The relief rally has legs. US equities continued to outperform last week, supported by reassuring macroeconomic and corporate earnings releases. Despite the adverse effects of trade-related uncertainty, which have pundits on alert for a potential recession later in 2025, we are more sanguine. A growth deceleration in the US is nonetheless likely as consumers have frontloaded their spending and may reduce it when trade tariffs start to fully impact. But the impact might be less severe than consensus fears, provided the Trump administration continues to reassure by securing trade deals with partners.

  • We show in the report that although the “tariff shock” is starting to bite, its impact on consumer prices has remained very contained so far.
  • Hard data indicate the US economy has been resilient so far in the face of higher tariffs and heightened uncertainty. Following some tariff front-running in March, retail sales were weak in April but did not crash. Reassuringly, also, there has yet to be any sign of a marked weakening of the US labour market.

De-escalation on the trade war front has led to higher Fed funds rate expectations, pushing rates up across maturities and impacting EUR rates as well. In our view, the recent rise in long-dated euro yields presents a renewed opportunity to lock in rates at a relatively high level for the longer term.

This week, we dig into five key calls for the next few months. We acknowledge that it remains tricky to formulate mid to long term views in the current context and some of these trades are indeed tactical.

  • Key call #1: Play the trade war détente with US equities, partially FX hedged. US equities underperformed earlier in the year, but the earnings season was quite reassuring (S&P 500 EPS growth : +13.6% yoy in Q1-2025). From a mid term perspective, the upside is somewhat capped by the rich valuation of US equities. Earnings expectations have the potential to be revised up after recent negative revisions, considering the upbeat earnings season and the trade war détente. This would contribute to stabilizing valuations while offering some upside.  Regarding the USD exposure implied by US equities, we have a slight long bias on the USD at current levels versus the Euro. However, we are no too aggressive on the FX side and remain partially hedged in our asset allocation.
  • Key call #2: OW Japanese equities. We believe there are upside risks on the asset class due to a likely trade deal with the US, a weaker JPY vs. USD, and attractive valuations in relative terms. However, the BoJ's rate-hike bias remains a factor to monitor as a hawkish stance could fuel the JPY. The performance of Japanese equities remains closely correlated to the USDJPY (a weaker JPY is a positive for Japanese equities). Weak Q1 GDP figures in Japan do not support a hawkish BoJ however.
  • Key call #3: Low oil prices for longer – OW Travel & Leisure, Chemicals. Historically, a lower oil price usually benefits Travel and Leisure (Airlines in particular), Chemicals (an energy intensive sector) and Real Estate (via lower interest rates). We are Overweight on such sectors in our allocation.
  • Key call #4: After the storm: towards a recovery in European Pharma? European pharma has been under pressure on the back of trade tariff and price cut threats from the US administration. Many stocks appear attractively valued, and the sector itself trades almost 20% below its long-term average on a 12-months forward P/E ratio basis.
  • Key call #5: Towards additional rate cuts from the ECB, dragging long term rates slightly lower at the long end of the curve as well. The ECB maintains an accommodative bias and is expected to cut key interest rates below 2% this year, compared to the current 2.25%. Trade tensions continue to pose a risk to growth, which led the Bank of England to lower its rates a few days ago. The growth forecasts by the ECB and the IMF remain low, at 1.1-1.3% per year in the eurozone until the end of 2027.

Week ahead: with the earnings season coming to an end in the US, the corporate newsflow is decelerating markedly. In Europe, 75% of the companies in the STOXX 600 Europe have reported quarterly earnings. In the context of our positive stance on travel and leisure, we will pay particular attention to earnings releases from Ryanair and Easyjet (Buy). On the macro front, watch the preliminary PMI surveys for May across major countries. In Germany, the IFO survey will be available (May as well). In Japan, the CPI for April will be released. In the UK, watch the April retail sales.