Financial markets are dealing with two major factors increasing uncertainty and creating an unstable environment:

• Geopolitics has become a key variable, shifting from a unipolar world (1991-2001) to a multipolar one (2001-2024), with a shift in alliances in 2025.
• U.S. policy decisions havebeen exceptionally rapid and numerous, with 79 executive orders in just 45 days, coupled with Donald Trump’s frequent reversals, adding to instability.

Confirmation of Our Economic Scenario

Recent events (geopolitical and trade tensions) reinforce the core thesis underpinning our economic scenario: transitions (geopolitical, digital, etc.) are fuelling and will continue to fuel a sustainable investment cycle.

Shift in Dynamics in Europe

With its back against the wall, Europe is moving in directions,witha twofold objective: to reinforce competitiveness (through the Competitiveness Pact and Omnibus directives[1]) and economic visibility (governance, economic policy).

The major changes observed in recent days are, on the one hand, the announcements of a possible change in budgetary doctrine in Germany (with a budget deficit that would rise from 2% to around 5% over the next few years), and on the other hand, the announcements concerning the need to increase European military spending through the “ReArm Europe” plan. This could mobilise EUR 800 billion through the creation of a new loan instrument of EUR 150 billion for the Member States, supplemented by investments decided by the Member States amounting to EUR 650 billion and which would then be accounted for outside the Stability and Growth Pact.

At this stage, these remain political intentions of leaders who have understood the shift in alliances and who need to change public opinion. Questions remain about the sectors concerned by the investment plans and the production capacity to meet them, and finally about the financing of these plans. 

In any case, the multiplier effects of capital expenditure are expected from 2026 onwards, although growth in 2025 will be penalized by the uncertainties.

It should be noted that the announcement of customs duties on certain European Union products at the beginning of April could influence our scenario. However, two arguments qualify this threat:

• While the trade balance is in deficit, capital flows correct this through European purchases of U.S. Treasury Notes (38% held by Europeans) and portfolio investments in the U.S[2].
• The increase in military spending will result in massive purchases of American equipment, even if the European Summit affirmed the need to create a European Defence. In 2023, nearly 78% of European purchases were made outside the European Union, including nearly 80% in the United States.

Reduced Visibility in the U.S.

Conversely, economic visibility in the U.S. is declining. If the Trump administration confirms tariff hikes, our analysis suggests a 1% inflation increase, negatively impacting consumption, which has remained resilient thus far.

Additionally, business sentiment surveys indicate that rising uncertainty is weighing on corporate decisions. A temporary economic slowdown in the U.S. is likely in spring and summer 2025, followed by a recovery in early 2026.

Central Banks in a Wait-and-See Mode

Recent events reinforce our monetary policy scenarios, particularly for the European Central Bank, which is unlikely to rush into action. European growth risks are now skewed to the upside for 2026, and the policy mix is rebalancing, easing the constraint on monetary policy.

What impact will this have on our market forecasts?

Equities

Overall, market visibility is deteriorating. However, equity markets are continuing to evolve in an environment of economic growth, the which momentum ofis nevertheless being questioned by investors with:

• More cautious consumers and companies reorganizing supply chains following tariff announcements
• Uncertainty over the Artificial Intelligence market’s potential size after the low-cost launch of Deepseek.

In Europe, we maintain a positive but cautious view.

Positive due to:

• the undervaluation of European equities relative to U.S. equities
• the German stimulus plan, seen as a driver for more robust European economic expansion via increased defence and infrastructure investments.
• positive capital flows into European equities after prolonged investor disinterest.

Cautious because of the political and economic complexity of implementing the German plan and the difficulty of resolving the conflict in Ukraine.

In the United States, our approach is also cautious:

• Macroeconomic figures are returning to average after the sharp acceleration in Q4, with employment in particular losing momentum.
• After the excellent performance of the US equity markets, investors could be led to take profits to finance other themes.

However, there are some important supporting factors, in particular the pro-business measures (deregulation) taken by the Trump administration and the continuing good reports from US companies.

Our scenario remains unchanged for the emerging markets, with significant potential to catch up with the developed countries, a support plan that is likely to be stepped up by China, and a Chinese technology sector that could benefit from a recovery potential against its US competitors.

Fixed Income

The announcement of Germany’s fiscal policy shift led to a major increase in 10-year German Bund yields, +29.8 basis points[3] — the largest rise since Germany’s reunification in 1990! The previous record, +22.8 basis points², was in late 2011 during the Euro crisis.

This tension in Bund yields has led to a reassessment of overall European risk, with other European interest rates widening in parallel.

In the US, rates rose by just 8 basis points.

Half of the move in European yields stems from inflation expectation revisions, while the other half is due to real rate adjustments. However, German credit default swap (CDS) levels remained unchanged, and the German stock market (DAX) rose +3.38%², illustrating the growth bias of the measures announced for the German economy, which has the leeway to implement them. For reference, Germany’s debt-to-GDP ratio remained contained at 63% in 2023[4].

Our forecasts were for 3.00% on 10-year Bund yields by end-2025 and 3.25% by end-2026. While the German stimulus plan was not factored into our prior forecasts, we await further details on its deployment, timeline, and multiplier effects before adjusting projections, as the tense and uncertain geopolitical context could limit its scope.

Document written on 06/03/2025

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