrow range; we see 10-year Treasury yields at 4.5% in March 2026. Despite the huge fiscal packages that Germany is about to pass, we see Bund yields below 3% in twelve months' time, not least because of Germany's low potential growth. In corporate bonds, we prefer investment grade to high yield.
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