Cesar Perez Ruiz

The challenge in 2025 will be navigating the wide range of potential outcomes. 

Investors will need to be agile to manage regional divergences in inflation and growth, as well as economic volatility in the US driven by fiscal and trade policies under the new Trump administration. In particular, the magnitude and sequence of tariffs on US imports and the corresponding retaliation measures will be critical drivers of inflation dynamics and growth prospects. From a market perspective, a key decision will be to predict US Treasury yields. In a pessimistic scenario of declining US fiscal discipline and an all-out trade war, leading to stagflation and limited central bank intervention, the US 10-year yield could rise driven by a significantly higher term premium and unanchored inflation expectations. Although equity valuations have shown a disconnect from bond yields lately, a substantial rise in yields could exert pressure on equity valuations, particularly if accompanied by a deteriorating macro environment.

In 2025, investors should establish a core positioning for their portfolios but remain ready to act on unexpected developments. US equities should be favoured due to the promise of corporate tax cuts and deregulation, expected to drive an improvement in earnings per share (EPS) growth. In contrast, Europe may face more limited margin expansion and modest EPS growth. 

Additionally, the strength of the US dollar is likely to be sustained by higher-than-expected US rates and a softening but robust cycle. In Europe, falling interest rates will make cash less attractive, prompting investors to seek carry in EUR and CHF investment grade bonds. The divergence in monetary policy between Europe and the US suggests that euro-denominated bonds should be favoured over US ones.