Global Asset Allocation: The View From Europe

Outlook

• Continued conflict in the Middle East and energy supply shock threaten higher inflation and weaker growth, particularly in energy‑import‑dependent economies.
• Despite elevated risk to growth and inflation, earnings momentum and economic growth still remain favourable, underpinned by accommodative fiscal policies across many regions. 
• US economic growth continues to show resilience driven by artificial intelligence (AI)‑driven capital expenditures (capex), consumer spending, and supportive fiscal policy; however, weakness in the labour market warrants monitoring.
• Markets outside the US have been benefitting from firmer domestic demand, where fiscal initiatives and improving corporate profitability are supportive. However, sustained higher energy prices pose a risk, particularly in Europe. 
• Key risks to global markets include escalating geopolitical tensions, a resurgence in inflation, reliance on AI‑driven growth, further deterioration in labour markets, and a widening of liquidity concerns within private credit.

Themes Driving Positioning

War premium

While the recent truce has temporarily brought relief to energy prices, the conflict in Iran remains unresolved, with the parties still far apart on their demands. This is raising concerns over continued uncertainty, with further escalation not off the table. While energy‑importing countries remain the most vulnerable, the US is not immune to the impacts, despite its energy independence. Higher global energy prices still filter into domestic costs, from fuel to transportation and beyond. And while the energy impacts could be fleeting with a durable end to the conflict, there are longer‑term costs to be paid as seen in the recently proposed nearly 50% year‑over‑year increase of the 2027 US defence budget ask, with a large portion to fund the conflict in Iran. This comes on the back of increased fiscal spending related to the One Big Beautiful Bill, estimated to add nearly USD 4 trillion in debt, which had already raised concerns over US spending and inflation. While the timetable remains uncertain with the conflict, the combination of energy supply constraints and higher debt levels is bringing inflation concerns back to the forefront, having us lean into inflation hedges.

 

The stalwart

In the face of heightened geopolitical tensions in the Middle East, it has been surprising to see the relative resilience of most equity markets across the globe. Some suggest it reflects an optimistic view that the US–Israel war with Iran will be short‑lived. But as the conflict drags on and the stakes rise, it is becoming a more uncertain bet. Where we are finding more certainty is in earnings resilience, continuing to prove a stalwart amid heightened geopolitical risk over recent years, with this year’s earnings expectations accelerating from already strong levels supported by fiscal spending, capex, tax incentives, and AI‑related broadening. Now with the earnings season about to kick off, investors will be eager to hear if the current risks are beginning to weigh on outlooks. But at least for now, earnings momentum seems to be helping underpin the market and supporting our view that broadening can continue, provided the conflict does not materially worsen.

 

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