MARKET INSIGHT – August 2025

MARKET INSIGHT

Prime Partners’ monthly analysis of global economic and financial market news.

Fewer uncertainties but more challenges

At the time of writing, the earnings season is in full swing, and so far, the trend has been towards positive surprises. The US economy continues to prove resilient, albeit less so than a year ago. Consumers are still on board, but there are signs of greater selectivity in their purchases. On the other hand, tariff uncertainty, the real saga of the last few months, is receding with a flurry of “deals”, sensationalized as usual by President Trump. Some things never change.

After Japan, the European Union recently put an end to the suspense by reaching an agreement with the US administration on a 15% tariff on European imports into the United States. Here again, a certain vagueness prevails, as the contours of the “deal” remain imprecise at this stage. What is more, the buzz about commitments from the Old Continent to buy a host of American products over the next few years seems to far outweigh the reality. Promises only bind those who believe them…

For those interested in psychology, in the 60s the Polish psychologist Robert Zajonc highlighted a concept he himself called the “simple exposure effect”. His research demonstrated that, in general, individuals prefer ideas and things to which they are frequently exposed rather than those that are unknown to them. Whether we believe in the simple exposure effect or not, we have to admit that over the past few months, investors have become accustomed to the US President’s rhetoric and methods regarding tariffs. The performance of the S&P 500 (up more than 14% over the last three months) is proof of this. After hearing over and over again that the return of high import duties was a necessity to put an end to the trade “rip-off” of which America had been the victim for too long, or that these levies would have little impact on inflation (and by extension on the Fed’s actions), the American stock market seems to have come to believe it. Rightly or wrongly, the second half of the year will tell.

U.S. inflation is the key variable on which all eyes are now focused, especially the Fed’s

US inflation is the key variable on which all eyes are now focused, especially the Fed’s. Between a dollar that has weakened by around ten percent and a tariff overlay that usually ranges between 10% and 20%, the bill at first glance seems rather steep for companies exporting to the United States. They will have to decide whether to pass on these additional costs to their customers, at the risk of seeing some of them turn away from their products, or to trim their margins. It seems likely that many will opt for a combination of the two, the impact of which is as yet difficult to quantify. In addition, it is quite possible that a wave of ingeniousness, characteristic of challenging times, will come to the aid of exporting companies with the aim, once again, of smoothing out the impact of tariffs by optimizing production processes and the various stages leading to end consumers. Many of whom still have painful memories of the “shrinkflation” that affected certain products at the time of the 2022 inflation peak.

Another important parameter is, of course, US employment. Although increasingly selective, consumers continue to be employed. However, the job market is less buoyant than it was twelve to eighteen months ago, and we are witnessing a “no hiring – no firing” policy, in other words a status quo on the part of companies whose order books, but also capital spending, have suffered in recent months from the lack of visibility induced by tariffs. The decline in uncertainty surrounding this topic should now enable them to better estimate the level of activity to come, and therefore to adjust or not their needs, both in terms of resources and investment.

These two elements, inflation and employment, also condition the attitude of the US Federal Reserve, and hence the timing of potential rate cuts. On a broader level, we also need to assess the extent to which President Trump’s “irritation” (to put it mildly) with Jerome Powell could once again stress financial markets. Investors would undoubtedly take a very dim view of any loss of independence by the US central bank if Donald Trump ended up finding a way to replace its current chairman with a White House stooge ahead of time.

On the European front, women are in the spotlight, with the Christine Lagarde / Ursula von der Leyen duo on all fronts. The former somewhat dampened the hopes of the most optimistic about further rate cuts by the ECB. The latter, on the other hand, visited Scotland and its golf courses to seal with President Trump the trade agreement mentioned in this issue, which of course few European governments can look forward to. Nothing encouraging for the EU, whose most recent figures confirm the sluggishness of its economy (+0.1% growth for the Eurozone in the second quarter).

That leaves the emerging bloc, whose market indices are generally having a very good year, helped by the dollar’s weakness and a less belligerent climate than a few months ago regarding tariffs between the USA and China. This last issue, although still unresolved, looks set to be the final major piece of Donald Trump’s tariff campaign. The hypothesis of a full-blown trade war with China has receded, and it seems likely that, following the example of Japan and the EU, an acceptable but loosely-defined agreement will eventually be announced. Surprisingly, the US administration has announced a 25% levy on Indian products, pointing in particular to that country’s ties with Russia, while Donald Trump has set a deadline for his Russian counterpart to conclude a ceasefire with Ukraine. It seems that tariffs can lead to anything.

This quick overview of the three major economic zones justifies the title of this monthly commentary. The tariff campaign launched on Liberation Day in early April, which at times seemed grotesquely staged, is coming to an end. Even if everything seems far from settled, and there is every chance that tariff issues will fuel stock market volatility throughout Donald Trump’s term in office, he can legitimately claim that the United States has succeeded in using its clout to twist the arms (not to say wring the necks) of its main trading partners. So, there is less uncertainty on this front, and market participants are beginning to have concrete figures to base their decisions on. It now remains to be seen whether the import duties will enable the US to further consolidate its economic and financial dominance, or whether, on the contrary, the Trump administration has laid the foundations for a weakening of American hegemony.

Our asset allocations welcome the decline in tariff-related uncertainties and the somewhat reasonable rates of import duties already announced. We are increasing our exposure to emerging equities by adding to an existing actively-managed fund in our portfolios. We are also taking advantage of the latest developments to divest our exposure to 20-year US Treasury bonds and reallocate to an active high-yield corporate bond strategy. The environment over the next few months is likely to remain favorable for such bonds, in contrast to US long-term yields, which could remain elevated for an extended period.

The tariff campaign launched on Liberation Day at the beginning of April, which at times seemed grotesquely staged, is coming to an end

The results of our allocations improved in July, driven by the good performance of equities, particularly US shares. It is also interesting to note that the S&P 500 managed to catch up with the European index, whereas the gap between the two was considerable at the end of the first quarter. On the other hand, we remain fully aware of the highly concentrated nature of this rally, in which a dozen or so very large companies, mainly from the technology and financial sectors, are responsible for a majority of the index’s gain.

Last month, we stated here that “a little more visibility on the tariffs and fiscal fronts could turn 2025 into a good year for equities.”. We have made progress in that direction and are now reflecting it in our allocations. our allocations. The effects of the new global trade environment will take time to fully materialize in economic figures, particularly in terms of inflation. The Fed’s attitude will depend on this, and may well continue to irritate President Trump, who always has a few choice words for Jerome Powell… This poses an additional risk of stress for investors, which we are keeping in mind.

To sum it all up, we now have a seemingly more stable playing field for equities, with less uncertain rules in terms of global trade, but henceforth many challenges for companies to adapt to.