• Trade agreements lead to higher US import tariffs
• Profit-taking on enlarged equity position, neutral outlook
• Weight of US government bonds reduced, credits expanded

Global financial markets continued their upward trend in July, with US equities reaching new all-time highs. The S&P 500 gained 2.2% for the month, resulting in an 8.6% increase year-to-date, while global equities posted similar gains. European equities, as measured by the MSCI EMU Index (+1%), underperformed their global counterparts, with the notable exception of the UK, which recorded a strong gain of +4.4%. Robust corporate earnings-particularly in the technology sector-and ongoing enthusiasm for artificial intelligence and innovation drove market sentiment. Early in July, trade agreements reached with major US partners, including the European Union and Japan, helped lift sentiment by alleviating immediate fears of an escalating trade conflict. However, these agreements also introduced higher-than-anticipated tariffs, pushing overall tariff levels to their highest point since the 1930s.

Despite this constructive backdrop, recent economic data from the United States have been softer than anticipated. Employment growth has slowed, with revisions to prior data pointing to a more pronounced deceleration, and GDP growth moderated to 1.2% in the first half of 2025, compared to 2.7% in late 2024. These developments, together with signs of easing inflation, have led markets to expect interest rate cuts from the Federal Reserve later this year, potentially amounting to 100 basis points by June 2026. Further policy easing is also anticipated from both the Bank of England and the European Central Bank.

At the same time, US politics have become an increasing source of market uncertainty. Pressure from the White House on the Federal Reserve and the early resignation of a key Fed governor have raised questions about central bank independence and the future path of monetary policy. Meanwhile, long-term fiscal sustainability has received more attention since the One Big Beautiful Bill (OBBBA) was passed. It is anticipated that this bill will significantly increase the US debt load. Together with the implementation of new US tariffs, some of which target important trading partners like Canada, Taiwan, and Switzerland, these developments have increased volatility and highlighted the unsettled nature of trade conflicts.

We do not believe current headwinds will lead to a recession or mark the end of the current equity bull market. Although the passage of the OBBBA has significantly altered the US debt outlook, we continue to view US debt as sustainable. Looking ahead, we believe the repercussions of the newly imposed tariffs are likely to remain contained. While trade tensions may contribute to short-term uncertainty, we expect the broader impact on growth to be cushioned by continued innovation, solid corporate balance sheets, and the growing likelihood of monetary policy easing. That said, markets may remain sensitive to developments on the trade front, particularly given the informal and provisional nature of recent “handshake” agreements, which leave room for further negotiations or potential reversals.

Against this backdrop, a balanced and diversified investment approach is favored. Following strong market performance, equity allocations have been reduced back to neutral, reflecting limited room for further expansion as valuations now stand above long-term averages. In fixed income, we have scaled back our overweight in US government bonds to a neutral position, given reduced yield attractiveness after hedging costs. Part of the proceeds has been allocated to investment grade corporate bonds, where we recognize the resilience of this asset class, though spreads remain tight. Our underweight in US investment grade credits is now less pronounced, while we continue to favor eurozone investment grade bonds for their relative appeal.

We remain alert to increased policy and economic uncertainty. The higher average level of US import tariffs is expected to push inflation higher and constrain global growth, while the outlook for further monetary easing in the US remains conditional on upcoming economic data. While a global economic expansion is still expected, we caution that much of the positive outlook is predicated on continued policy support, especially the anticipation of significant Federal Reserve rate cuts. However, there is a risk that these expectations may not be fully realized, potentially resulting in upward pressure on bond yields and renewed volatility in stock markets. In summary, the current environment calls for a neutral allocation to equities and bonds, a focus on quality and selectivity, and a commitment to broad diversification across asset classes and currencies to successfully navigate the evolving economic and policy landscape.

Please find attached our last Asset Allocation Update for August.