This time it's for real! With a 0.25% cut in its key interest rates, the US Federal Reserve (Fed) has given financial markets what they have been waiting for the past few months: the resumption of US monetary easing after a nine-month hiatus, following a 100 basis point reduction in its key interest rate between September and December 2024. Indeed, while most central banks are already well underway in their cycle of rate cuts, the FED has kept its rates unchanged in 2025 since inflation has returned below 3%.
That said, Jerome Powell's change of tone in Jackson Hole suggests that the labor market situation would certainly carry more weight in the next decision than the inflation trajectory. Investors have continued to rely on these potential rate cuts and the exceptional investment cycle (linked to artificial intelligence (AI) and tax cuts in the United States) to justify even higher equity valuations. This has notably supported the more than 10% rise in the S&P 500 index since the beginning of the summer, compared with just over 3% for the EuroStoxx 600.
The latest inflation figures have certainly risen slightly, but customs duties do not seem to have played a major role as the increase is mainly due to rises in rents and property prices. The consumer price index also rose in August, reaching its highest level since January, influenced by its food and energy components. However, falling producer prices, a slight increase in unemployment benefit claims and, above all, a sharp decline in job creation (although heavily influenced by migration policy and the time it takes to create new replacement jobs), ultimately led to the rate cut announced by the US Federal Reserve on September 17th.
With nominal rates above 4%, it is true that the Fed has the means to reactivate its cycle of rate cuts, even if Jerome Powell tempered enthusiasm a bit by signaling the move was not the start of a long rate lowering cycle. Unless the market decides to "sell" on the news, we should expect a continuation of the stock market rally, as history shows following a rate cutting cycle in the absence of a recession, despite current high valuations. Markets expect two more rate cuts until year-end (as the FED signaled) and nearly three between now and September 2026. This seems very ambitious to us as long as inflation remains above the Fed's 2% target. The new rate forecasts for 2026 could show a significant gap between these expectations and a more cautious Fed stance.
Furthermore, politicization within the US Federal Reserve Committee is likely to increase with the appointment as governor of Stephen Miran, a close associate of Donald Trump, and the imminent announcement of Jerome Powell's successor. This leaves two options for monetary policy: a politicized Fed following Trump's instructions to lower rates despite stubborn inflation, or a more independent Fed that will lower rates less than the market expects. This uncertainty poses a risk for US equities. As far as the European Central Bank (ECB) is concerned, it has won its battle against inflation with forecasts of 2.1% for 2025 and 1.9% for 2027, and kept its rates unchanged in early September after eight rate cuts anticipated by the markets.
At the same time, the steepening of the yield curve is accelerating amid short-term rate cuts caused by global monetary easing and long-term rate rises linked to the strong wave of mistrust in the bond market. This mistrust is fueled in particular by the White House's efforts to undermine the independence of the US Federal Reserve, and in Europe by rising political uncertainty, the financial cost of stimulus plans and the end of the ECB's monetary easing.
Switzerland and Singapore are exceptions to this global trend of rising long-term interest rates and appear to be rare havens of financial stability. Switzerland is financing itself at 0.15% in CHF for 10 years, very close to the lows of summer 2022, and Singapore is borrowing at 1.80% in SGD, compared with nearly 3% at the beginning of the year, reflecting perfect control of debt and public deficits.
Ever-increasing deficits and a debt trajectory that sometimes seems uncontrollable in certain countries are increasingly prompting investors to favor high-quality corporate bonds over long-term sovereign bonds. As a result, several companies in both the United States and Europe are currently managing to finance themselves at rates below sovereign rates of the same maturity. This is particularly the case in France due to political uncertainty, with more than 60 large, high-quality companies refinancing at lower rates than the French government. However, this remains marginal compared to the size of the credit market.
Fitch's downgrade of France's credit rating to A+, for the fourth time since the Covid crisis, had little impact on French debt yields, which had already been under considerable pressure for several months and were already trading at the level of a BBB-rated country. Will Moody's and S&P, which are due to make their decisions on October 24th and November 28th, choose to align themselves with Fitch, as was the case during previous downgrades? The reality is that France's debt-to-GDP ratio has become almost similar to that of Italy, which justifies equivalent rates, even though Italy's rating is lower. That said, unless we see a further widening of risk premiums, French debt remains well subscribed in new auctions for the time being and has significant liquidity buffers thanks to an efficient and well-developed financial sector. The market also believes that Paris still has the means to mobilize the French people's record savings and that the ECB will not be able to remain inactive in the event of a speculative attack on French debt.
Long-term US government bonds are suffering from the erosion of the pillars of confidence on which their status as a very low-risk asset for investors has historically been based. Confidence in the United States, via the stability of the dollar, the "American security umbrella" and the enforceability of the rule of law are being challenged on a daily basis. The United States has added $1.2 trillion in debt to its liabilities in just two months, or more than $21 billion per day. Although this figure has been partially redistributed in an economy with a 6% deficit and 3% growth, it represents $50 per day for every American, or $3,500 in additional debt per capita since the beginning of July 2025! In this context, we continue to favor short duration and high-quality corporate bonds over sovereign debt.
On the equity side, AI continues to expand its sphere of influence beyond purists. The latest example is Oracle, a long-standing software manufacturer, which has surged 150% since last April following its massive rise on September 10th after announcing a record £300 billion contract with Open AI. At the same time, NVIDIA reached a market capitalization of $4.4 trillion, close to Germany's GDP, and its distant competitor Broadcom soared by +50% in September to a market capitalization equivalent to Spain's GDP.
Overall, growth sectors have led US indices in recent weeks, while value or low-valuation sectors have surprisingly supported global indices. There has also been a significant dichotomy in the largest capitalizations of indices on both sides of the Atlantic since the beginning of the year. While the ten largest stocks in the S&P 500 index have contributed to 70% of performance since the beginning of 2025, their 10 largest European counterparts in the Eurostoxx 600 index have posted a negative performance of -2%, while the next 590 stocks have delivered an average return of +16% over the same period.
Although the indices have performed well since the start of the year, active portfolio management requires careful stock selection, particularly among large US companies and other categories in Europe. It is also essential to choose the right company profile, which requires in-depth strategic analysis. Despite strong momentum, an exceptionally good summer for equities and a favorable outlook, the current low volatility should encourage the adoption of asymmetric strategies. These strategies aim to take advantage of rising markets while protecting part of the exposure in the event of a correction. It is worth noting that the market is anticipating six rate cuts between now and the end of 2026 and that expectations for AI are high, which means it is necessary to guard against any potential disappointment.
Nicolas Bickel
Group Head of Investment Private Banking & CIO