MARKET OUTLOOK SEPTEMBER 2025
LEGAL TUG-OF-WAR IN THE UNITED STATES
Last week, a U.S. appeals court ruled that many of Trump’s import tariffs were “illegal,” stating that he had exceeded his authority in imposing them. However, the court stopped short of outright banning the tariffs. Trump has until October 14 to appeal to the Supreme Court. The possible outcomes could look like this:
- The Supreme Court reverses course and rules that Trump’s import tariffs are indeed lawful. However, this outcome is considered unlikely.
- The opposite is also possible, meaning Trump would have to lift his import tariffs. This also seems improbable. Such a move would throw international relations and the outlook for public finances into complete chaos.
- The Supreme Court is expected to choose a middle ground. It may decide that a number of import tariffs are based on laws that were never intended for that purpose, but there are many paths to the same goal: other laws could potentially serve as a legal basis for the tariffs.
America’s public finances were already in poor shape, but the situation could worsen if the government fails to generate substantial revenue from import tariffs. As mentioned, it is unlikely that the Supreme Court will declare all tariffs unlawful, but for now, it remains entirely unclear what powers the U.S. President actually has in this area. Weak economic growth and the prospect of significantly lower government revenues from tariffs would severely cloud the outlook for U.S. public finances.
BENDURA INVESTMENT POLICY
The terms attractive / unattractive describe the return potential of the various asset classes. An asset class is considered attractive if its expected return is above the local cash rate. It is considered unattractive if the expected return is negative. Very attractive / very unattractive denote the highest conviction views of the BENDURA Investment Committee. The time horizon for these views is 3-6 months.
GLOBAL ECONOMY
USA
In recent decades, U.S. economic growth has typically ranged between 3 and 4%. This was highly beneficial for public finances, as higher growth and lower unemployment lead to increased tax revenues and reduced social spending. Additionally, globalization, the rise of the internet, and other technological innovations exerted significant downward pressure on wage growth and inflation. However, globalization has largely come to a standstill and, in some areas, has even reversed into deglobalization. Furthermore, certain measures – such as import tariffs and import restrictions – reduce external competition. This gives more room for wage growth and inflation to rise.
Due to demographic developments, the labor force is now growing only marginally compared to previous annual increases of 1.5 to 2%. Many Western countries are trying to curb migration as much as possible. The U.S. is even expelling foreign workers. Western populations are strongly opposed to further immigration. Migration is often perceived as a threat to domestic culture, religion, social norms, and other societal values. Even if it would be economically desirable, it is therefore unlikely that the doors to migrants will be opened wider anytime soon.
Europe
European leaders speak of “de-risking” their relationship with China, thought they stop short of seeking a complete break. The EU criticizes Chinese practices – such as unfair subsidies and human rights violations – and has introduced instruments including a screening mechanism for Chinese investments and measures against economic coercion in response to Chinese sanctions. Nevertheless, major European economies, especially Germany, remain heavily dependent on China as an export market.
Geopolitically, this means that Europe sometimes aligns with the American position (for example, in excluding Huawei, albeit half-heartedly in some countries), but at other times hesitates to enter into full confrontation. The war in Ukraine has further damaged China’s image in Europe—Beijing’s continued support for Putin is viewed negatively. Even back in 2019, however, the EU had already labeled China a “systemic rival.” The EU will therefore at least partially support the U.S.’s tough stance on China, while at the same time trying to pursue an independent course to avoid becoming merely a pawn of Washington. France, in particular, has traditionally been keen to avoid becoming overly dependent on the United States.
Asia
Southeast Asian nations are not necessarily aligning with the American stance in the trade war. On the contrary, regions like Southeast Asia (ASEAN) are benefiting from the shifting trade flows—Chinese and American companies are increasingly investing in countries such as Vietnam, Thailand, and Indonesia to reduce their exposure to tariffs. As a result, these countries are seeing a rise in exports to both the U.S. and China. At the same time, political tensions are increasing: The Philippines and Vietnam are seeking U.S. support in the South China Sea against China’s assertive behavior, but they are also reluctant to forgo Chinese investments.
EQUITIES
“Sell in May and go away” – but not this year! Instead of tanning on a beach, investors who stayed in the market enjoyed a stellar summer on the stock exchanges – from the April lows through the end of August. August once again proved to be a month where the path of least resistance continued upward. The S&P 500 rose for the fourth consecutive month, bringing its year-to-date gains to nearly 10%, despite a 18% decline in the first quarter. U.S. equities continued their outperformance of recent months.
In August, the S&P 500 hit five of its total 20 record highs for the year, rising by 1.9%. The tech-heavy Nasdaq Composite gained 1.6%, while the Dow Jones Industrial Average climbed 3.2%. All three, however, were outperformed by the Russell 2000.
Tariffs emerged as a central theme during the second-quarter earnings season. While many companies pointed to cost pressures from tariffs, mitigation strategies – especially by retailers – were positively received by investors. Also encouraging were signs that consumers continued to spend. Overall, second-quarter earnings figures were strong: earnings per share (EPS) growth for S&P 500 companies came in at nearly 12% year-over-year – well above the 4.8% expected at the start of the season. Although more companies than average beat earnings estimates, the magnitude of these positive surprises was below the five-year average.
