Global Asset Allocation: The View From Europe

Outlook

• We maintain a balanced view on risk assets, supported by fiscal stimulus and central banks’ easing, offset by signs of moderating economic growth and persistent inflation pressures. 
• US economic growth is supported by fiscal spending and potential for Fed easing, although uncertainty remains around tariff impacts. 
• Outside the US, growth outlooks remain challenged by trade uncertainties, though increased fiscal stimulus, particularly in Europe, and central banks’ easing continue to provide support. 
• Key risks to global markets include the lingering impacts of global trade tensions, elevated inflation, potential policy missteps by central banks, a weakening labour market and ongoing geopolitical tensions. 

Themes Driving Positioning

Too soon? 

Following US Fed Chairman Jerome Powell’s Jackson Hole speech, markets have nearly fully priced in a 25‑basis‑point rate cut this month, with Powell adopting a more balanced tone and acknowledging potential labour market weakness. This shift echoes last year’s pivot when the Fed moved to prioritise the labour market as inflation neared its target. The bond market, however, saw the moves as premature, pushing Treasury yields nearly 100 basis points higher as the Fed lowered short‑term rates by the same amount. Today, with additional fiscal stimulus on the horizon, elevated Treasury issuance, and tariffs continuing to threaten inflation, the bond market may once again deem the timing too soon and inflationary, sending yields higher. With longer‑dated Treasury yields already under upward pressure, any perceived misstep by the Fed could prove costly, as they try to strike a precarious balance between stabilising the labour market without stoking inflation. 

Perfection 

With equity markets trending near record levels and valuations becoming stretched once again, narrow leadership and reliance—particularly in the US—on artificial intelligence (AI) spending are a growing concern. Markets have priced in a high degree of certainty that the pace of AI spending will continue and that those companies that are investing heavily in AI technology will see a significant payoff. It is unquestionable that AI technology will be transformative to many industries and lead to greater efficiencies over the long term. The risk for investors today, however, is that the AI theme is the primary driver of the market and economic growth, with other areas of the economy still pressured by high interest rates, uncertainty around tariffs, and the job market. With the market so narrowly focused on every data point surrounding AI spending and AI company‑related earnings outlooks, the risk of disappointment is high. Delivering perfection has almost become a requirement rather than a goal. 

 

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