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4/24/2025
The U.S. president's policies are forcing us to revise our growth and market forecasts downwards. 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.
When making long-term investment decisions, investors and company managers alike need maximum planning security and a reliable legal framework. The sudden way in which the U.S. government has upended its tariff policy in particular means this is certainly not the case at present. It is also extremely difficult when announcements seem not to be based on any comprehensible model, so that the 180 countries suffering punitive tariffs have no idea how they can avert them. Whether comprehensive and sustainable trade agreements can be negotiated within 90 days (the duration of the pause on individual tariffs) with so many countries is highly questionable. In any case, some damage likely to be caused by the universal tariff of 10% that will in all probability remain in place will persist.
From an investor perspective, it is important to distinguish between negative developments and negative surprises. We believe that, especially after ‘Liberation Day’ on April 2, the U.S. government will hardly be able to shock investors as negatively again. But the negative effects from policy so far mean that we expect the U.S. economy to weaken significantly this year, suffering at least one quarter of negative growth. And our forecast U.S. growth rate for 2026 has been halved from 2.2% to 1.1% – the sharpest cut we have made in any region. At the same time, we have raised our inflation forecast -- which explains why we do not believe that the U.S. Federal Reserve (the Fed) will counter the economic downturn with earlier and sharper interest rate cuts.
It is quite possible that our core scenario will prove too pessimistic in twelve months' time. However, a worse outcome than we forecast is just as possible. We are in uncharted territory. For the first time in many decades, the Western security architecture is up for grabs, investors are questioning the safe status of U.S. assets on a large scale, and globalization is facing a prolonged setback. However, there is still hope that companies will once again prove to be surprisingly adaptable, as they did during the Covid pandemic and the war in Ukraine.
Compared with our 12-month forecasts in March, we have slightly lowered our U.S. and German government bond yield forecasts and are now essentially not far from today's levels. The sideways movement is the result of opposing forces affecting yields: in the U.S., the economic slowdown (and the three interest rate cuts we expect) on the one hand, and the enormous refinancing needs and loss of confidence in U.S. Treasuries on the other. In Germany the trillion-euro infrastructure package is helping to counteract weaker-than-expected economic growth. On the currency front we do not see any recovery for the dollar and expect it to weaken further slightly.
Given the uncertain environment, we have decided to reduce both our earnings estimates and target valuation price-to-earnings multiples for equities slightly – which implicitly means that we are not modeling a deeper economic downturn here. We consider further setbacks over the coming months to be realistic, but there are also good reasons to stick with equities: they’re not only a potential hedge against a renewed flare-up in inflation, they also offer upside potential should U.S. policy prove more conciliatory after all. We prefer Europe to the U.S., as the U.S. valuation premium remains very high, and Europe should benefit from a shift in investor funds out of the U.S.
Oil: Due to reduced demand and high supply from OPEC+ countries, we have lowered our oil price forecast (per barrel of Brent) to USD 63 at the end of March 2026. By contrast, the gold price is continuing to rise due to unchanged high demand from central banks and private investors; we now see USD 3,600/ounce as possible in March 2026.
| Gross domestic product (GDP) growth (in %, year-on-year) | Inflation, CPI (in %, year-on-year) |
| Region | Old 2025F | New 2025F | Region | Old 2025F | New 2025F |
| United States | 2.0 | 1.2 | United States | 2.6 | 3.2 |
| Eurozone | 1.0 | 0.8 | Eurozone | 2.3 | 2.1 |
| Japan | 1.2 | 0.9 | Japan | 2.6 | 2.0 |
| China | 4.5 | 4.0 | China | 0.5 | 0.5 |
| Rates | Current[1] | March 2026F | Spreads | Current[1] | March 2026F | |
| U.S. Treasuries (2-year) | 3.87% | 3.95% | Italy (10-year)[2] | 113bp | 110bp | |
U.S. Treasuries (10-year) | 4.38% | 4.30% | U.S. Investment Grade[3] | 99bp | 110bp | |
| German Bunds (2-year) | 1.75% | 1.60% | U.S. High Yield[3] | 371bp | 450bp | |
| German Bunds (10-year) | 2.50% | 2.50% | Euro Investment Grade[2] | 105bp | 90bp | |
| Japanese gov. bonds (2-year) | 0.70% | 1.00% | Euro High Yield[2] | 371bp | 400bp | |
| Japanese gov. bonds (10-year) | 1.34% | 1.70% | Asian Credit | 212bp | 145bp |
| Equities | Current[1] | March 2026F | Currencies | Current[1] | March 2026F | |
| United States (S&P 500) | 5,376 | 5,800 | EUR vs. USD | 1.13 | 1.18 | |
| Europe (Stoxx Europe 600) | 517 | 550 | USD vs. JPY | 143 | 135 | |
Eurozone (Euro Stoxx 50) | 5,099 | 5,400 | USD vs. CNY | 7.29 | 7.50 | |
| Germany (Dax) | 21,962 | 23,500 | Commodities (in Dollar) | |||
| Emerging Markets (MSCI EM)[[4] | 1,096 | 1,160 | Gold | 3,228 | 3,600 | |
Japan (MSCI Japan Index) | 1,570 | 1,690 | Oil (Brent) | 66 | 63 |
F refers to our forecasts as of 4/23/25
bp = basis points
Source: Bloomberg Finance L.P.; as of 4/23/25
Spread over German Bunds
Spread over U.S. Treasuries
MSCI Emerging Markets Index
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R-070495-4 (7/25)
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