The S&P 500 Index closed last week at an all-time high, bouncing back from a 20% decline earlier this year.1<\/a><\/sup><\/p>\n\n\n\n Markets appear to be pricing in clarity on US trade policy, and modest support from Congress and the Federal Reserve (Fed).<\/p>\n\n\n\n The fiscal backdrop in Germany is significantly underappreciated by many market participants, in our view.<\/p>\n\n\n\n We\u2019re at the midpoint of 2025, and markets commemorated the occasion with a\u00a0new high<\/a>\u00a0for the S&P 500 Index last week. Given that the market endured a 20% decline from its February 19 peak to the morning of April 91<\/a><\/sup>\u00a0(just before the US administration announced a 90-day pause on its Liberation Day tariffs), it\u2019s unlikely that many investors expected US stocks to be back at record levels by midyear. And yet, here we are. So, what do we make of this new high?<\/p>\n\n\n\n The 20% decline in the S&P 500 Index from mid-February to early April signaled the current slowdown in US economic growth2<\/a><\/sup> and anticipated price pressures. Markets tend to move ahead of economic data, not the other way around.<\/p>\n\n\n\n Markets now appear to be pricing in greater clarity on trade policy from the Trump administration, along with modest support from Congress and the Fed<\/a>. Our base case assumes that tariffs will trigger a one-time price adjustment rather than sustained, broad-based inflation<\/a>.<\/p>\n\n\n\n While the durability of the ceasefire between Israel and Iran remains uncertain, history suggests that regional conflicts<\/a> rarely derail global market cycles. We don\u2019t expect tensions to significantly disrupt global economic activity.<\/p>\n\n\n\n NVIDIA lost about $600 billion of value on January 27 when a Chinese firm announced that its DeepSeek models<\/a> could produce similar AI outcomes as US firms.3<\/a><\/sup> Some market participants questioned whether the hyperscalers would start to cut back on their spending. There has been no evidence of that happening. Last week, comments from NVIDIA CEO Jensen Huang indicated that he sees a continued rapid acceleration in spending. His comments took NVIDIA\u2019s stock price to a new all-time high.4<\/a><\/sup><\/p>\n\n\n\n The recent $41 billion in outflows from global equity mutual funds and ETFs between March and mid-June underscores the difficulty of timing the market.5<\/a><\/sup> Volatility and extreme sentiment often create buying opportunities. Reacting emotionally to short-term headlines \u2014 whether with panic or exuberance \u2014 is rarely productive. We believe a better approach is for investors to stay focused on their long-term plans.<\/p>\n\n\n\n A slew of indicators released last week suggested that a long-awaited slowdown in \u201chard\u201d economic data may have finally begun to arrive.<\/p>\n\n\n\n On the inflation front, last week saw the core Personal Consumption Expenditures Price Index, which is the Fed\u2019s preferred inflation gauge, tick up to 2.7% on a year-over-year basis in May. However, the headline measure, which includes more volatile food and energy prices, was lower at 2.3%.10<\/a><\/sup> These figures were largely in line with expectations yet may begin to creep higher in the coming months as businesses potentially pass on the costs of higher tariffs.<\/p>\n\n\n\n Importantly, despite the growing weakness in parts of the economy, we\u2019d caution against making big investment decisions based on a single quarter or month\u2019s worth of economic data. The decline in first-quarter GDP was primarily due to a surge in imports in anticipation of tariffs.11<\/a><\/sup> The recent drop in new home sales largely reflects an ongoing slowdown in the housing market, given elevated home prices and high mortgage rates.12<\/a><\/sup> The rise in jobless claims is a sign of continued cooling in the US labor market, which has been happening since 2022.13<\/a> <\/sup>Taken together, recent data points to a resilient, albeit moderating, US economy.<\/p>\n\n\n\n While US stocks hit an all-time high last week, the US Dollar Index (DXY) hit a three-year low.14<\/a><\/sup> It has been on a downtrend almost uninterrupted this year, and we have little reason to think that\u2019ll stop. Tariff and immigration policy is dollar negative as these policies undermine the US growth story.<\/p>\n\n\n\n The US, under the Biden administration, and now the Trump administration, is sending a clear message that the dollar will be weaponized. Foreign investors, who are over-indexed to US assets, would therefore be expected to buy fewer US assets than they have in previous decades. This would continue to put downward pressure on the dollar.<\/p>\n\n\n\n News that Section 899 may be removed from President Trump\u2019s \u201cBig Beautiful Bill\u201d will likely reduce fears of holding dollar assets. (The proposed new Section 899 of IRS code could increase the taxes imposed on individuals, businesses, governmental, and other entities based in countries deemed to impose unfair taxes on US individuals and businesses.) We think the damage has been done and investors are starting to slowly diversify away from the US.