Market Outlook July 2025
Markets remain remarkably resilient despite geopolitical shocks and policy uncertainty
In recent months, investors have adopted a new mantra: “Nothing ever happens” – at least when it comes to market reactions. Despite a barrage of geopolitical headlines, including a significant escalation in the Middle East, US equity markets have not only shrugged off the noise but surged to new highs. Since the April lows, the S&P 500 has staged its fastest recovery ever, reclaiming all losses and setting a fresh record in just 90 days. This rebound has been driven by a combination of improving macroeconomic indicators, renewed enthusiasm for artificial intelligence, and relatively cautious investor positioning, which left room for upside surprises.
As we enter the typically quieter summer months, investors face a complex mix of risks and opportunities. The Middle East conflict, while de-escalated for now, remains unresolved. Trade policy developments in the US could shift quickly, and the upcoming Q2 earnings season will test the strength of corporate fundamentals.
At the same time, falling bond yields – driven by dovish signals from the Fed and softer economic data – are providing support for equities. Historically, markets tend to recover quickly from geopolitical shocks, and that pattern may hold again.
Despite the strong performance of US equities, many investors remain cautious. Concerns persist about the sustainability of the rally, especially given the backdrop of global conflict, trade policy uncertainty, and domestic political drama. The Trump administration’s self-imposed 90-day deadline for trade negotiations has approached, and questions remain about the fate of proposed legislation in the Senate. Yet, this skepticism may be part of what’s keeping the rally alive. With sentiment and positioning still relatively subdued, there’s little evidence of excessive exuberance or overcrowding – conditions that often precede market corrections.
BENDURA Investment Policy
*inkl. UK und CH
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
U.S. economic growth in 2025 is significantly slower than what investors have seen in recent years. The labor market, which was previously very tight and drove strong wage growth, has now normalized. There’s roughly one job opening per unemployed person, and wage pressures have eased. Households have also run through most of their excess savings, and any new government stimulus – such as from the proposed “One Big Beautiful Bill” – won’t take effect until next year. As a result, fiscal policy is expected to weigh on the economy this year rather than support it. Consumer spending, which is usually a key driver of the U.S. economy, has weakened. Real spending has declined over the first five months of the year, which is a pattern typically seen during recessions. This slowdown began even before new tariffs were introduced, suggesting deeper underlying issues. The housing market is also under pressure. According to Redfin, the supply of homes for sale is now far outpacing demand – the widest gap since 2014. Home prices are on track for their worst year in decades, excluding the 2008 financial crisis. In response, the administration has introduced regulatory changes aimed at lowering interest rates and encouraging lending, but these measures have had limited impact so far. The labor market remains the strongest part of the economy, but even here, cracks are forming. Continuing unemployment claims have reached new highs for this cycle, and surveys show that people are finding it harder to get jobs. A major challenge for the administration is the Federal Reserve. While the government is trying to stimulate the economy through regulatory changes, real relief depends on lower interest rates. So far, the Fed has been cautious. Most members of the Federal Open Market Committee (FOMC) expect only two rate cuts this year, and some don’t expect any at all. This has frustrated policymakers who want faster action to support growth.
Europe
At its June meeting, the European Central Bank lowered the key interest rate once again. At 2%, the deposit rate is now in neutral territory, and further easing steps are likely to be discussed more controversially in the ECB body from now on. The macroeconomic environment as a whole speaks in favor of an additional key interest rate cut. Economic sentiment in Europe is showing cautious optimism – Citi Economic Surprise Index rose to 27.3, indicating that recent economic data has generally exceeded expectations. Business confidence is improving, with the IFO Business Climate Index reaching 88.94. Other indicators like the ZEW Economic Expectations (11.6) and Sentix (14.25) also continued to rise in June, pointing to a gradual recovery in outlook among companies and investors. Although the manufacturing sector is still contracting—reflected by a PMI below 50 – it has been steadily improving since late 2024. On the inflation front, headline inflation dropped from 2.2% to 1.9%, and core inflation eased from 2.7% to 2.3% in May. Both figures came in lower than expected.
