Laurent Denize, Global Co-CIO ODDO BHF.

"Therefore, the prudent investor should enjoy the summer break but also remain vigilant, staying prepared to act swiftly"

While it hasn’t been fully explained, many periods of market turmoil have begun in the summer period, when liquidity is low. Remember 2024 when a weak US jobs report in August was followed by other poor data prints, fueling fears of a US economic slowdown. In addition, the Bank of Japan raised interest rates at the end of July, causing the yen carry trade to unwind and the Topix to fall by more than 12% in a single day. Another recent example is 2022 when Jerome Powell delivered a hawkish speech at the annual Jackson Hole Economic Symposium in late August. This was followed by the US central bank delivering another 75 basispoint interest rate hike in September. That August, the S&P 500 fell more than 4%, followed by a 10% loss in September. Whether it’s a self-fulfilling prophecy or not, we need to stay alert on our deck chair (between swims) with our checklist to tick the ten boxes of what could derailthe financial markets in the summer.

Tariffs roulette

As trade letters from the US continue to be mailed out, the deadline has been pushed from April 2nd to July 9th and then to August 1st for an ever-increasing list of countries. Who is next? To what extent? Nobody knows. What is certain is that uncertainty is far from over, as evidenced in the continuing mixed headlines, and the impact on the economy likewise might not yet have been fully digested. Specifically for the European Union, the proposed 30% “reciprocal tariff” rate together with the existing sectoral duties (steel, aluminum, autos) could lower Euro area GDP by a cumulative 1.2% through end-2026. The key here is to monitor the outcome of various trade negotiations … and stay connected to X and Truth Social.

Earnings season

The Q2 earnings season has kicked off and Europe must be scrutinized particularly closely. Consensus expects earnings per share (EPS) to decline by 2% year-on-year in Q2, a five-quarter low. This is due to weaker sales and the strength of the euro. There are two things to consider here: one is to have a close look at sectors with high US sales exposure (consumer services, pharma, media, software, construction) and the forex impact on those sectors. The second is to monitor the earnings revision trend for 2025e. Expectations for EPS growth in 2025e have halved since April, and we anticipate further EPS cuts over the coming months. It will not be surprising to see negative EPS growth in Europe in 2025 (the consensus is still at +2%), which would jeopardize the diversification from international investors towards Europe.