Relying on fundamentals despite everything

After a slight decline in December, the first month of the year marked the return of risk appetite: global equities posted a performance of nearly 3% in euros. This time, however, contrary to the usual trend, the outperformance comes from European stocks, not American ones.

Indeed, while the US markets gained nearly 2,6%*, Europe significantly outperformed, reaching nearly 6,5%*.

Why did the trend reverse in January? The low valuation of European equities and the lower exposure to technology compared to the US were two positive factors for European stocks. Meanwhile, US equities, especially those in the Technology sector, suffered episodes of stress, particularly linked to the rise in popularity of DeepSeek, the new Chinese artificial intelligence that is undermining US tech giants and calling into question the astronomical spending on artificial intelligence until now.

The rise in popularity of DeepSeek, released as a more comprehensive and especially much cheaper model than ChatGPT, literally shook up the industry, leading to a reconsideration of the whole topic of artificial intelligence that lasted several days. The cost of training this new AI, which according to its developers would amount to just USD 6 million, has cast doubt on the billions of dollars invested by all US tech giants in the AI race, and consequently on the high valuations of these companies.

Although the markets finally managed to put things into perspective after a few days, Donald Trump’s return to the White House generated a new wave of volatility. His announcements of imminent tariffs of 25% on Canada and Mexico, and of 10% on China--all of the United States’ main trading partners--caused a wave of panic in the equity markets. However, after a few hours, the markets regained their calm as the application of these tariffs was postponed by a month. The Canadian and Mexican governments announced increased border controls to curb both illegal immigration and the entry of fentanyl into the US.

Europe, for now, has been spared. However, we expect the Old Continent to also become the target of such announcements in the coming weeks or months.

The current environment is highly uncertain: from one day to the next, higher tariffs are likely to be applied and subsequently revoked. This, of course, makes investors nervous.

Fortunately, the market has been able to focus on fundamentals, which remain strong on both the macro and corporate fronts. Economic figures still demonstrate good resilience, and US companies continue to show solid profitability.

Throughout the Trump 2,0 administration’s term, the markets’ challenge will be to navigate beyond the effects of announcements that may fall like a blow and fade after a few days, as was the case in January. Admittedly, these announcements tease economic scenarios by making them more uncertain, but the initially destabilising effects are still being counterbalanced by the solidity of fundamentals.

In conclusion, the overall allocation continues to recommend an overweight to equities, still favouring US equities that benefit from a healthy economy. On the contrary, the threat of tariffs, which weighs on the rest of the world, greatly reduces visibility for these economies. In addition, sector allocation, in line with an encouraging view on the US economy, highlights sectors such as US banks, Consumer Discretionary, Communications Services and European Real Estate (based on more marked rate cuts in Europe).

*Performances are calculated in euros.

2025 has begun with an upward trend on the global markets, supported by a strong earnings season, particularly in the US, and robust growth accompanied by a favourable monetary policy with a drop in interest rates, particularly in Europe. For once, the European market clearly outperformed the US stock markets: the MSCI Europe gained 6,50% at the end of the month, while the MSCI North America posted a performance of only +2,34% in EUR.

In the US, half of the S&P500 has already published its results in January, and earnings are above expectations on average. The message from companies is generally positive in terms of outlook. From a sector point of view, financial companies posted the strongest performance on the US market, driven by solid results and hopes of deregulation generated by the new Trump administration. The Technology sector struggled more, after an excellent year in 2024. Indeed, the successful launch of the Chinese artificial intelligence platform DeepSeek generated doubts about potential over-investment by US companies, and triggered a sell-off in the sector.

At the end of December, exposure to the Technology sector was reduced while exposure to the European Real Estate sector was increased. This sector, which is currently undervalued, should benefit from controlled inflation in Europe as well as from rate cuts. The exposure to the Communications Services sector was maintained. In addition, the Consumer Discretionary sector, which relies on a healthy US consumer, was overweight. Conversely, caution remains warranted on the Basic Materials and Energy sectors.

In January, sovereign rates initially continued their upward trajectory that began in December, then reduced their losses in the second half of the month. All in all, January ended with rates up in Europe and down slightly in the US. In the US, the 10-year lost 4bp while the 2-year lost 3bp. In Europe, the German 10-year rate rose by 6bp and the 2-year rate was unchanged.

In the US, inflation concerns were at the forefront of investors’ minds at the beginning of the month. The potential introduction of tariffs by the new Trump administration and a number of economic data pointing to the resilience of the US economy pushed bond yields sharply higher, with investors becoming much more sceptical about the prospect of new Fed rate cuts. However, these movements began to reverse after inflation figures turned out to be not as bad as investors feared. There was then increased hope that the Fed would make further rate cuts this year, a sentiment that Christopher Waller, the Fed’s governor, officially supported by stating his openness to a rate cut as early as March if the data allowed.

In Europe, yields followed the upward trend initiated in the US in the first half of the month. While investors have no doubt that the European Central Bank’s next actions will involve cuts in its key rate, the magnitude of the cuts has been revised downwards. Overall, the latest economic publications highlight a sluggish economy, point to a deceleration in inflation, and arrive along with reassuring comments from the ECB at the end of its last meeting: all elements that point to further cuts in the key rate over the coming months.

European credit ended the month on a positive note. Spreads tightened as expectations of a more accommodative monetary policy from the ECB overshadowed concerns about economic growth, threats of tariffs by the US and rate hikes earlier in the year. In the US, spreads did not move during the month, remaining anchored at historically low levels.

Despite the recent volatility in yields, we recommend keeping duration close to that of the market.