US equities touched new highs in August and European markets traded close to their March levels, while corporate credit spreads compressed over the summer. Sentiment was led by expectations for AI capital expenditure, a strong US earnings season, and a relatively dovish Fed at Jackson Hole. Markets seems to be ignoring the risks around economic activity (e.g., labour markets), political pressure on the Fed, fiscal deficits, and corporate margins.We believe the themes below are likely to drive the markets now: 

• Tariffs will have a bigger impact on US growth than on inflation. Inflation pressure is likely to be transitory, but may not materialise all at once (ie, service vs goods). Growth will remain in a soft patch this year and in 2026 due to a cooling labour market and slowing wage growth (not yet visible clearly). Higher near-term inflation will also weigh on consumption for the rest of the year. Also, the Eurozone will be affected by tariffs, but the ECB will continue its support. Growth in the second half of the year will be weaker than in the first half of the year. Nonetheless, domestic demand is holding up, supported by real wage growth, but export risks are high. 
• The Fed’s focus is shifting from inflation to growth, while political pressure on the Fed is rising. Overall, we maintain our projections of three rate cuts this year (the first in September) by the Fed, driven by a weakening economy as the Fed shifts its focus toward employment. The ECB will likely remain data-dependent and open to rate cuts in the coming months. 

You can now read the full whitepaper at the link below