After a fairly complicated month of April, dragged down by US President Donald Trump’s announcements of “reciprocal tariffs”, the global equity markets rebounded in May. At the end of the month, the global index had gained nearly 6% in euros. Over the period, the US markets rose by 6,5%, Europe by 4,7%, and emerging indices by 4,3%.
Although the year got off to a difficult start, the announcement of a tariff pause restored investor confidence and brought the indices back to their pre-tariff war levels.
On the bond market, the trajectory of the 10-year reference rates trended upwards. In the United States, the 10-year sovereign rate rose from 4,16% to 4,4%: lurking in the background were fears about public debt sustainability and the new budget bill (the “One Big Beautiful Bill”), which launched the debate about potential tax cuts. In Germany, the 10-year rate ended the month slightly above its starting point, at 2,50%.
With the temporary suspension of tariffs and effective tariff rates now expected to be much lower than a month ago, the worst-case scenarios of recession and major stagflation were avoided.
But does this mean that this bout of volatility and companies’ reduced visibility will have no economic impact? There are no guarantees. While the equity indices have returned to pre-tariff announcement levels, the economic trajectory is not expected to emerge entirely unscathed.
Despite the announced pauses and cuts, effective tariff rates are ultimately expected to be three to four times higher than before Trump’s return to the White House. According to an independent study conducted by Yale University’s Budget Lab, the average US household is projected to lose nearly USD 2.800 in purchasing power compared with 2024 due to the higher inflation caused by implementation of the tariffs.
While it may be going too far to describe the future economic impacts as stagflation, the environment would on the whole be stagflationary, characterised by lower growth and higher inflation.
In Europe, in contrast, the European Central Bank (ECB) should be pleased that inflation is moving towards the 2% target, meaning it can maintain a downward bias on key interest rates. In addition to monetary support, Europe should also benefit from fiscal support as long as the new coalition in Berlin keeps its promises.
In this environment, a slight underweight to equities and a favourable bias towards the European markets over the US markets make more sense. The difficult economic trajectory, combined with a complacent market with high valuation levels, could lead to unpleasant surprises on the US markets. In sector terms, we continue to favour Communication Services, due mainly to its exposure to the artificial intelligence theme. We also like the European Real Estate sector to take advantage of European rate cuts.
From a bond perspective, we prefer European over US yields. In the United States, inflation expectations and public debt are making bonds less attractive, while in Europe they are likely to benefit from falling rates and subdued inflation. On the corporate debt side, we favour carry and quality through the investment-grade segment.
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