“Capital markets are entering a phase of potential disruption. Recent developments in the United States, geopolitical tensions, and structural shifts in monetary policy point to a volatile second half of the year. We expect US growth to slow sharply in H2 as the impact of tariffs works its way through the US economy. We now believe there is equal chance of the US being in a ‘slowdown’ or a ‘stagflation’ scenario by the end of 2025 (both 40% probability), while we put the chance of ‘cyclical recession’ at 20%. A more positive ‘reflation’ scenario is off the table for now.”
US interest rate policy: a shift may be coming – but remains uncertain
“The probability of a rate cut by the US Federal Reserve at its upcoming meeting on 17 September has surged to over 90%. This shift is driven by weaker-than-expected labour market data and a significant downward revision of previous months’ figures - the largest since 1979. Despite this, the Fed is expected to face challenges in justifying a rate cut, especially following recent hawkish remarks from Chair Jerome Powell.”
“The FOMC is now split into three camps: political appointees advocating for immediate cuts to align with the Trump administration’s agenda, traditional doves responding to weakening data, and hawks committed to preserving the Fed’s independence and mandate. While a September rate cut is technically justified by the data, the Fed may delay action to assert its autonomy, with December remaining the more likely inflection point.”
Tariffs and Trade Conflicts: Further Escalation Likely
“The tariff debate is far from over. More than 60 countries, including India, Taiwan, Switzerland, and Canada, have already received notices of new import duties. Additional sector-specific tariffs and punitive measures targeting BRICS nations are expected. These tariffs are not merely economic tools; they are being used to advance geopolitical objectives, especially in negotiations with China, India, and Brazil.”
“The Federal Reserve remains cautious, as the economic consequences are still unclear. Pre-emptive effects have distorted the current picture, and a slowdown in economic activity is anticipated in the coming months. The Atlanta Fed has warned that if average tariffs reach 20%, the US could face a recession, a threshold that is now within reach.”
“Two scenarios are plausible: tariffs may drive up prices, fuelling inflation, or they may dampen economic activity, leading to disinflation in a recessionary environment. In either case, rate cuts could follow, though in the latter scenario they would be reactive rather than stimulative.”
Fiscal dominance: a new era for monetary policy
“US government interest payments have more than doubled since the pandemic, now exceeding USD 1.2 trillion annually. Given the rising debt burden and spending levels, the Fed may be forced to adopt yield curve control measures, similar to those used in Japan.”
“The US is entering a phase of fiscal dominance, where government spending programmes increasingly overshadow monetary policy. How the Fed responds in this environment will be critical for market stability. Recent dissenting votes within the Fed’s decision-making body suggest growing internal tensions.”
“Long-term yields are expected to rise significantly, prompting a reassessment of US asset allocations. While global portfolios remain heavily weighted toward US equities, weakening long-term fundamentals in the US dollar signals caution may be needed.“
Earnings season and market structure: beware of false signals
“The current US earnings season shows solid growth of 8.2%, largely driven by the “Magnificent Seven” with 22% year-over-year earnings growth. The rest of the market lags behind with just 4%. Investment momentum, particularly in artificial intelligence, is slowing: projections for 2026 show only 9% growth—down sharply from previous years.”
“The disparity within market segments is striking. Even among the Magnificent Seven, performance varies widely. This uneven distribution and heightened macro volatility underscores the need for nimble and dynamic asset allocation and also raises the question of whether strategic repositioning is necessary.”
“The months ahead will be shaped by monetary policy decisions, geopolitical developments, and structural market shifts. Investors should prepare for heightened uncertainty, where tactical and selective investing will be key. The ability to anticipate political and macroeconomic trends will be a decisive factor in portfolio success.”
