Equities

Cyclicals took the lead in the second quarter

Most stock markets increased in the second quarter, while US equities stagnated in euro terms. The main reason for this was the 6% devaluation of the US dollar against the euro. Cyclical sectors performed better than defensive sectors. Since the beginning of the year, the DAX has outperformed the S&P 500 by around 27% (in the same currency), thanks in part to German infrastructure and defence programmes.

Negative earnings revisions likely to subside

Earnings expectations for the S&P 500 have been revised downwards from 14% to 8% for 2025 – which is a more realistic assessment in view of a weakening US economy. However, Trump’s unpredictable behavior, lower immigration and higher tariffs could put additional pressure on corporate profits. On the other hand, fiscal stimuli and the weaker US dollar are having a positive effect, which is benefiting particularly export oriented US tech companies. In addition, deregulation efforts are likely to have a supportive effect as the year progresses. European exporters, on the other hand, are suffering from the strong euro, but are benefiting from lower energy prices and government programmes. The German economy should gain momentum in the second half of the year. European banks remain attractive: they are less susceptible to currency fluctuations and tariffs, and benefit from steeper yield curves.

Recession now priced out again

After consensus still saw a recession probability of around 50% for the US in April, this figure has recently fallen significantly, in line with Trump's retreat in the tariff dispute. Although US earnings estimates have been reduced in recent months, the S&P 500 has recovered more than 20% from its lows – and valuations have risen with the price. While European stocks are trading close to their historical averages, the P/E ratio for the S&P 500 is almost 22 – 25% higher than the historical average since 1987.

New all-time highs also likely in the US

Q3 is likely to see another spikes in volatility. This is indicated by weakening US economic data, lower liquidity over the summer months and Trump’s erratic behavior. In the past, he has often questioned impending “deals” in order to renegotiate them. If the same happens this time, this could lead again to (short-term) uncertainty in July/August. However, we assume that the setbacks will actually be seen as a buying opportunity. We also do not expect the lows of April to be revisited, as less optimistic investor sentiments and positioning should also result in a smaller correction.

Investors will focus on the Q2 reporting season with regard to profit margins and the outlook. The weak dollar should lead to positive surprises for US companies with a high proportion of international sales. The “higher for longer” US interest rates, on the other hand, are likely to weigh on US companies with high debt levels and high refinancing costs. This is likely to include some US small caps. European small caps, on the other hand, benefit from lower valuations, lower interest rates and better growth momentum in Europe than in the US. Emerging market equities are receiving a tailwind from the weak US dollar and relatively attractive ratings. They remain a worthwhile addition to the portfolio. In view of the increased uncertainty under Trump, we have no strong regional preference for the coming months.

Provided there are no major political surprises, the path of least resistance should be characterised by new highs in the medium term – driven by strong fundamentals in the technology/AI sector, stable demand from systematic strategies as a result of improved volatility and momentum signals as well as buying by active investors in the event of setbacks.