Consensus forecasts, mid-year picture

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On the macro front, the opening part of 2025, despite the volatility peaks triggered by trade tariffs and mounting geopolitical tensions, confirmed expectations for ongoing global growth, albeit at a weaker pace. In 2025, Eurozone growth should be confirmed at around 0.9%, in line with 2024,and at around 1% in 2026. Growth forecasts for the US are currently 1.4% in 2025, down sharply from 2.8% in 2024, and 1.6% in 2026. The slowdown in the US is tied to the uncertainties surrounding trade tariffs and to the recent increase of oil prices caused by geopolitical tensions. Europe is waiting on the financial packages currently being drawn up by the German government and the EU Commission.

On the inflation front, 2025 is proving to be a year of stabilization

The introduction of trade tariffs by the US initially pushed up market expectations, on fears that have now largely eased. In the Eurozone, inflation closed 2024 at 2.4% and declined in 1H 2025. Therefore, consensus forecasts are now around 2.0% for this year, and 1.9% in 2026. Core inflation, that in 2024 averaged 2.9%, is forecasted at 2.4% in 2025, closing in on the ECB`s 2% target, and should then drop lower in 2026. In the United States, inflation in 2024 levelled off in the 3.0% area. Consensus estimates for 2025 place it at the same level. The latest readings outline a slowdown of inflation, although the medium-term effects of Trump’s trade policies and fiscal reform are prompting analysts to confirm their 3.0% forecast. Core inflation, the Fed’ s preferred measure, was 2.8% in 2024 and is forecast at 3.0% in 2025. These expectations reflect a normalization of prices and rule out new flare-ups despite the renewed tensions in The Middle East and the fallout (limited for now) on oil prices.

In 2025, the central banks continued to lower interest rates, albeit at different paces

For what concerns the ECB, the market expects policy rates to drop from 2% at present (deposit rate) to 1.75% at the end of the year. Since June 2024, the ECB has cut rates by 200 basis points in total to date. As regards the Fed, the announcement of trade tariffs, and expectations for expansionary fiscal measures, have eased, but not cancelled, expectations for lower rates. Expectations now point to Fed Fund rates of 3.75% at the end of 2025, after two cuts in the period, as opposed to the seven priced in at the end of 2024. When comparing monetary monetary policy expectations with inflation expectations, by cutting rates to 1.75% the ECB would be placing the policy rate at a slightly lower level than inflation, thus taking a mid-way stance between neutral and moderately accommodative: a plausible assumption given the slow pace of economic growth in the euro area.  By contrast, by lowering interest rates to 3.75% the Fed would be keeping them above the inflation rate, thus retaining a certain degree of monetary restriction. In this case as well, such conduct would be appropriate in light of the only modest slowdown of the US economy, with inflation still above the target rate.                                                                                                                                                      

For what concerns the bond markets glimpse into the future is allowed by forward rates, that indicate the future interest rates implied by the current shape of the curves. The euro curve, with short-term interest rates at 2%, and the long-term (10Y) rate at 2.6%, implies a positive slope for the future curve interest rates on the decline and long-term on a one-year horizon, with short-term rates at just above their present levels. Movements on the US curve are expected to be even smaller. Short- and medium-term interest rates are forecast to drop marginally, tracking the Fed’s moves. Long-term rates are estimated slightly higher than their present levels. These indications are perfectly aligned with the expectations for economic growth, inflation, and monetary policy management outlined above. The fact that short-term interest rates are seen at lower levels in a year’s time than they are now, reflects the expectations implied in the ECB an Fed policy rates. On the other hand, expectations for stable long ends of the curves reflect forecasts for ongoing economic growth. These expectations would allow investors to take advantage of the coupon flows offered by the bond markets, and to cash in capital gains in the event of an unexpected slowdown of the macro cycle (anti-recession insurance policy).

For the stock markets, the future trend of indices depends on the combined evolution of earnings and multiples (Price Earnings, P/E)

While there are no consensus forecasts for the P/E, analysts provide earnings estimates for the year to come. In the Eurozone, Eurostoxx earnings are forecast higher by 2.6% in 2025, and to subsequently accelerate to +11.3% in 2026. In the US, S&P 500 earnings are forecast to gain +9% in 2025 and to accelerate to +13.9% in 2026. In the United States’ case, these estimates reflect expectations for supportive fiscal measures addressed to businesses, and the usual, important contribution of technology sector profits. For Europe, forecast growth rates are lower than in the US, in line with expectations for slower economic growth and inflation. In both the US and Europe, these forecasts seem realistic for 2025, revised downwards compared to the beginning of the year as a result of trade tensions. As regards 2026, the reacceleration of earnings will require easing political uncertainties and the full implementation of the financial packages. Earnings growth should not be considered as anestimate of the expected return on the underlying markets, as it should be combined with the dynamic of the P/E ratio. From this point of view, the US market seems rich, whereas European multiples emerge as being in line with long-term averages.