Cautious optimism amid uncertainty over tariff impacts

The tariff shock continues to weigh on global growth, with overall tariffs slightly exceeding initial expectations. However, the trade deals struck by the US in the summer have averted worst-case scenarios and provided more clarity to companies and economies. German defence spending and infrastructure investment will support growth in late 2025 and 2026, while domestic demand recoveries in both China and the eurozone are vulnerable due to weak confidence. Both the US and the eurozone face below-trend growth, with US inflation reaccelerating and eurozone inflation falling below target.

Global equity markets have continued their upward trajectory, buoyed by strong second-quarter earnings results, solid earnings forecasts and steady market momentum. Adding to the market's positive momentum are hopes that the Federal Reserve (Fed) will cut interest rates to support the economy. Fed Chair Jerome Powell’s speech at Jackson Hole fuelled these hopes, as he opened the door for a September rate cut. However, Powell also emphasised that any decision would hinge on incoming economic data, which includes new inflation and employment data. Our view on Fed will be updated when we have all data necessary available.
 
While market conditions remain supportive, risks to the rally remain. Valuations, particularly in the US, are nearing historical highs and significantly above long-term averages. Moreover, tariff-induced inflation and slowing growth could weigh on corporate margins and challenge optimistic earnings forecasts. Over the longer term, concerns are emerging about the reliability of key economic data and the independence of financial institutions, including questions about the Federal Reserve’s independence and the Trump administration's intention to buy a stake in Intel. While these issues are unlikely to trigger a sharp market correction in the near term, they could gradually erode investor confidence. This may lead to a slight increase in risk premiums.

Therefore, we are comfortable with our current position. We retain a neutral equity positioning, while we also keep a neutral regional allocation. That said, should volatility return to the markets, it could provide an opportunity to increase our equity exposure, provided economic fundamentals remain supportive.

On balance yields are stuck in a range this year. Treasuries are mainly trading between 4,25 – 4,5% and Bunds between 2,5-2,75%. With inflation, and especially inflation expectations, rising in the US, eurozone inflation is expected to surprise on the downside next year. This could result in lower yields in the eurozone. Spreads, on the other hand, tightened further with the exception around ‘Liberation Day’. However, spreads are now lower again than at the beginning of the year. This makes valuations of higher yielding bonds demanding.

As a result, we retain a modest overweight bond position with a preference for European high-quality bonds. We remain cautious on higher yielding bonds, like high-yield bonds, as we believe investors are not rewarded for the risk they take. At the same time, we maintain a slight overweight position in duration after we reduced this overweight earlier in the summer.

Financial markets are presenting a tale of two narratives: optimism spurred by strong earnings and economic resilience on one hand, and caution driven by elevated valuations and tariff impact uncertainty on the other. Equities have continued to climb a wall of worries, but the risk of a correction remains, especially in the US. For now, we maintain a neutral position in equities and a modest overweight in fixed income, favouring high-quality bonds. 

Richard de Groot 
Chair Global Investment Committee