Summary
- The risk of a recession is now decreasing after sharply increasing in April. The US administration has toned down its vocal calls for large tariffs on some key trading partners after realising the potential damage to its own economy.
- However, historically high tariffs are going to be implemented (Chart 1), which will lead to lower growth and pressure on profit margins. This has been disregarded by the market during the recent equity recovery.
- US equities have become expensive once again. The recent recovery was driven primarily by retail investors who probably did not fully understand the long-term consequences of tariffs. US P/E levels are now back above 20, which is a level at which most institutional investors are reluctant to buy, particularly given the fairly optimistic earnings forecasts in the US.
- Therefore, we recommend diversification in terms of both asset classes and geography. In Europe, we favour select themes such as electrification, infrastructure and EU strategic autonomy. Furthermore, supported by sizeable fiscal stimuli, a market segment worth revisiting is European SMID caps.
- Sector view: we downgrade EU Insurance from Positive to Neutral as it is no longer cheap after a strong rally this year. We also downgrade EU Media sector from Neutral to Negative as it is expensive and there are still questions relating to growth and the impact of AI.
No sector change in the US.