<\/p>\n\n\n\n The dollar has continued to weaken even as the Fed is expected to cut less than the market had priced in the first quarter.15<\/a><\/sup> We continue to believe the Fed has a difficult job justifying cutting rates given the growth and inflation backdrop today. It\u2019s made all the harder with their independence being questioned too. The data mentioned above does make us question when the Fed will start to cut again. For now, it remains very much in a wait-and-see mode.<\/p>\n\n\n\n We hear a lot of skepticism around whether the German announcements at the start of the year that defense and infrastructure spending will be increased will be followed through on and make a difference. Our view is that skepticism is misplaced, and the fiscal backdrop in Germany is significantly underappreciated by many market participants. It\u2019s a core reason for the expectation that European stock markets could outperform US stock markets in the coming months and years, and that the euro could further strengthen.<\/p>\n\n\n\n Further evidence supporting our thesis came last Tuesday when the German government agreed on a draft budget for 2025. The plan included 200 billion euros of defense and infrastructure spending in 2025, which would mean raising debt to the tune of 3% of GDP. That\u2019s a bold aim for the rest of this year but is likely to encourage more private investment in order to capture some of that spending.<\/p>\n\n\n\n At the NATO summit last week, members agreed to a new 5% of GDP defense spending target. If achieved, that would double defense spending by 2035. This is a long-term trend worth following.<\/p>\n\n\n\n We believe European stocks and the euro stand to benefit from Germany\u2019s newfound desire to invest, as well as NATO\u2019s increased defense spending. European stocks have beaten US stocks this year,16<\/a><\/sup> especially in common currency terms, and we think that trend will continue.<\/p>\n\n\n\n A sustained disruption to oil supplies and higher oil prices isn\u2019t our base case. The ceasefire between Israel and Iran supports that base, and Brent crude oil has fallen below where it was before Israel struck Iran on June 13. In our view, this is a clear example of where ignoring the knee-jerk reaction to geopolitical events is the right course of action. Risks in the region are clearly not removed completely, and commodity markets remain sensitive to any re-escalation in tensions. However, absent an extreme scenario, we believe this is a low-probability event. Lower oil prices lend support for weakening inflation and, therefore, slightly reduce the headwinds to Central Banks\u2019 rate cuts.<\/p>\n\n\n\n We\u2019re open to changing our views as facts change. Dogma can be a killer of investment returns. But the facts as we interpret them suggest further weakness in the US dollar, the potential for international stocks to outperform US stocks, and a preference for short duration over long duration fixed income.<\/p>\n\n\n\n —<\/p>\n\n\n\n Originally Posted on June 30, 2025<\/p>\n\n\n\nMarket expectations<\/h3>\n\n\n\n
German spending<\/h3>\n\n\n\n
Five trends to watch<\/h2>\n\n\n\n
1. Markets lead the economy<\/strong><\/h3>\n\n\n\n
2. Looking ahead to improved policy clarity<\/strong><\/h3>\n\n\n\n
3. Geopolitical tensions and market resilience<\/strong><\/h3>\n\n\n\n
4. Artificial intelligence (AI) narrative isn\u2019t dead<\/strong><\/h3>\n\n\n\n
5. Perils of market timing<\/strong><\/h3>\n\n\n\n
US economy shows signs of moderation<\/h2>\n\n\n\n
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Confidence in the US dollar continues to erode<\/strong><\/h2>\n\n\n\n
German fiscal support is still underappreciated<\/strong><\/h2>\n\n\n\n
Ceasefire means oil risk premium disappears<\/strong><\/h2>\n\n\n\n
What to watch this week<\/h2>\n\n\n\n
Date<\/th> Region<\/th> Economic release<\/th> Why it\u2019s important<\/th><\/tr> June 30<\/td> China<\/td> NBS Manufacturing and Non-Manufacturing Purchasing Managers\u2019 Indexes<\/td> Key indicators of economic activity in China\u2019s industrial and service sectors.<\/td><\/tr> June 30<\/td> Eurozone<\/td> Consumer Price Index Flash Estimate<\/td> Preliminary inflation data; influences European Central Bank monetary policy.<\/td><\/tr> July 1<\/td> US<\/td> ISM Manufacturing Purchasing Managers\u2019 Index<\/a><\/td> Measures manufacturing sector health, a leading economic indicator.<\/td><\/tr> July 1<\/td> Canada<\/td> Gross domestic product (GDP)<\/td> Monthly GDP data reflects economic growth trends.<\/td><\/tr> July 1<\/td> Australia<\/td> Reserve Bank of Australia interest rate decision<\/td> Central bank policy decision; affects currency and markets.<\/td><\/tr> July 2<\/td> US<\/td> Job Openings and Labor Turnover Survey (JOLTS)<\/td> Measures labor demand; important for employment outlook.<\/td><\/tr> July 2<\/td> US<\/td> Federal Open Market Committee (FOMC) meeting minutes<\/td> Provides insight into Fed\u2019s monetary policy stance.<\/td><\/tr> July 3<\/td> Eurozone<\/td> Unemployment rate<\/td> Key labor market indicator; affects consumer confidence.<\/td><\/tr> July 3<\/td> US<\/td> Initial jobless claims<\/td> Weekly snapshot of labor market conditions.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n