Monthly House View
30.06.20268 min
Resilience, risks, and rate hikes
Despite oil price uncertainty, markets have gained steadily since March, buoyed by hopes for a Trump-Iran peace deal and the Strait of Hormuz reopening. Strong corporate earnings and easing inflation post-energy shock support a positive equity outlook, encouraging investors to remain invested, looking through the noise. Meanwhile, the new Fed chair’s firm stance on inflation reinforces policy confidence amid ongoing inflation shocks.
Macroeconomic scenario
US: Defying gravity—growth holds as inflation bites
The US economy remains robust, with our GDP growth forecast unchanged at 2.1% for 2026 and 2.0% for 2027, with the consensus recently catching up to these figures. Recent Q1 and Q2 data confirm continued US momentum, with consumption supported by tax refunds and corporate front-loading in inventories in anticipation of potential supply chain disruptions. These supports are expected to fade, and higher energy prices are projected to moderate sequential consumption growth to 1.5%–2%.
Inflation remains a central concern. The 2026 inflation forecast has been revised up to 3.6% (+20 basis points (bps)), while 2027 is now expected at 2.4% (+10 bps). This reflects recent upside surprises, notably from software and AI-related services. Short-term inflation drivers include tariffs, artificial intelligence (AI) investment, and higher commodity prices, particularly as Middle East supply chain disruptions are expected to take time to normalise.
Despite these pressures, the outlook remains that US inflation will converge toward the Federal Reserve’s (Fed) 2% target by 2027. Housing prices continue to decline, wage indicators are no longer accelerating, and long-term inflation expectations are anchored near 2.3% mid-June. The labour market, while improved, is expected to normalise, with consumer surveys pointing to a modest upside risk for the unemployment rate, currently at 4.1%.
Financial markets continue to assign a higher probability to a rate hike in 2026. However, we maintain our view that the Fed will reduce rates by 25 bps in 2027—postponed from our earlier expectation of the second half of 2026—as inflation normalises and policy rates move toward the more neutral level of 3.5%.
Euro area: ECB on the tightrope
The Euro Area economy contracted by 0.2% quarter-on-quarter (QoQ) in Q1 2026, mainly due to Ireland’s GDP plunging 12.1% and a smaller decline in France (-0.1%), which has become the region’s laggard. This lowered our 2026 average growth forecast from 0.8% to 0.4%.
Ireland’s GDP volatility, driven by multinational pharma stockpiling ahead of US tariffs, had a historically pronounced impact. Despite this, the region as a whole showed some resilience: private consumption rose 0.2% QoQ, government consumption 0.5%, while Euro Area retail sales grew 1% year-on-year (YoY) in April.
Exports rebounded by +5% YoY in May, after sharp declines in the last three months. Private business investment is expected to be more resilient than historical norms, especially in defence, AI, and pharmaceuticals. Energy prices are easing, while EU natural gas storage is on track to reach 80% by the end of summer—sufficient to ensure winter supply. Producer prices rose 4.9% YoY in May, while consumer prices rose 3.2% with a peak expected in Q4 2026.
There remains a risk of inflationary spillover from energy to food prices, particularly given the potential impact of the Super El Niño phenomenon. In this context, the European Central Bank (ECB) hiked rates as expected by 25 bps in June and is likely to do so again in July, unless oil prices surprise significantly to the downside.
Asia: Bank of Japan breaks the silence
Asian inflation continued to rise in May, with several economies now above target. South Korea and New Zealand kept rates steady but struck a hawkish tone, while Indonesia hiked by 75 bps to support the rupiah.
Industrial and retail growth in China softened in April, yet exports have been redirected, sustaining trade momentum (Chinese exports surged +19% YoY in May). Surveys are stable in manufacturing (with the Purchasing Managers' Index (PMI) at 51.8 in May) while accelerating in private sector services (from 52.6 to 54.4). Nevertheless, Chinese producer prices are rising (up 3.9% YoY), but consumer price pass-through remains limited (with the inflation rate unchanged at 1.2% in May).