European stock markets showed strength in August. The Stoxx Europe 600 reached a five-month high, and the FTSE 100 marked a new record high. The laggards of the month were Germany’s DAX and France’s CAC, both of which ended slightly in the red. On the winning side, the Spanish and Italian indices outperformed the broader market. Interestingly, Switzerland’s SMI also ended the month clearly in positive territory, gaining 2.97%.
Despite tariffs – among the highest in the developed world – and a currency that has appreciated by roughly 13% this year, the SMI delivered a strong August performance of 4.5% in U.S. dollar terms, compared to 3.5% for the MSCI Europe. Nevertheless, Swiss equities are currently trading at a valuation premium of about 11% over the Euro Stoxx 50 (based on the expected price-to-earnings ratio) – well below the long-term average of 20–25% and near the lowest level in the past four years.
Japan experienced a double blow at the end of July: the long-ruling Liberal Democratic Party lost its majority in the upper house of parliament, and just three days later, the U.S. imposed 15% tariffs on Japanese exports. Investors responded positively – the iShares MSCI Japan ETF has risen by 9% since the agreement with Washington.
There is now a possibility that Prime Minister Shigeru Ishiba, who led the LDP to a third consecutive electoral defeat, may nonetheless remain in office. The 15% tariffs could turn out to be a relative advantage for the automotive sector: since U.S. carmakers pay 50% tariffs on imported steel, Japanese manufacturers could gain market share.
Further gains in Japanese equities may prove more difficult to achieve. One possible strategy is to shift focus from industrial heavyweights to domestically oriented stocks – especially financials. Monetary conditions are favorable for Japanese banks: the Bank of Japan maintains its key interest rate at 0.5%, while the yield curve for long-term loans is rising significantly. On the other hand, the yen is expected to appreciate against the U.S. dollar, which would weigh on the earnings of globally active manufacturers such as Toyota Motor and Sony Group.
BONDS
U.S. Treasury bonds mostly strengthened, accompanied by a noticeable steepening of the yield curve. The yield on two-year notes fell by 32 basis points, as expectations for multiple 25-basis-point rate cuts in 2025 increased.
In Europe, long-term British borrowing costs approached their highest levels of this century. This was driven by concerns over the country’s economic outlook and a global rise in yields, partly fueled by tensions between Donald Trump and the U.S. Federal Reserve.
Yields on 30-year German Bunds rose to their highest level in fourteen years, climbing eight basis points to 3.30% – the highest since 2011 – as investors demanded higher term premiums. Yields on similarly long-dated bonds across the rest of the Eurozone and the United Kingdom also moved higher, as did those on U.S. Treasuries. The European Central Bank is currently taking a wait-and-see approach.
Although growth is currently very low, there are relatively strong fiscal stimuli in place. Moreover, interest rates in Europe are already quite low. However, we must factor in that uncertainty surrounding U.S. import tariffs is likely to persist and could weigh on global growth. At the same time, European inflation has already declined to around 2%. If the dollar were to depreciate and the euro appreciate, Europe’s economy could struggle to expand sufficiently, increasing the risk of inflation falling too low.
COMMODITIES AND CURRENCIES
The United States faces large deficits in both public finances and the current account.
As a result, substantial international capital inflows are needed to prevent U.S. interest rates from rising and the dollar from depreciating. Currently, international investors are increasingly reluctant to invest in the U.S. at previous levels due to Trump’s policies. Added to this are concerns about deteriorating public finances and rising inflation. This wouldn’t be as concerning if the Fed were responding with rate hikes – but instead, the central bank plans to cut rates. In principle, this points to a tendency for the dollar to weaken (unless long-term U.S. interest rates rise too quickly and force the Fed to tighten monetary policy temporarily).
However, Europe’s economy is growing only sluggishly, and inflation appears to be well under control. Fundamentally, this makes rate cuts easier for the ECB than for the Fed. That would typically support euro depreciation, but three factors suggest the opposite:
- European public finances appear more stable than those of the U.S.
- A rate cut in the U.S. increasingly seems driven by inflation concerns, whereas in Europe it would be aimed at supporting weak economic growth.
- The European economy is likely to receive more fiscal support, at least as long as import tariffs remain in place.
August was disappointing for Bitcoin: The price fell by around 6%, which dragged down the overall crypto market. After four strong months of ETF inflows, BTC experienced net outflows of approximately $750 million for the first time. Price action remained below the $120,000 mark and showed little volatility.
Ethereum, on the other hand, stood out: Its price rose by over 23%, breaking a three-year streak of negative August performances. ETH also reached a new all-time high near $4,900.
Gold saw a strong rally in August: The price rose by about 5.3% in USD, reaching around $3,429 per ounce. This brings the year-to-date performance to an impressive +31%. This rally was driven by a weaker U.S. dollar, geopolitical tensions, strong ETF inflows, and growing stagflation concerns in the U.S. Notably, demand from North America and Europe stood out, with gold ETFs recording inflows totaling $5.5 billion.
