The moment of truth
355 Monday, 7 July 2025 13:22
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The deadline for President Trump's tariffs is fast approaching, with the 90-day pause set to expire on July 9. It will be a test for the TACO trade (Trump Always Chickens Out), which supported risk assets in the last quarter.
- As we go to press, trade deals have only been announced with the UK, China and Vietnam. Agreements with important trade partners such as the EU, Japan and Korea are still missing.
- The final stretch of trade negotiations could cause some renewed market volatility, in a context where the Q2 US equity market rally pushed valuations to stretched levels. Also, August/ September are historically adverse in terms of seasonality. For these reasons, we recommend to tactically de-risk portfolios over the course of July.
- The earnings season is about to start in the US and in Europe. According to Factset, the consensus of analysts expects S&P 500 EPS growth at 5% in Q2, down from 9.3% as of end-March. In Europe, Q2 earnings for the STOXX Europe 600 are expected to increase 0.6% from Q2 2024 according to LSEG. Although low expectations open the door to positive surprises, the US economy appears to be slowing down. The June job market report pointed to weaker job creation by the private sector.
The long-term investor should stay calm. Most recent developments regarding the fiscal bill and trade tariffs remind us of this legendary song from the Rolling Stones: “You can’t always get what you want, but if you try sometimes, you just might find, you get what you need.” And indeed, Trump is so far getting what he needs. His fiscal bill was approved by the Congress last week without significant tweaks. He managed to get some asymmetric trade deals, in which the trade tariff he imposes on foreign countries is much higher that the tariff for US goods. He might also get a dovish Fed next year and so far, the trade uncertainty is translating into a moderate slowdown. He is planting the seeds to maintain his majority in 2026, which is a positive for markets from a medium-term perspective.
Should you fear the Big, Beautiful Bill? 10-year and 30-year US Treasury yields have remained anchored in the range of 4-5% in the past two years, and the fiscal bill approved last week by the Congress does not help towards easing the pressure at the long end of the curve. Compared with January 2025 budget projections, the CBO estimates the Big Beautiful Bill would increase deficits by $3.4 trillion over the 2025 2034 period ($340 bn per year under a linear distribution of deficits). Markets are questioning fiscal discipline and are applying a higher term premium due to uncertainty about the long-term sustainability of public finances. We nonetheless expect the term premium to stabilize and see 10-year Treasury yields at 4.2% by end-2025.
The outlook for the USD. The US Dollar is a central component of the global monetary system, and its fluctuations have major implications for asset classes, from European/ Japan/ EM equities to global fixed income and credit markets and commodities. Considering the massive depreciation of the USD on a year-to-date basis (-10.5% for the DXY) and our cautious near-term outlook for risk assets on a tactical basis, we believe there is room for a stabilization of the USD in Q3 or even a slight rebound. This would be negative for Gold, which has benefitted from the Dollar depreciation and positive for Japan equities, one of the most positively correlated asset with the USD according to our estimates.
For European equities, greater visibility on trade and a consolidating USD could temporarily ease the pressure on globally-exposed and cyclical sectors in Q3. Within this space, we are more constructive on sectors that have sold off amid earnings cuts (we are OW on Basic Resources and Neutral on Luxury Goods, Autos).
Week ahead: the agenda of data releases will be light, and the market focus is likely to switch towards Trump’s trade deals. The minutes of the mid-June FOMC meeting will be available. Mid-July, the earnings season will start in the US and in Europe.
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