• Structural distrust of US economy unwarranted
• Inflation effect of US trade tariffs still to come
• Investment policy unchanged

Global financial markets closed the first half of the year on a strong footing. In June alone, the MSCI All Country World Index gained 3.9%, bringing its year-to-date return to 7.3% in USD terms. The S&P 500 advanced by 5.1% during the month (Q2: 10.9%), reaching new all-time highs. However, beneath the surface, the rally remained narrow, as the recovery was primarily driven by large-cap technology and AI-related names. Broader indices, such as the equal-weighted S&P 500, delivered more modest returns (3.4% in June), underscoring the market’s dependence on a limited number of growth drivers. European markets underperformed in June amid mixed economic data (MSCI EMU: -0.7%). Fixed income markets posted solid gains in June, supported by falling yields and stable credit spreads. In Euro terms, the 2025 year-to-date equity return are still very modest, with global equities (AC) at -4.5% YTD. US Treasuries rose 1.3%, while European returns were more muted, with the aggregate index flat and credit markets posting modest gains. While political and fiscal uncertainty capped upside in Europe, expectations of rate cuts—driven by softer inflation and weaker macro data—provided a favourable backdrop for bond markets globally.

Geopolitical tensions briefly returned to the forefront in June, following Israeli strikes on Iranian nuclear sites and subsequent targeted US military actions. While these developments triggered temporary spikes in oil and gold prices and heightened uncertainty in the Middle East, the broader market response remained contained. A ceasefire has since been established, and risk sentiment proved resilient. Against this backdrop, the combination of easing inflation pressures, resilient earnings, and improving policy visibility has created a more constructive tone across markets—though short-term volatility, especially around trade and central bank policy, remains likely through the summer.

The US economy is clearly slowing, but the nature of the slowdown is structural rather than cyclical. Following years of aggressive post-pandemic stimulus, the economy is transitioning away from excess. Real consumption has weakened—particularly in discretionary goods—while the housing market is facing growing supply and falling prices. Corporate investment has moderated, and while the labour market remains intact, signs of softening are emerging through rising continuing claims and slowing wage dynamics. This cooling phase reflects a rebalancing rather than a breakdown. Markets have largely repriced expectations: earnings forecasts outside the technology sector have been materially adjusted, and the underlying macro signals point to a decelerating but still functioning economy.

On the policy side, the US administration is clearly prioritizing nominal growth as a response to its growing fiscal challenges. The One Big Beautiful Bill, though not yet fully in effect, outlines a sweeping tax and spending agenda that will expand deficits substantially in the coming years. Rather than front-loading austerity, the government is pursuing a strategy of growth-led debt stabilization—relying on stronger economic output and higher nominal revenues to manage its obligations. Complementary regulatory measures, such as capital relief for banks, are intended to unlock credit flows and support domestic demand. Tariffs are also being maintained not only as geopolitical leverage, but increasingly as a fiscal tool to help offset revenue gaps. While not branded explicitly as a growth strategy, the overall policy mix reflects a deliberate effort to sustain economic momentum and avoid a fiscal contraction. Tariff policy, while still a source of friction, appears more tactical than ideological. The administration is using tariffs as both a negotiating tool and a fiscal instrument, given the widening deficit path. This pragmatism suggests that headline tariff levels are unlikely to escalate substantially from here, as the priority remains preserving nominal growth to manage rising debt.

Monetary policy remains pivotal. The central bank has been cautious, citing concerns about tariff-related inflation and lingering supply-side price pressures. However, the more relevant signals—particularly on the demand side—suggest that underlying inflation is easing and that real rates are now too restrictive. While we acknowledge the Fed’s data-dependent stance, we believe there is a growing case for gradual but meaningful rate cuts in the second half of the year. Tariff effects are largely supply-driven and should not dominate policy decisions. With growth cooling and inflation normalizing, we expect the Fed to shift its focus toward supporting domestic demand and maintaining financial stability. In the meantime, the adjustment burden has largely fallen on the US dollar, which has weakened in response to softer data and policy uncertainty. The depreciation has helped absorb pressure that might otherwise have weighed more directly on stock markets, acting as a release valve for broader economic imbalances. However, the dollar’s decline is not driven solely by cyclical factors like growth differentials or shifting yield expectations. A deeper, structural reassessment is underway, as investors increasingly question the long-term fiscal outlook and the credibility of US institutions. As a result, the weakening dollar also reflects a partial erosion of trust—one that could amplify capital outflows over time.

While near-term volatility remains a risk—driven by geopolitics, trade policy uncertainty, and uneven data—we believe the second half of the year holds room for a gradual improvement in market conditions. A clearer policy backdrop, softening inflation, and the prospect of more accommodative monetary policy should provide support, particularly if central banks adjust cautiously to shifting economic dynamics. Against this backdrop, we continue to favour high-quality equity exposures, growing duration positions in sovereign bonds, and a reduced reliance on cash. Gold remains an effective strategic hedge in a more volatile and currency-sensitive environment. Overall, the investment outlook is stabilizing, but challenges remain. We are closely monitoring these challenges, but they also present opportunities for positive surprises which should not be underestimated.

 

Please find attached our last Asset Allocation Update for July.