Asia
In May, China’s retail sector saw a surprising surge in sales, driven by government subsidies and festive shopping around Labor Day and the Dragon Boat Festival. The early start of the 618 Shopping Festival also boosted consumer spending. Categories like electronics, communication tools, office supplies, and furniture saw major gains, with sales jumping between 25% and 55% compared to last year. Food, alcohol, tobacco, and jewelry also performed well. The subsidies introduced last year are proving effective, with some regions already exhausting their allocated funds. About half of the total subsidies for the year remain, suggesting that the shopping momentum could continue in the near term. However, unless the government extends further support, the growth rate is expected to slow in the second half of the year due to strong performance in the same period last year.
Since the start of the year, investment in China has grown more slowly than expected. Private investments have stalled, and public investment growth has also lost momentum, signaling a broader economic slowdown by mid-year. Industrial production has weakened too, likely due to declining export demand. Talks between China and the U.S. in London yielded few concrete outcomes. Tariff levels weren’t addressed, though China is speeding up rare earth export licenses, and the U.S. is slightly easing restrictions on certain goods and maintaining student visa access for Chinese nationals. However, a significant shift in trade relations doesn’t appear to be on the horizon.
Equities
U.S. stock markets led the way in June, with the S&P 500 climbing 4.96% to a new all-time high, and the tech-focused Nasdaq surging over 6.5%, also hitting a record. This rally was fueled by strong performance from major tech companies, most notably NVDA (+16.9%) and META (+14%). Also, a slightly more dovish tone from the Federal Reserve, and renewed optimism around trade developments helped. Notably, these gains came despite ongoing geopolitical and domestic political uncertainties. The next major challenge for U.S. companies is fast approaching as earnings season kicks off soon. Analysts are forecasting a 7.1% increase in earnings for S&P 500 firms this year, with even stronger growth expected in 2026. These projections will be tested in the coming weeks as second-quarter results are released. The strong showing by U.S. equities helped narrow the performance gap with European markets, while in contrast, European stocks lagged, with none of the major indices finishing the month in positive territory, largely due to geopolitical tensions, particularly following Israel’s attack on Iran. As a result, the earlier outperformance of European markets over the U.S. has diminished. While the Eurostoxx 600 remains up about 6.6% year-to-date, the S&P 500 is now close behind with a 5.5% gain. So far, optimism hasn’t been reflected in the economic data. Many now fear that the region is struggling to maintain the momentum sparked by Germany’s €1 trillion “whatever it takes” investment plan for defense and infrastructure. In fact, the European Commission recently downgraded its growth forecasts, partly in response to new tariff threats from former U.S. President Trump. Additionally, a Commission survey published last week showed that consumer and business confidence declined in June across both the EU and the eurozone.
Despite these setbacks, the overall outlook for European equities remains positive. Investor sentiment is still constructive, supported by attractive valuations (Stoxx 600 trades at ~13.5x forward earnings vs. 20.4x for the U.S.), strong fund inflows and improving macroeconomic conditions.
Asian markets also had a strong June, marking their third consecutive month of gains. Most major indices in the region posted positive returns. Tech-heavy indices outperformed, and South Korea’s Kospi stood out following the election of a market-friendly president. The MSCI Asia Pacific ex Japan index rose 5.3%, while Japan’s Nikkei 225 jumped 6.6%, outperforming the broader Topix, which gained just 1.1%. In Greater China, bank stocks listed in Shanghai and Hong Kong led a broader market rally.
Bonds
Following the inflationary shocks caused by the COVID-19 pandemic and the war in Ukraine, global inflation has now largely stabilized, thanks in large part to the decisive actions taken by central banks around the world. After years of aggressive rate hikes to combat surging prices, inflation is now under control in most countries and regions.
According to current forecasts, global inflation is expected to decline for the third consecutive year, reaching around 3% in 2025. This downward trend appears resilient, even in the face of new import tariffs or temporary spikes in energy prices, which are not expected to significantly derail the broader disinflationary momentum.
As a result, monetary policy is shifting. A growing number of central banks are now moving from tightening to easing. Since the beginning of the year, nearly 80% of the world’s major central banks have already cut interest rates, marking the highest rate-cutting activity in five years. This signals a coordinated global pivot toward supporting growth as inflation pressures ease.
