Are we along for the ride as Europe kicks off strongly?
In the first two months of this year, European equity markets shot up solidly. In fact, European equities outperformed their US counterparts by some 10%. The big US technology companies seem to remain somewhat spot on, partly due to the meteoric rise of China's cheaper DeepSeek's AI model early this year. Mark Van Assche, account manager Private Banking and Wealth Office, talks to Siegfried Top, investment strategist at KBC Asset Management.
05/03/2025
Economy
- All kinds of figures are coming in thick and fast.
- Retail sales in the US managed to recover somewhat in February, but consumer confidence plummeted, with fears of inflation fuelled by higher import tariffs and a weakening labour market weighing on US consumer sentiment.
- In Europe, additional public spending on defence and infrastructure appears to be bolstering optimism about growth, but most effects are not expected until 2026-27. An imminent decision on higher import tariffs on European products in the US (expected in early April) could have a significantly adverse impact on growth.
Commodity prices - inflation
- Inflation in both the US and Europe is currently being driven by stubborn but not accelerating core inflation (especially in the service sector). In addition, it is widely believed that global inflation will increase again due to Trump’s policies (as a result of planned import tariffs and the impact of stricter migration policies on the labour market).
- It may take some time to see this effect, as inflation rates seem to be improving at the moment.
Fiscal and monetary policy
- Trump is planning new tax cuts under his leadership and is even toying with the idea of eliminating income taxes. However, the extent to which his tariff plans can compensate for this remains to be seen.
- China also continues to regularly support its flagging economy through new policy decisions.
- In the euro area, the major investments announced for defence and infrastructure are gradually taking more concrete shape.
- Both the Fed and the ECB have been lowering their key rates for some time now. In March, the ECB cut its key rate by 25 basis points. The Fed recently took a time-out, but is widely expected to trim its key rate by 50 basis points this year.
Bond markets
- Yields are increasing again, especially in the euro area.
- Even Germany is abandoning its penchant for budgetary control in order to quickly expand its military capabilities.
- As a result, European government bond yields have risen sharply, going up at a speed not seen since the early 1990s. This unprecedented increase has caused bond prices to tumble in just a few days.
Equity markets
- The results season is complete.
- S&P500 companies easily outperformed expectations with earnings growth of 13% and financials and technology the sectors with the most positive surprises. Analysts are now expecting earnings growth in excess of 12% for US companies in 2025. This seems feasible, although the contribution from the technology sector is declining and other sectors are expected to contribute more.
- In Europe, earnings and turnover growth were slightly higher than expected, putting the region on track to record its first growth in earnings in two years (approximately 2%). The expected earnings growth of 8% for 2025 is almost certainly too high.
Risks
- The conflict in the Middle East and Ukraine could continue to cause nervousness.
- As far as what will happen to the aid to Ukraine, Trump's policy decisions could certainly have a big impact, something we’ve seen for ourselves in the past few weeks. As a result, there was considerably more volatility last week.
- Lastly, Chinese AI technology may throw a spanner in the works due to the fact that DeepSeek has achieved impressive results at a fraction of what it costs in the West.
Fears of a sharp slowdown in US growth and headline news of tariff wars and geopolitical conflicts are taking hold of the markets.
Siegfried top, Senior Investment Strategist KBC Asset Management
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