In December, inflation in the United States rose less than anticipated, both at the producer and consumer price levels. After several weeks of significant increases in long-term yields, this announcement was met with relief by investors and triggered a rebound in the bond market in the US and globally. These reassuring figures reduce the likelihood of an interest rate hike by the Federal Reserve in the second half of the year, a scenario that had started to be priced in by some market participants.
It is worth recalling that, despite the threat of new import tariffs potentially being introduced by the Trump administration, we continue to dismiss the risk of a substantial surge in long-term rates from current levels. Indeed, a yield of approximately 4.6% on 10-year US Treasury bonds provides significant compensation for inflation risk, as future inflation expectations remain stable, hovering around an annualized rate of 2.5% over the next decade.
European stock markets have kicked off the year with a bang, outperforming all others, including the US market. Yet, this rally has largely gone unnoticed, as sentiment toward the region remains deeply negative. Indeed, 2024 was a disappointing year, both economically and in terms of market performance. Since summer, economic indicators have frequently fallen short of expectations, weighed down by cautious consumers, intensifying global competition, and political uncertainties.
The outlook for 2025 remains mixed. Economists have been revising their growth forecasts downward in anticipation of tariffs announced by President Trump, compounded by persistent political instability across Europe. Nevertheless, certain developments could positively influence investor sentiment for those willing to look beyond the current slump. These include a more pronounced monetary easing by the European Central Bank (ECB) than initially expected and fiscal easing in Germany, facilitated by the likely formation of a right-wing coalition following early elections. Other factors, such as a truce in Ukraine, an economic recovery in China, or a stabilization of France’s political landscape, which may already be underway, could also help restore confidence. It’s worth noting that European households hold excess savings, which should diminish as interest rates decline and sentiment improves.
European stock markets have underperformed, particularly following political turmoil in France, a trend exacerbated after Donald Trump’s election, which triggered significant capital outflows in favor of the US companies with potential tariff exposure have suffered the most, suggesting that much of the bad news is already priced in.
European equities continue to trade at a historically steep discount to the US market. While earnings momentum remains lackluster, partly due to greater exposure to China, the valuation gap appears excessive. Investors have focused on negative fundamentals, which could amplify the impact of positive surprises. This dynamic sets the stage for a continued rebound in European markets, driven by catalysts such as improved economic conditions supported by lower interest rates or progress on the political front.
Donald Trump promised on Sunday evening to sign nearly a hundred executive orders within hours of his inauguration. The reforms will target areas such as immigration, energy, and climate. Investors will therefore quickly gain clarity on the new presidency's impact on the US economy.