Solid US growth and inflationary risks
US activity is solid, while the disinflation process is stalling. A reflationary scenario seems likely for the months ahead: US growth is likely to remain robust and inflationary risks will emerge under the impetus of the Trump administration’s tariff threats and the rise in the public deficit. Against this backdrop, the US Federal Reserve (Fed) is likely to maintain a slightly restrictive monetary policy and limit its rate cuts.
In Europe, economic growth remained weak at the end of 2024, but confidence indicators started 2025 on a more positive note. Interest rate cuts are likely to be announced at every meeting of the European Central Bank (ECB) until at least mid-year. A cyclical recovery could be envisaged at a later stage, once the monetary easing has spread to credit and real activity. The political agenda in the eurozone remains heavy, but tensions are easing: budgetary uncertainties in France now seem to be behind us, while in Germany, measures to support growth could emerge after the elections. The major German parties are basing their campaigns on measures to remedy domestic economic weakness.
A favourable scenario for equity markets in the short term, less favourable for the bond segment
This reflation scenario is favourable for the equity markets, but weighs somewhat on the bond markets. The recent rally in US treasuries has created windows of opportunity to reduce positioning again on the long end of the curve, which will suffer from a rebound in inflation expectations. The desynchronisation of the economic cycle between the United States and the other developed countries is reflected in bond positioning. Eurozone sovereign bonds, on the other hand, should continue to benefit from the disinflation process still under way and from the acceleration of monetary easing by the ECB.
US economic activity will continue to underpin corporate earnings growth, and is a buoyant factor for equity markets in the short term. However, diversification beyond US large caps, where concentration risk and valuations are high, would seem to be in order. We have therefore reduced our exposure to US equities to a level in line with the benchmark index, and reallocated profits to other regions. Value sectors, such as financials, should outperform against a backdrop of solid growth and increasing price pressures. We also favour small- and mid-caps, which offer significant potential for catching up on valuations. Finally, we believe that a neutral stance on the US technology sector is essential, given that the US should remain at the forefront of innovation and that the sector should continue to outperform the market in terms of earnings growth.
In the longer term, the spectre of the trade war could weigh on growth
At the beginning of February, Donald Trump made good on his threats by announcing his first tariff hikes. These latest statements on trade policy are fuelling global geopolitical tensions, increasing inflationary risks and, in the longer term, could weigh on global growth. Tensions with China will be something to watch over the coming months. Since Donald Trump’s first term in office, they have spread to areas other than trade, such as financial markets and technology. The US administration’s current investigation into the potential threats to national security posed by Deepseek is its most recent illustration.
These factors argue in favour of diversifying portfolios beyond equities, for example by positioning in the dollar, Swiss franc or gold, which benefit from their role as safe havens. Monetary loosening, which will be more moderate in the United States, and the growth differential continue to support the US currency. Gold also remains buoyed by demand from central banks. Finally, exposure to products that are uncorrelated with the traditional markets, such as hedge funds, also provides additional diversification.
This article was originally published in .