Growth slowing down, markets moving higher?

Nevertheless, there are some bright spots in Europe as well. For instance, the number of new mortgage loans has risen sharply in recent months. Historically, this is a good sign for the development of retail sales. Mortgages are, after all, loans – and when consumers borrow more, they generally spend more, which is favourable for economic growth. Overall, we expect growth in the eurozone to remain low this year, eventually picking up slightly in 2025.

In contrast to Europe, consumer spending in the US remains solid. And although the labour market is cooling down a bit, the US is enjoying higher economic growth than the eurozone. That said, US growth has significantly slowed this year compared to last year. But inflation is also falling, allowing the Federal Reserve (Fed) to cut interest rates further. A soft landing for the US economy thus seems within reach. In that scenario, inflation and growth gradually decline without the economy slipping into a recession.

On balance, we think the global economy can reach a trend-like growth level in 2025. Against this backdrop, we remain slightly overweight in both equities and bonds.

Despite uncertainty about the upcoming US presidential elections and tensions in the Middle East, sentiment in equity markets remains positive. Both the S&P 500 and the Dow Jones reached new record highs last week.

The earnings season for the third quarter has just begun. At this moment, it is too early to determine whether corporate earnings for the past quarter meet market expectations. But if we zoom out a bit, we see that earnings have been increasing since early 2023, both in the US, Europe, and emerging markets. Market analysts also foresee a robust earnings recovery for the next 12 months. But at the same time, we see more analysts revising their earnings expectations downward, as the economy cools.

Overall, we find the macroeconomic climate favourable enough to remain slightly overweight in equities. Given the resilience of the US economy, we prefer US equities over their European counterparts. We are neutral on emerging markets.

At the sector level, we are positive about information technology (slightly overweight). We think this sector will continue to benefit from long-term trends such as digitalization and the rise of generative AI. We are also slightly overweight in the healthcare sector. This sector is less sensitive to economic developments, which we see as a plus now that growth is slowing down. In the materials sector, we are slightly underweight: decreasing demand could adversely affect company earnings in this sector. We are also slightly underweight in consumer staples. Our view on all other sectors is neutral.

We expect a further decline in the high interest rates that are currently affecting European consumers. Last week, the ECB took another step in this direction by lowering its policy rate by 0.25% again. Lower interest rates are not only good news for consumers but also for bond investors. We therefore remain slightly overweight in bonds. We prefer high-quality bonds, such as government bonds and investment-grade corporate bonds. We are cautious about riskier bonds (bonds with relatively high credit risk), such as high yield and emerging market debt.

Given our expectation of further declining interest rates, we maintain a high duration (interest rate sensitivity) in the portfolio. When interest rates fall, the prices of long-term bonds – bonds with higher duration – rise faster than those of bonds with a shorter maturity.

In the short term, the US presidential elections could lead to more volatility in financial markets. Geopolitical tensions could also cause market unrest. But in the somewhat longer term, the market environment is favourable. This offers opportunities for risky assets, such as equities. And now that central banks have taken their foot off the monetary brake, bonds can also yield attractive returns. In short, although growth may slow down, markets can continue to rise.

Following the outcome of the US elections and its potential impact on markets, we are adjusting our equity positioning at both the regional and sector level.

At the regional level, we are increasing our equity position in the US from a modest overweight to an overweight. At the same time, we are decreasing our position in European equities, moving from a modestly underweight position to an underweight position.

At the sector level, we are increasing our position in financials from neutral to modestly overweight. At the same time, we are decreasing our position in consumer staples, moving from modestly underweight to underweight. This implies that our new sector positioning will entail overweight positions in IT, financials and healthcare, and underweight positions in consumer staples and materials.

The core reasoning behind the adjustments is related to the outcome of the US elections. We believe the anticipated ‘red sweep’ by the Republican Party will have a positive impact on near-term sentiment in US equity markets, with investors anticipating lower taxes, the implementation of import tariffs and deregulation. For European markets, the election outcome could have adverse effects, especially given the possibility that import tariffs will be imposed on specific European product categories, which comes on top of already quite lacklustre economic growth in Europe.

From a sector perspective, we believe the financial sector, especially in the US, will benefit from anticipated policy measures by the Trump administration. Meanwhile, we expect that the consumer staples sector will continue to struggle.

Richard de Groot
Chair ABN AMRO Global Investment Committee