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Market Outlook - June 2025
9/12/2025
U.S. markets are trading slightly higher than at the beginning of 2025, European markets, and in particular German markets, are trading significantly higher.
Vincenzo Vedda
Chefanlagestratege
Overview:
#1 Market & Macro
Outlook for equities rather optimistic – despite a number of risk factors
- U.S. markets are trading slightly higher than at the beginning of 2025, European markets, and in particular German markets, are trading significantly higher. The half-life of the stock
market slump after U.S. President Trump’s first tariff announcements is obviously not much longer than that of his statements on the levels of tariffs. How is this possible? many an investor might wonder. After all, the topic of tariffs is still around. - One possible explanation: meanwhile the U.S. President has quite often stepped back at least partly when market reactions were too negative. “Risks for the global economy continue to be high. But for valuations markets are focusing mainly on the development of corporate profits,” DWS Chief Investment Officer Vincenzo Vedda says. And these are not looking that bad.
- “On a global scale, we expect further earnings growth for the current year and the year to come,” Vedda continues. The U.S. equity index S&P 500 benefits above average from the hype around Artificial Intelligence and growth in general in the field of various digital topics. Moreover, Vedda attests companies significantly increased capabilities to adapt to changing framework conditions.
- “Even though our outlook on equities is rather optimistic for the twelve months to come, investors are well advised to closely watch developments of yields on the bond market,” Vedda suggests. They will be very important risk signals in the twelve months to come. “If the continuously high U.S. deficit and strongly rising yields of Japanese sovereign bonds pushed the yields of 30-year U.S. Treasuries towards five percent, we would have to revise our yield forecasts,” Vedda explains.
This is, however, not our base scenario. “We expect yields to remain volatile but to stabilize around the current level in twelve months’ time. This turns bonds into an attractive investment. Broadly diversifying a portfolio across several asset classes is mandatory in these uncertain times.
Topics driving capital markets
Economy: modest growth expected for the United States and Europe
- Reluctance to invest against the background of various tariff conflicts and flagging consumption are a drag on U.S. growth. We expect the U.S. economy to grow by a meagre 1.2% in 2025 (2024: 2.8%).
- Our forecast for Europe is an economic growth of 1.1% in 2025, i.e. slightly below U.S. growth. However, even this would be equivalent to an acceleration since growth stood at only 0.8% in 2024
Inflation: inflation rates in the United States significantly higher than in Europe
- Tariffs should start to have a negative impact on inflation from the beginning of the second half of 2025 so that inflation rates might peak at four percent in the third quarter.
- Inflation risks in Europe are markedly lower. In May, cost of living rose by only 1.9% (April: 2.2%). This has been the lowest increase since September 2024. However, in Germany, inflation stubbornly remained at 2.1%.
Central Banks: U.S. central bank remains cautious in face of inflation risks
- We expect the Federal Reserve to continue acting cautiously in the face of inflation risks and not to cut rates before this autumn. We forecast four further rate cuts by mid 2026.
- At the beginning of June, the European Central Bank (ECB) cut its key rates for the eighth time in a row to 2.0 percent. Since inflation has been contained in the Eurozone, the scope for further rate cuts should diminish.
Risks: accelerated geopolitical escalation or sharply rising rates
- A further geopolitical escalation remains one of the major risks, with consequences difficult to predict.
- Things could certainly get dicey on capital markets if interest rates rose significantly. Triggers could be a renewed acceleration of inflation but also an escalation of political crises.
#2 Equities
U.S. tech stocks: new protagonists around the corner but the trend seems to be intact
- Total returns of approximately six percent for global stocks – this is the DWS investment strategists’ forecast for the twelve months to come. This will, however, only be possible if the influential U.S. stock market with its tech stocks marches along, too, particularly stocks in the field of Artificial Intelligence. The first big hype already seems to be a thing of the past. “For us, the topic of Artificial Intelligence, however, continues to be the most exciting investment topic in the tech sector,” portfolio manager Tobias Rommel claims. Technological progress in the field of AI should continue to generate significant sales and earnings growth of AI winners.
- “In the last few years, the highest returns were generated by hardware manufacturers, particularly those supplying components for data centers,” Rommel continues. Although the demand of chips, for example, remains on a very high level since a still growing number of AI users are asking for ever higher computing powers, Rommel forecasts a change of favorites: “In future, I see the biggest potential in the field of AI users. This could be corporations from very different sectors: manufacturing, health care or also education.
” Although these sectors are completely different, they have one thing in common: by applying AI, they could improve their products and reduce their costs. What the future holds in store, can already be guessed today – self-driving cars or humanoid robots are about to become reality. In spite of all these positive aspects, there are also some drags, in particular the topic of tariffs. Even the mood of professional investors was rather gloomy, with many of them underweighting tech stocks recently,” Rommel states. This could, however, offer a good opportunity to enter the market at comparably reasonable prices. Valuations of many stocks have meanwhile turned more moderate again.
U.S. stocks but also German papers rather expensively valued
Price/earnings ratios based on profits expected for the next 12 months
Sources: Bloomberg Finance L.P., DWS Investment GmbH, as of 31 May 2025
Equities USA
Outlook has slightly improved again but uncertainty remains high
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Equities Germany
High price gains and meanwhile comparably high valuations
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Equities Europe
Further potential depends on a swift ending of downward revisions of corporate earnings
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Equities Emerging Markets
Chinese equities currently more promising than their Indian counterparts
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#3 Fixed Income
Corporate bonds: attractive, particularly for income-oriented investors
- A broad diversification of investments across various asset classes remains the order of the day in these uncertain times. “With a view to fixed income, we are still constructive on investment- grade Euro corporate bonds. The rate cuts by the European Central Bank should increase the pressure on investors to increasingly shift their capital from short to medium and long maturities, which are less impacted by rate cuts,” Thomas Höfer, DWS rate expert, states. The storm raised by U.S. tariff announcements has meanwhile completely abated.
- “Risk spreads versus sovereign bonds of 97 basis points – 100 basis points are equivalent to one percentage point – are only three basis points higher than after the first tariff announcements on April 2. We currently prefer risk-adjusted investment-grade bonds versus high-yield bonds,” Höfer continues. The yield spread of 1.5 percentage points is historically low: total returns of investment-grade Euro bonds currently amount to 3.1 percent, while high-yield bonds return 4.6 percent. Corporate bond returns also stand comparison with dividend yields of stocks. Höfer’s conclusion: “This asset class is back again as a real alternative for income-oriented investors.”
Alternatives to dividends: Corporate bond returns
Returns of investment-grade Euro corporate bonds versus equities
Sources: Bloomberg Finance L.P., DWS Investment GmbH, as of 30 May 2025
U.S. government bonds (10 years)
No yield shock expected
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German government bonds (10 years)
In high demand – yields should remain low
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Emerging Market sovereign bonds
Risky in the short run, interesting in the long run
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Credit
Investment Grade
USA | Eurozone |
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High Yield
Substantially lower yield spreads do not adequately reflect short-term risks in our view. In the long run, potential total returns appear to be interesting.
USA | Eurozone |
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#4 Currencies
Euro/Dollar: Dollar should remain weak
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#5 Alternative Assets
Gold: Demand should remain high – still some upward scope
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LegendThe strategic view by June 2026 The indicators signal whether DWS expects the asset class in question to develop upwards, sideways or downwards. They indicate both the short-term and the long-term expected earnings potential for investors. Source: DWS Investment GmbH; CIO Office, as of 10 June 2025 | |
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Forecasts are based on assumptions, estimates, views and hypothetical models or analyses which may prove to be incorrect. Past performance is not indicative of future results.