Global Asset Allocation: The View From Europe

Outlook

• We maintain a modest overweight position across global risk assets. Despite extended valuations, earnings trends and economic growth remain favourable, with the latter supported by fiscal and monetary policies across most regions.
• US economic growth remains resilient fuelled by artificial intelligence (AI)-driven capital spending and supportive fiscal and monetary policies, although the softening labour market warrants monitoring.
• Markets outside the US are supported by fiscal spending (notably in Europe and Japan), lower inflation and moderating trade risks. 
• Key risks to global markets include narrowness of AI trends supporting earnings, economic growth and markets, sticky inflation, potential for quickening labour market declines and ongoing geopolitical tensions.

Themes Driving Positioning

Four-peat?

The US equity bull market is now entering its fourth year, having put up double-digit returns in each of the past three, leaving investors wondering whether it can keep the streak alive. While multiyear stretches of positive equity market returns are common, delivering double-digit returns four years in a row is rare. The naysayers point to elevated valuations, narrowness of the market, uncertainty around Fed policy amid leadership change, a softening labour market and US midterm election risk. Yet history has shown bull markets don’t die of old age alone, and while valuations are elevated, they’re below prior cycle extremes. Bulls can also point to still robust earnings expectations, a broadening of artificial intelligence (AI) beneficiaries, fiscal support, increased capex spending, deregulation, rising mergers and acquisitions (M&A) activity and easing trade tensions. With the risks reasonably balanced and momentum still intact, the path of least resistance for the equity market may continue to be higher for now. The question is: Can it reach double digits for the four-peat?

That was then, this is now

The US bond market delivered surprisingly strong performance last year, ending up more than 7%. US investors with overseas bond exposure fared even better, gaining close to 9% thanks to a weaker US dollar. While many investors had expected higher inflation—driven by tariffs and global fiscal spending plans to pressure bonds—yields ultimately ended the year lower. Fed easing in the latter part of the year—in response to softer labour market data and easing inflation—helped cement a winning year for bonds. Demand also contributed as investors finally moved from cash into short and intermediate parts of the yield curve. As we start this year, risks to the bond market appear tilted to the downside once again, with upward pressure on rates from still above target inflation, strong growth supported by fiscal spending and a flood of supply expected from sovereigns as well as corporations funding AI spending. The added uncertainty around monetary policy under a new Fed chair may also bring with it much higher volatility, leaving bond investors wishing they were back in 2025.

 

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