Finally, the Bank of Japan raised its policy rate by 25 bps to 1%—the highest level since 1995—responding to 2.7% YoY inflation and a yen down almost 10% year-to-date. This move is likely to prompt further tightening in the region and supports our below-consensus outlook for Japan in 2026. Nevertheless, the region is expected to be a major beneficiary of the reopening of the Strait of Hormuz and should continue to gain from the ongoing expansion and diversification of supply chains driven by the AI boom.
Asset allocation convictions
Markets continued their upward momentum since the end of March in anticipation of the interim peace deal between President Trump and Iran. The planned reopening of the Strait of Hormuz should reduce pressure on oil prices and inflation, which is good news for the global economy. The combination of a constructive macro scenario and very strong corporate earnings justify our positive view on equities. On rates, the new Fed chair used his debut press conference to make clear that the central bank will not tolerate inflation. This message, more hawkish than expected, will probably alleviate some concerns regarding the Fed’s independence and credibility.
Equities
Within equities, emerging markets and the United States led gains, driven largely by continued enthusiasm for artificial intelligence (AI) and semiconductor themes, with returns increasingly concentrated in a handful of mega-cap names. Japan also performed well, while Europe lagged. The strong returns in the tech sector—particularly for semiconductors—are supported by robust demand combined with supply shortages, resulting in significant price increases. Thus, despite some pockets of exuberance, this move is justified by strong fundamentals. It is difficult to know exactly how long this concentration can continue, but at some point, a broadening out of performance would be healthy. The reopening of the Strait of Hormuz, if confirmed, could trigger some rotation.
In the United States, retail investors remain a key force supporting markets, as illustrated by the recent IPO of SpaceX, where extreme valuations did not dampen investor appetite. Markets experienced a few weeks of volatility in early June due to uncertainty around the Iran conflict and the Fed’s policy stance. As geopolitical tensions eased, markets recovered, but this episode was a good reminder of the importance of diversification.
In emerging markets, market concentration is even more pronounced, with three stocks accounting for 30% of the index. The divergence in performance between countries is striking, Korea is showing stellar performance driven by memory stocks, while China and India are down year-to-date.
Europe has underperformed since the start of the conflict, so the reopening should be positive for the region, which remains more sensitive to energy prices. However, the growth outlook remains unexciting, and the recent rate hike by the ECB will not help to boost it.
Overall, the United States and emerging markets remain our preferred regions within equities. Valuations are higher in the US, but earnings momentum is very strong—thanks to AI—and has even outpaced market returns, meaning valuations have improved since the start of the year. Emerging markets offer an attractive combination of valuations and strong earnings growth. However, as the index is increasingly dominated by Taiwanese and Korean stocks, emerging markets are also a play on AI. In this context, Europe remains interesting for portfolio diversification, as it is clearly less exposed to that theme.
Geopolitical developments once again proved to have only a limited and short-lived impact on markets. Maintaining a disciplined approach and staying invested has been the right decision and continues to be rewarded. Despite episodes of volatility, it is important to stay the course.
Fixed income and credit markets
Rates have been under pressure over the last months, with higher energy prices pushing inflation higher. In this context, bond markets were volatile and have not contributed much to performance recently. We maintain a cautious stance on sovereign debt and keep interest rate sensitivity low, given ongoing fiscal uncertainties and energy-driven inflation. However, our base-case view is that inflation is probably close to its peak; hence, if our forecasts hold true, rates should not move much higher if the reopening of the Strait is confirmed. We recently took advantage of higher rates to lock in attractive yields for portfolios, while remaining underweight duration overall.
Investment grade credit remains the core segment that we favour within fixed income in this environment, as it offers an attractive carry while company fundamentals are relatively strong. High yield is also interesting with a selective approach. Finally, emerging market debt in local currency remains a strong conviction, as the very high yields compensate for foreign exchange volatility.
Currencies
The US dollar has strengthened over the last months, maintaining its safe-haven status but showing signs of renewed weakness as risk appetite returns. The medium-term outlook remains for a gradual decline, with a target for EUR/USD at 1.23 by 2026. As equity markets stabilise and energy prices moderate, the dollar is likely to face renewed downward pressure, driven by global central banks and investors seeking diversification. Gold remains supported by structural factors—central bank diversification, geopolitical risks, and high developed market debt—despite intermittent profit-taking by some emerging market central banks.
