Solid US growth and economic divergence

The US economy continues to stand out for its robust growth, outperforming its developed market counterparts. This momentum is reinforced by the Trump administration's policy agenda, with its emphasis on domestic business-friendly policies. Growth forecasts for the US remain optimistic, with moderate inflation and interest rates set to remain accommodative. However, this economic divergence could accentuate the strength of the US dollar, creating challenges for non-US economies.

Euro/US Dollar trend

Impact of tariffs

Tariffs, particularly those imposed on China, remain a major concern. While these measures are largely anticipated and manageable, the risk of a wider trade war could have a significant impact on currency markets and equities. Widespread tariffs could lead to higher inflation and increased risk aversion, affecting bond yields and equity markets.

Interest rates and fiscal expansion

Post-election fiscal expansion in the US, as well as in Japan and the UK, is raising concerns about higher terminal interest rates. This situation could be exacerbated by new fiscal policies, increasing the risk of higher risk premiums on bond markets. Emerging markets, meanwhile, could face additional challenges from rising US rates and a strong dollar.

Outlook for China and Europe

China, while facing tariff-related challenges, has room to respond with fiscal and monetary measures. However, the outlook for Chinese assets remains mainly determined by domestic policies.

In Europe, growth is challenged by trade uncertainty and fiscal constraints, limiting the ability of monetary and fiscal policies to respond.

Energy markets and inflation

Energy markets are likely to remain in a stable price range, although geopolitical risks and increased production capacity may influence oil prices. Inflation, although falling, could be affected by the trade and fiscal agenda, requiring particular attention from central banks.

Valuation challenges and diversification

P/E ratio of the S&P 500 index over 10 years. It has fluctuated between 20 and 40 times earnings (source: Multpl).

The high valuations of US equities (P/E ratio over 30x for the S&P 500) pose a growing challenge, although long-term bond yields look more attractive. Diversification remains essential to mitigate risk, with opportunities in non-US bonds and diversified assets. European equities, and French equities in particular, are at historic discounts due to the old continent's complicated geopolitical situation (both internal and external), high debt levels and weak growth.

Investors will have to navigate an environment marked by divergent economic policies, trade tensions and valuation challenges, while keeping a watchful eye on global macroeconomic developments.