Earnings show room for growth

Corporate earnings and liquidity are the driving factor of stock prices and currently, earnings growth expectations for 2025 for both the US and EU are solid. In recent months, the momentum of earnings growth expectations has improved in Europe, while it has weakened in the US. Still, the consensus is that US companies will grow their earnings by more than 12% in 2025. The expected growth in Europe is almost 8%, so slightly lower, but still very respectable. This earnings expansion on both sides of the Atlantic supports further growth in stock markets. Therefore, we continue to prefer equities with a slight overweight in the portfolio.

Equity markets world-wide have started the year with positive returns, but Europe has caught the eye of investors. Long have investors favoured US equities over their European counterparts, but a shift appears to be happening. Although the US economy remains stronger than its European counterpart, its equity market is significantly more expensive. Meanwhile, the valuation of European stocks is close to their long-term average. This is not a new phenomenon, so what could be the trigger for this new behaviour?

Investing is all about relative attractiveness. Firstly, Trump adds uncertainty. Not only for Europe when it comes to possible tariffs, but also for the US economy, which will also be harmed by tariffs. Secondly, we see economic indicators in Europe slowly improving. Thirdly, the expected interest rate divergence between the ECB and Fed favours investments in the Eurozone. Given the improvement of the relative attractiveness of Europe, we have increased our positioning in European equities and reduced our positioning in US equities earlier this month. As a result, we have a neutral view on all regions, including emerging markets, in the portfolio.

ABN AMRO Group Economics no longer expects any rate cuts from the Fed this year, leaving the policy rate in restrictive territory. The prolonged resilience of the US economy has recently resulted in higher-than-expected inflation in the US. Moreover, additional Trump tariffs could lead to a further uptick in inflation. In Europe, the economy is slowly recovering while inflation is stabilising and slightly above the ECB’s target of 2%. This justifies a more neutral policy rate, while trade tariffs are a risk for economic growth. Therefore, we still expect the ECB to cut its policy rate further in the course of the year. For bonds, this divergence in rates means that we retain a preference for high quality European bonds with a longer duration. Although spreads become ever tighter, we believe higher yielding bonds, like high yield and emerging market debt, are too expensive. As a result, we remain cautious on riskier bonds.

Despite a lot of uncertainties on the political and geo-political front, equity markets remain in a good mood. With the different equity markets at or near all-time highs investors focus on the resilience of the world economy and the solid earnings expectations for 2025. We also see this with further spread tightening in credit markets, while longer term interest rates have not moved a lot this year.

In all, the ABN AMRO Investment Committee made no changes to the allocation. It remains slightly overweight equities and bonds and underweight cash in the portfolio.

Johanna Handte

Head of Global Asset Allocation Strategy and member of the Global Investment Committee / Chair of the Global Investment Committee