Global Asset Allocation: The View From Europe

Outlook

• We maintain a balanced view on risk assets, buoyed by fiscal stimulus and accommodative central bank policies helping support economic growth, against a backdrop of elevated valuations and lingering inflation.
• US economic growth is supported by fiscal spending and the possibility of further Fed easing, as concerns have shifted to the labour market.
• Outside the US, growth is supported by fiscal and monetary stimulus helping offset potential weakness from tariffs. Despite the political uncertainty in France, increased fiscal spending in Germany should lead to stronger economic growth in Europe over the medium term. A de‑escalation in trade tensions and pro‑growth policy shift are improving sentiment towards China.
• Key risks to global markets include the lingering impacts of global trade tensions, sticky inflation, potential policy missteps by central banks, a weakening labour market and ongoing geopolitical tensions.

Themes Driving Positioning

Staying power?

Hopes for lower interest rates have sparked several small‑cap rallies in recent years, seeing them finally outperform large‑caps, but unfortunately the rallies have been short‑lived. The latest Fed cut has reignited enthusiasm for small‑caps, now seeing them ahead of large‑caps by nearly 4% since April lows, with most of the gains coming since August. It may not just be the Fed reengaging on rates cuts this time that is driving outperformance, as other tailwinds may provide staying power. Among these is the recent passing of the One Big Beautiful Bill, a resurgence in M&A activity, the administration’s push on deregulation and a de‑escalation in trade tensions. And while valuations favour small-caps relative to large-caps and small‑caps are seeing an uptick in earnings expectations, the risk of inflation keeping rates elevated and the recent weakness in the labour market possibly pointing to slower growth warrant a balanced view.

Private matters

Outside of the negative economic impacts of a prolonged government shutdown, the direct impact of no publicly available data could really challenge an already embattled and data‑dependent Fed. Having just made their first rate cut since going on pause late last year has heightened the focus on the trajectory of the labour market. With the last read from August showing a steep decline in job growth and the unemployment rate jumping to a four‑year high of 4.3%, investors were eager to see the—now delayed—September release. Last month’s revisions showing 911,000 fewer jobs being added between April 2024 and March 2025 gave investors another reason to worry and question the reliability of the data. In the absence of public data, private market data are what matter, and ADP’s September update showing a loss of 32,000 private sector jobs furthered concerns of a cooling labour market. With the Fed in the dark, the longer the absence, the bigger the chance of an unwelcome data dump.

 

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