Investor sentiment in equities was buoyed last week by the passage of the ‘Big Beautiful Bill’, signs of US economic resilience, and hopes of easing trade tensions.
US equities remain our preferred sector for the second half of the year, underpinned by stronger earnings growth expectations, a persistently weaker dollar, and significant exposure to the technology sector.
Market recap
Beyond the numbers
Macroeconomics
The passage of the ‘Big Beautiful Bill’ brings more clarity to US fiscal policy. This will add more than USD 4 trillion to US deficits over ten years relative to the current situation. Nonetheless, since most tax cuts have simply been extended, this budget bill will provide only modest additional stimulus over the medium term.
The latest non-farm payroll figures showed an increase of 147,000 in June, but the gains were driven by a jump in state and local government employment, as well as in healthcare. In contrast, private payrolls rose by only 74,000, the lowest level since October. This slowdown is more in line with other recent data which have pointed to a cooling job market, including the employment components of the two ISM surveys.
Elsewhere, eurozone inflation for June was in line with the European Central Bank’s (ECB) target at +2.0%, suggesting that the ECB has room to cut rates again this year, and we expect it to do so in December.
Asset allocation: strategic views as at July 2025
Equities
Global equities continued to climb, with a total return of +1.3% (MSCI ACWI) last week, led once again by US equities, with the S&P 500 up by 1.8% versus the STOXX Europe 600 being down by 0.4%. However, beneath the surface, a sharp rotation dominated performances, with the Magnificent 7 lagging behind (+0.5%), and more economically sensitive areas of the market leading, such as US small- and mid-caps, which were up by 3.6% and 2.9%, respectively.
Expectations of positive trade developments, such as the announcement of the US accord with Vietnam, the passage of the Big Beautiful Bill in Congress, and a still-resilient reading of the US economy with stronger-than-expected June non-farm payrolls, pushed investors to go higher up the risk curve to more cyclical and value segments of the market, financed by the sale of overcrowded positionings in quality and growth.
The initial stage of the rotation into cyclical laggards appears to have been principally driven by technical and positioning factors, as well as market expectations of an improving US and global economic outlook. US tariff clarity, future rate cuts and stimulus in Europe and China over the second half of the year are adding support to the asset class overall. This is especially true for US equities, which are underpinned by a stronger earnings growth outlook, a weaker USD and an elevated exposure to the technology sector. Consequently, we have upgraded our conviction level on US equities from 3/5 to 4/5.
However, we remain mindful of elevated valuation levels on the S&P 500 (forward 12-month P/E of 22.3x versus the 5-year average of 20.1x) ahead of the start of the Q2 earnings season, as any disappointing data could provoke a contraction.
US equities are supported by a stronger earnings growth outlook, a weaker USD and elevated technology sector exposure
Fixed income
The performance of fixed income was mixed last week, with high yield (HY) and AT1s performing quite well (+0.4% and 0.6%, respectively), while investment grade (IG) ended up flat, ending a solid positive streak seen on the asset class since the beginning of the year.
Following the release of stronger-than-expected US jobs data, markets are now pricing in only two rate cuts for the year, versus 2–3 just a few days ago, and with virtually no chance of a cut before September. Fed Chair Powell reiterated that he was entirely focused on inflation targets and that he will wait until he better understands the impacts of Trump’s tariffs before lowering interest rates.
The yield on 10-year Treasuries rose during the week to reach 4.35%, mostly pushed by the approval of Trump’s bill that is expected to materially increase US deficit and debt levels over the coming years.
Meanwhile, in the UK, there were also tensions on 10-year gilts, which yield rose to over 4.6% on Wednesday following fears about the UK budget after some key reforms were abandoned.
Markets are now pricing in two Fed rate cuts by year-end
Forex & Commodities
Last week, the EUR/USD rose to highs of above 1.1820, and the USD/CHF fell to levels of just below 0.79; these moves reflected ongoing USD weakness. US Federal Reserve Chair Powell revealed that Fed rate cuts would have happened sooner had the US’s tariff policy not been in place. The GBP traded lower across the board as UK Prime Minister Kier Starmer appeared reluctant to give his full backing to the UK’s Chancellor of the Exchequer, Rachel Reeves.
Gold traded higher to levels of around USD 3,360 per oz, reflecting USD weakness.
The GBP traded lower across the board
The opinions expressed herein are correct as at 7 July 2025 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
