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Market backdrop: Good, with “ifs” and “buts.”
12/09/2025
Benign, for now: Our forecasts for the next 12 months
Let’s start with the basics. After strong investment performances in the year to date,[1]
“Recent earnings reports show growth. The U.S. Federal Reserve looks set to cut rates multiple times – we, along with most market participants, have pencilled in five cuts. Economic growth, both in the U.S. and globally, looks set to accelerate as we head into the next year, after this year’s soft patches,” explains Vincenzo Vedda, Chief Investment Officer at DWS. “However, there are plenty of 'buts' and 'ifs’, once you start looking more closely.”
Take investments and U.S. company earnings. Increasingly, these are driven by strong growth in corporate spending on artificial intelligence (AI). The long-term potential for positive AI surprises should not be underestimated as people and businesses learn how to best use the various new tools available to them. However, hype-driven exaggerations are also to be expected along the way, if economic history is any guide.
The same could be said of recent trade wars and truces, and the broader geopolitical shifts we are witnessing. Here too, there is plenty of hype – both in terms of positive and negative views. Our base case remains that average U.S. import tariffs will eventually stabilize at about 14%. That still looks just about manageable. So far, the introduction of U.S. import tariffs has been less harmful than feared, giving consumers and companies some breathing space to adjust to the new realities.
For fixed income, prospects of a lower yield differential between the U.S. and other developed markets look set to further weaken the dollar, as investors might diversify away from U.S. assets. Across regions, spreads remain near multi-year lows, supported by strong technicals (persistent inflows, healthy primary absorption) and resilient fundamentals.
In short, things look good for now, but with little margin for errors of any sort. And based on what we have all experienced so far this year, the next bit of political news causing market jitters is perennially only a social media post away. All this may help explain the continuing appeal of gold as a potential portfolio diversifier, after already rising 33% year-to-date.
Key DWS forecasts for the next 12 months
* Gross domestic product (GDP) growth expectations for 2026 (year-on-year in %)
** Consumer price inflation expectations for 2026 (year-on-year in %)
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 9/3/25
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Alternative investments may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable for all clients.