Global Asset Allocation: The View From Europe

Outlook

• Markets have continued to push higher despite geopolitical uncertainty, supported by resilient earnings and ongoing artificial intelligence (AI)‑driven investment, even as inflation and policy risks remain. 
• The global economy continues to benefit from fiscal spending and investment in AI infrastructure, though growth is becoming more uneven across regions and the path of energy prices remains uncertain.
• The policy outlook remains uncertain as central banks balance lingering inflation pressures against concerns about moderating growth and a gradually softening labour market, leaving the path for interest rates increasingly data dependent.
• Key risks include a renewed rise in energy prices and inflation, further geopolitical escalation, continued reliance on a narrow set of market leaders, and signs of deterioration in labour markets or private market liquidity.

Themes Driving Positioning

Fed gets less chatty

The arrival of a new Fed chair appears to have changed the policy backdrop, though not necessarily by putting rates on a meaningfully different near‑term path. The bigger shift may be in communication: Kevin Warsh appears less inclined to guide markets towards a specific policy outcome, placing greater emphasis on incoming data and making the path of policy less predictable. This matters because inflation remains the Fed’s primary constraint. While signs of labour market softening could increase pressure to ease policy, they may no longer be enough on their own to prompt rate cuts, particularly with inflation still above target. In other words, while inflation remains above target, investors may not be able to count on the Fed to respond quickly to every bout of market or economic weakness, as policymakers place greater weight on maintaining inflation credibility. Importantly, this shift extends beyond the new chair. The latest Fed projections showed a broader committeewide move away from cuts and towards the possibility of hikes, despite political pressure for easier policy. For investors, that points to continued rate and yield curve volatility and reinforces the case for a cautious stance on duration.

A tale of two styles

Style leadership is becoming increasingly regional. In the US, we remain modestly overweight Growth over Value. Continued AI investment, positive earnings revisions, strong free cash flow, and healthy balance sheets continue to support the Growth complex. A high‑profile initial public offering (IPO) pipeline could also support interest in US Growth by bringing more innovation‑led companies into public markets. Valuations and concentration remain risks, so this is not a call to chase Growth indiscriminately, but the earnings engine remains compelling and has been supported by strong return on equity. That leadership is not universal. In developed markets outside the US, Growth does not have the same depth of AI exposure, while Value benefits from a more attractive mix of valuations and improving fundamentals. Positive interest rates continue to support financials, fiscal expansion is benefiting cyclicals, and rising defence spending is creating a multiyear tailwind for industrials and infrastructure. The takeaway: We favour Growth where earnings leadership remains strongest, and Value where improving fundamentals and supportive policy have the potential to drive the next leg of earnings growth.

 

For a region-by-region overview, see the full report (PDF).