A heated exchange is currently going on whether or not US exceptionalism is coming to an end. Albeit the noise there is no denying that the high policy uncertainty in the US, as well as the US’s limited room for manoeuvre on both monetary and fiscal fronts, is impacting the US economy. We believe that US markets may indeed see prolonged capital outflows as non-US investors scale back their US exposure. Nevertheless, US stocks remain part of a well-diversified portfolio. We believe that US equity allocations should focus on truly exceptional companies, where there is no equivalent outside of the US. That said, portfolios should be diversified wherever possible with non-US names.

Europe

There is a clear contrast between policy dynamics in the US and Europe, with a notable shift towards fiscal easing evident in the latter. With fiscal policies becoming more supportive and the European Central Bank keeping interest rates low, earnings growth in Europe is poised to rebound after a prolonged period of stagnation. We highlight Germany and Switzerland in particular, where we see opportunities for investors.

Germany

Within Europe, we believe that German equities are positioned to do well due to their bias towards cyclical growth sectors, their attractive valuations, and the strong projected earnings growth. Specifically, we currently like German mid-cap stocks, as the MDAX Index’s weighting of industrials and materials is heavier. These stocks should therefore benefit more from the German government’s unprecedented fiscal stimulus announcement earlier this year, which is aimed at boosting defence and infrastructure spending.

Switzerland

The 2025 earnings growth expectations for Swiss companies are also solid. In general, they tend to be more stable compared to those of their European and US peers. In Switzerland, we also prefer mid-cap stocks given their quality bias. In both Germany and Switzerland, mid-cap companies tend to be more sensitive to local growth dynamics and less exposed to global trade risks.

Asia

Outside of Europe, we also see opportunities in Asia to diversify away from the US. In this region, we believe that China and Japan are currently attractive.

China 

In China, some volatility can be expected depending on how further trade talks develop. But while the impact of the tariffs on Chinese exporters will still be significant, the de-escalation of the trade conflict overall should ease the pressure on the Chinese economy. Furthermore, Chinese firms are now placing greater emphasis on controlling costs in order to enhance margins. Furthermore, they are increasing dividend payouts and share buy-backs to raise shareholder returns. All these factors should be reflected in the performance of their shares going forward. Valuations in China are currently at compelling levels. Additionally, they have a low correlation to equities in the rest of the world, making Chinese equities a good diversifier.

Japan

Regardless of how the trade negotiations between Japan and the US play out in the end, further progress in terms of corporate governance and labour market reforms should support the Japanese equity market. We expect efforts by companies to drive long-term shareholder returns and value creation to both increase in pace and broaden in scope. We also see the potential for further support measures, with fiscal policy set to be expansionary and monetary policy remaining significantly accommodative with negative real rates.

Next Generation: Extended longevity is a global phenomenon

Among our Next Generation themes, we would currently focus on Extended Longevity and Future of Finance. Companies relevant to the Extended Longevity theme are set to benefit from shifting spending patterns as the population ages, together with the growing number of age-related diseases. As for Future of Finance, the theme should benefit from the ongoing disruption of the financial industry, as well as from the resilient nature of the asset management industry. Investors could consider a barbell strategy with a mix of investments in Extended Longevity and Future of Finance, thereby pairing a more defensive theme (thanks to the exposure to healthcare companies) with a more cyclical one.

Finally, the expectation of a pickup in fiscal spending in Europe should benefit the Future Cities theme, which should also structurally benefit from the growing urgency to tackle the challenges that climate change is posing to cities around the world.

For more on our outlook on equities, fixed income, and Next Generation trends, as well as our views on the global macroeconomic environment, please download our Market Outlook Mid-Year 2025.