Market Outlook August 2025
Bull markets climb a wall of worry Things get critical when almost everyone believes that …
Navigate To Section:
Overview
Bull markets climb a wall of worry
Things get critical when almost everyone believes that prices will rise much higher. At that point, most market participants who were willing to buy have already done so. What remains are mainly potential sellers. Recently, the market has increasingly been driven by retail investors. This is typical for the final phase of a bull market. The core question, of course, is: when will the turning point be reached? Let’s take the American S&P 500 Index as an example. Typically, the price-to-earnings ratio for this index is close to the reciprocal of the yield on ten-year government bonds. That would currently be around 22. For next year, the earnings per share in the index are estimated to be about $300. So the fair value would now be approximately 6600, which is close to the current index level. But how long will that remain the case? In the event of a recession, for example, earnings collapse, and if ten-year interest rates rise further, the multiplier decreases. This is exactly the source of doubt for most experts. Some fear a recession, while others mainly expect a rise in ten-year interest rates. At first glance, it currently seems rather unreasonable to be very afraid of a recession in the U.S., because:
- Wage increases are higher than inflation.
- Due to high house prices and stock market levels, the wealth effect is significant.
- Interest rate spreads are low.
- The weakened dollar and import tariffs offer protection from international competition.
All of this is true. Nevertheless, most economists expect no more than 1 to 1.5% growth in the coming years. The major issue: The government in Washington is causing massive uncertainty with its tariff policies and spending cuts in research and development. The same applies to its handling of various legal and democratic norms. As a result, many companies are postponing investments until the situation becomes clearer. Additionally, U.S. interest rates are not supporting growth but are slightly dampening it. The same goes for fiscal policy: it will be mildly restrictive until the end of the year and only slightly stimulative starting next year. Moreover, import tariffs not only create significant uncertainty but can also be seen as additional taxes for consumers and businesses.
Our 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 the second quarter of 2025, the U.S. economy made a surprising turnaround, growing at an annualized rate of 3% after shrinking by 0.5% in the first quarter. The main driver of this development was a significant decline in goods imports, which had previously risen sharply. Consumer spending also increased slightly but remained below the level of the previous year. Investment activity remains subdued: both corporate investments and construction investments declined. This led to a weakening of private domestic final demand from 1.9% to 1.2%, indicating a continuing slowdown in growth. For the second half of the year, GDP growth is expected to fall to around 1%.
Trade policy remains a major source of uncertainty. President Trump continues to pursue a tough stance on import tariffs, which dampens investment willingness and burdens consumers’ real incomes. Since tariff revenues are needed to finance tax cuts and other expenditures, there is little room to ease tariff policy. In an alternative scenario, U.S. importers initially absorb the increased costs caused by tariffs and the dollar’s depreciation themselves, which reduces their profit margins. So far, these costs have hardly been passed on to consumers, which could temporarily prevent layoffs. However, given the tight labor market, companies are hesitant to cut staff, fearing they might struggle to find qualified workers later.
Although experts say the labor market is somewhat easing, this is not yet reflected in the unemployment rate. Job search is becoming increasingly difficult, raising the risk of sudden mass layoffs if economic growth does not pick up again.
Europa
The European economy presents a mixed picture in the second quarter of 2025. Eurozone GDP remained nearly stagnant and even declined slightly in Germany (–0.1%). Investment activity is weak, while consumption – both private and public – showed a slight increase. The European Central Bank (ECB) responded to the weak economic performance with further interest rate cuts, as inflation fell to 2.3%, approaching the target level. For the full year, growth is expected to be only 0.9%. Geopolitical uncertainties, especially the looming threat of U.S. tariffs on EU exports, are weighing on sentiment and investment willingness. Germany is particularly affected due to its high share of exports to the U.S. The European Commission warns that uncertainty alone could cost up to 0.3% of GDP. Despite all that, the labor market remains relatively stable, even though its momentum is slowing. Real wages are rising moderately, which supports consumption. However, a sustainable recovery strongly depends on easing global trade tensions and further fiscal stimulus.
Asien
China’s economy grew more strongly than expected in the second quarter. A temporary tariff suspension with the U.S. and government consumer subsidies – especially during the May holidays – supported both industry and consumption. Nevertheless, economic momentum slightly weakened compared to the previous quarter.
Investment activity is particularly weak: fixed asset investments fell to their lowest level since the pandemic, with declines in the real estate sector, infrastructure, and manufacturing. Foreign trade is also losing momentum, suggesting a further slowdown in growth for the third quarter. Despite this, the annual forecast was raised to 4.9%, bringing it closer to the official growth target. Geopolitically, tensions remain high: the U.S. increasingly views China’s rise as a threat and is pursuing a confrontational approach, which could further strain economic relations.
Aside from the previous analysis, there are still some positive factors for equities. Companies continue to buy back large amounts of their own shares, and the number of IPOs remains low. Additionally, Washington’s policies are stimulative for stocks – not only allowing companies to depreciate investments more quickly (which will significantly reduce tax pressure next year), but also strongly advocating that American tech firms not be taxed more heavily abroad. This increases pressure on other countries to adopt more business-friendly policies to protect their competitiveness and investment climate.
