Outlook 2nd half 2025: Europe’s catch-up potential is real

• Jean-Christophe Rochat
  CIO
  Banque Heritage

The “Liberation Day“ in the United States acted as a shockwave:the new government’s initial measures were unexpectedly harsh and unpredictable, triggering significant turbulence in financial markets. At the same time, Europe initiated a major fiscal shift, with a dramatic increase in defense spending plans, redefining its priorities amid an increasingly fragmented geopolitical landscape. Central banks are diverging further; the Fed remains on hold while the ECB continues its easing cycle. Geopolitical tensions have escalated further, particularly with the U.S. intervention in Iran. As we enter the second half of the year, uncertainty remains high. And yet the U.S. economy shows remarkable resilience, supporting financial markets that, despite volatility, ended the semester at or even above historical highs. In this complex yet opportunity-rich environment, our approach for H2 2025 is designed to provide strong anchors for your portfolios while enhancing the agility required to navigate the volatility of this new landscape.

USA: Diverging economic signals amid heightened uncertainity

In the United States, the first half of 2025 was marked by sometimes contradictory macroeconomic signals. On the one hand, the so-called “hard data“ indicators such as employment, consumption, and private investment continued to show a degree of resilience. The labor market remains robust, reflecting an economic dynamic that, despite headwinds, has yet to weaken in any structural way. On the other hand, sentiment surveys, whether from households or businesses, are showing increasing caution, fueled by a volatile political environment and diminished visibility on medium-term growth drivers. Inflation appears to have stabilized, at least temporarily, and has yet to fully reflect the impact of recent tariff increases. However, the 0.5% contraction in GDP in the first quarter, sharper than expected, raises questions. This decline is largely the result of anticipatory behavior: in response to rising trade tensions, companies sharply increased imports in a preemptive stockpiling effort to avoid upcoming tariffs. While this logistical front-loading is temporary, it distorts the short-term economic picture and makes data for the coming quarters more volatile and thus harder to interpret. Beyond these technical effects, several structural factors call for caution. The trade environment remains unstable, with tariff policy still at the heart of prevailing uncertainties.

The negative consequences could become more evident in the second half of the year, potentially taking the form of margin pressures, workforce adjustments, or a slowdown in domestic demand. The lack of clarity around upcoming fiscal decisions further complicates the macroeconomic outlook. The “Big Is Beautiful“ plan, promoted by the Trump administration, includes new tax cuts for households and businesses without any clear offsetting reductions in public spending. The rapidly widening federal deficit, against a backdrop of persistently high interest rates, raises questions about the medium-term sustainability of the U.S. fiscal trajectory and could put upward pressure on bond yields. In this environment, where solid fundamentals coexist with structural uncertainties, we havechosen to adopt a cautious stance. The exposure to U.S. assets was reduced during the firsthalf of the year, and we are maintaining this selective approach for the second half. This is not a rejection of the United States’ structural strengths, its capacity for innovation, deep capital markets, and leadership in technology and AI, but rather an acknowledgment that the risk/reward equation has deteriorated significantly. A “soft landing“ remains the base case scenario, but it hinges on assumptions of tariff de-escalation, political normalization, and disciplined fiscal support, conditions which at this stage appear far from being met.

European stumulus 

Amid growing uncertainty in the United States, Europe, long overlooked by investors now presents an increasingly attractive profile. The political landscape remains fragmented, but Donald Trump’s return to the U.S. presidency appears to have triggered a wake-up call; European governments are becoming more aware of the need for stronger coordination and a unified economic response. Growth, though modest, was revised upward in the first quarter, supported by a fiscal shift in Germany and stimulus measures across several major economies. Aware of the potential impact of tariff hikes on its productive base, Europe now seems determined to boost domestic demand and support investment. It also holds a key advantage: greater fiscal and monetary flexibility than the United States. With inflation more contained, the European Central Bank has been able to pursue a more decisiv easing cycle. In June, it cut rates by 25 basis points, its eighth consecutive cut since June 2024, bringing the deposit rate down to 2.0%. On the fiscal side, several countries, most notably Germany, retain significant room for maneuver. We believe this combination of monetary support and fiscal stimulus could enhance the Eurozone’s ability to restart its economy in a more balanced and sustainable way over the coming quarters. Finally, in equity markets, European valuations remain significantly lower than those of U.S. stocks, despite a notable rebound earlier this year. The catch-up potential is real, especially as European companies have concrete levers to improve margins: the energy transition, increased digitalization, and administrative simplification.

Switzerland: External Headwinds 

The Swiss economy remains closely tied to global economic conditions, particularly those in the Eurozone. As in the Eurozone, Swiss GDP grew by 0.7% in the first quarter of 2025, a stronger-than-expected performance driven in part by the resilience of the German economy. However, this rebound should not overshadow significant headwinds. The sharp appreciation of the Swiss franc against both the U.S. dollar and the euro is weighing on the competitiveness of exporters, already weakened by the implementation of punitive tariffs since April. Swiss exports to the United States, its largest trading partner, totaling nearly CHF 53 billion, are now subject to a 31% tariff, substantially higher than the 20% rate imposed on EU exports. This situation poses a serious risk to Switzerland’s export-oriented industrial base and calls for swift diplomatic engagement. In this environment, the monetary policy of the Swiss National Bank serves as a key anchor. With inflation remaining very subdued, the SNB cut its policy rate to 0% in June, providing meaningful support to domestic economic activity. We believe this stance could help cushion, at least partially, the impact of a global slowdown and trade tensions on the Swiss economy.

Conclusion

For the second half of the year, we maintain a cautious and selective approach to equity markets. Government bonds remain a relevant hedge against downside surprises to global growth. and are expected to benefit from ongoing monetary easing, particularly in the United States in the coming quarters, and to a lesser extent in Europe. Gold should be favoured among commodities and caution is advised with oil.