The U.S. Federal Reserve (Fed), which has held its benchmark interest rate steady at 4.25% to 4.50% since December, is also expected to join this trend. Market expectations and Fed guidance both point to two rate cuts by the end of the year, reinforcing the broader shift toward more accommodative monetary policy. U.S. Treasury yields moved lower across the curve, signaling stronger demand for government bonds. The 2-year yield fell back below 3.75%, while the 10-year yield dipped below 4.25%. This broad-based firming suggests a shift in investor sentiment, possibly driven by expectations of future rate cuts, softer inflation data, or increased geopolitical uncertainty.
German 10-year bond yields, currently around 2.55%, are expected to decline to approximately 2.3% in the near term. This short-term drop could occur even if U.S. long-term interest rates remain elevated, which is a divergence from the usual pattern, where German yields tend to follow U.S. trends. One possible reason for this decoupling is a potential shift in investor sentiment away from the U.S. dollar and U.S. bonds, which could lead to increased demand for German government bonds instead. Looking further ahead, a gradual upward trend in yields is anticipated, driven by a modest recovery in economic growth and persistent larger budget deficits in Germany. However, even with these upward pressures, yields are unlikely to exceed 2.90% in the foreseeable future, suggesting a relatively contained rise.
Commodities & Currencies
The recent behavior of oil prices has puzzled many investors, especially given the tense geopolitical backdrop. Although prices are still higher for the month, the rally has been muted and short-lived. Oil climbed until mid-June but then gave up most of its gains, even before former President Trump announced a ceasefire. One key moment was when Iran attacked a U.S. military base in Qatar – an event that might have signaled escalation. Yet, oil prices fell 7% that day, suggesting that markets interpreted the strike as a controlled and symbolic gesture, not a serious threat to global oil supply. Iran avoided targeting the Strait of Hormuz, which is a critical oil transit route, likely because closing it would damage its own exports and provoke international backlash at a time when its economy is already fragile.
Beyond geopolitics, the mechanics of the oil market also help explain the price action. While the world consumes about 100 million barrels of oil per day, the financial market trades over 6 billion barrels daily. This means oil prices are more influenced by speculative trading, especially by hedge funds and money managers, than by physical supply and demand. When there’s a lack of fundamental buyers or sellers to balance these trades, liquidity gaps can cause sharp price swings. With oil flows unaffected and both Israel and Iran agreeing to a temporary truce, immediate supply risks are fading. The recent retreat in Brent crude suggests that the risk premium is shrinking, and unless the ceasefire collapses, prices may continue to ease. Many analysts now expect global oil supply to exceed demand by year-end, which could put further downward pressure on prices. Investors appear to be gradually shifting away from the U.S. dollar, with growing interest in the euro. This trend is supported by the increasing economic and military cooperation among European nations, which is expected to foster more investment opportunities denominated in euros over time. However, despite this shift, the euro bond market remains relatively small and cannot yet absorb the volume of dollars that might be sold if the dollar were to lose significant reserve status. This means the euro is not yet ready to replace the dollar as the world’s primary reserve currency. That said, even a modest reduction in dollar holdings could have a strong upward impact on the euro, given the current market dynamics. The EUR/USD exchange rate is expected to rise toward 1.20 in the near term, although a short-term correction to around 1.12 is likely, due to the pair being in an overbought condition. After this correction, the uptrend is expected to resume, with projections suggesting the euro could climb further to 1.25–1.30 over the medium term. This outlook reflects both shifting investor sentiment and structural changes in global capital flows.
In the short term, the Swiss Franc is expected to underperform relative to the Euro, and this weakness could also extend to its performance against the U.S. dollar. The key driver behind this expected underperformance is the Swiss National Bank’s (SNB) likely continuation of monetary easing, while the European Central Bank (ECB) is nearing the end of its rate-cutting cycle. This divergence in policy paths could widen the interest rate differential, making the Swiss Franc less attractive to investors in the near term. This creates a tactical risk, potentially leading to short-term depreciation. However, the long-term outlook remains strong, underpinned by Switzerland’s solid economic fundamentals, including a persistent current account surplus, positive income balance, and a robust foreign direct investment (FDI) inflows. These structural strengths provide a firm foundation for the CHF, suggesting that once the current monetary policy divergence plays out, the currency could resume a path of gradual appreciation over the longer term.