Unmentioned negative factors include that after the sharp rise in U.S. stock prices, a short-term correction would not be surprising. Moreover, Washington has signed trade deals with major economies that are mostly framework agreements. While this has helped overcome trade-related uncertainty, it also gives the market room to price in the expected effects of higher import tariffs. Since tariffs are higher than the hoped-for average of 10%, with spikes for countries like China, this could lead to falling stock prices.
U.S. stocks are highly valued, and there is a risk that a too-restrictive Fed policy and higher import tariffs will continue to put downward pressure on growth, leading to disappointing earnings growth. On the other hand, the depreciation of the U.S. dollar increases the value of profits earned abroad. Additionally, American tech giants could benefit from the AI boom.
Therefore, we are slightly increasing our allocation to U.S. equities but remain underweight overall.
European stocks are more attractively valued than American ones and also have the wind at their backs, as ECB monetary policy is more expansionary and there is a prospect of increased fiscal stimulus next year. Therefore, we expect European equities to outperform within a globally diversified equity portfolio. However, we are aware that further appreciation of the euro could negatively impact corporate earnings.
The higher U.S. tariffs have two sides. Negative: growth is under greater downward pressure, and exports to the U.S. become more difficult. There is also a growing risk of a trade war if Europe introduces higher import tariffs to protect its own market. On the positive side, there is a weaker US dollar and growing political pressure on the Fed to lower interest rates more significantly. Furthermore, there is a growing need for countries outside the US to stimulate their own economies more, which is positive for emerging market equities in the long term. We are maintaining a neutral allocation to emerging market equities.
Bonds
The range in which long-term government bond prices are moving is narrowing. This is often a precursor to increased volatility. The key question is: when and in which direction will this higher volatility occur? As for timing, we currently expect an overall sideways movement, since positive and negative factors are currently balanced. Slowing economic growth is likely to put upward pressure on bond prices. However, concerns about the delayed inflationary impact of higher import tariffs and the prospect of more expansionary fiscal policy next year are likely to exert downward pressure on government bond prices.
Although bond prices are likely to move sideways in the short term, a breakout from the trading range is approaching. Rising long-term interest rates are expected to be a significant trigger for a risk-off sentiment in the coming quarters. Corporate balance sheets are relatively strong, which limits defaults for now. Companies can also refinance easily thanks to the current risk-on climate. However, interest rate spreads are already very low, meaning the favorable environment for corporate bonds is largely priced in, and the margin of safety for investors is thin.
A key reason for this is the persistently high budget deficits. Since a large portion of these deficits ultimately benefits companies in the form of higher revenues and profits, this is positive for corporate balance sheets – even as concerns about public finances grow. Additionally, the share of private debt in corporate financing is increasing.
In the future, interest rate spreads are likely to rise temporarily once a recession occurs and/or long-term interest rates continue to climb due to concerns about public finances. While recession fears are expected to increase, we do not currently anticipate an actual recession.
In any case, we expect long-term interest rates to rise over the coming months. In the short term, this could increase upward pressure on interest rate spreads, but ultimately, rising rates are likely to trigger a risk-off phase and growing concerns about crowding out of companies by the government. This significantly increases the risk that companies may be unable to refinance maturing loans or may only do so at high interest costs, which could strongly slow down the economy.
Commodities & Currencies
In the coming months to quarters, we expect a combination of slowing economic growth and increased upward pressure on long-term interest rates. Both are negative for real estate prices. A further rise in long-term interest rates could also lead more real estate investors to decide – out of necessity – to sell commercial properties at a loss. A larger supply would put even greater downward pressure on property prices.
Next year, the economic outlook is expected to brighten thanks to more expansionary fiscal policy. This could support real estate prices later in the year, but we do not expect strong upward pressure, as we also anticipate more upward pressure on long-term interest rates.
Central banks have already purchased large amounts of gold in recent years compared to the pre-COVID era. However, since central bank balance sheets have expanded rapidly overall, gold holdings remain a small part of total assets. Geopolitical uncertainty also remains high, making it riskier for many central banks to hold large reserves in U.S. and/or European bonds. To reduce this risk, they are likely to allocate more reserves to other markets where geopolitical risks are lower. At the same time, they want to prevent their own currencies or those of allied countries from appreciating too strongly.
We also expect additional demand for gold from investors who, due to growing fears about out-of-control public finances, anticipate inflationary policies from central banks. Although we are very optimistic about the outlook for gold over the coming quarters and years, we expect a sideways movement or even a corrective decline in gold prices over the next few weeks to months. At the beginning of the month, the Bitcoin price hovered around the 120,000 USD mark. The price benefited from growing market confidence that a clear legal framework for digital assets will soon be established in the U.S. Previously, the U.S. House of Representatives approved the so-called “Genius Act,” according to the DPA news agency. The law (“Guiding Emerging National Innovations for Unified Standards”) aims to regulate the handling of cryptocurrencies, especially stablecoins. The Genius Act could have a signaling effect beyond the U.S. With its adoption, the crypto sector receives a comprehensive regulatory framework for the first time in the world’s largest economy.
Downloads
