The speed of the change in the markets’ mood is impressive, from blissful optimism in the wake of Donald Trump’s election to profound pessimism at the beginning of March.
Penalised by the fall of the Magnificent Seven, exactly 25 years after the dotcom bubble began to burst (the peak was reached on 10 March 2000), the tech giants are taking their toll on Wall Street. Investors fear that the trade war will derail the economy, and there is concern about the trajectory of inflation. Short-term economic visibility is becoming poor and market volatility is rising.
Against this backdrop, Christopher Dembik, Investment Strategy Adviser at Pictet AM, has two messages. In the short term, it is important to adopt a cautious approach. A distinction needs to be made between the short and medium/long term, which is still supported by major trends such as artificial intelligence, still positive economic growth and healthy growth in corporate profits (according to CNBC, profits for the S&P 500 were estimated at $273 at the end of 2025 and recently stood at $270).
Christopher Dembik and Pictet Asset Management continue to favour US equities, with a particular focus on technology and artificial intelligence. However, the recent breaches of technical thresholds on the downside of major US indices are prompting caution.
Heged Funds, an Atlanta Federal Reserve index
The downtrend in the major technology stocks is due to the sell-off in hedged funds in recent weeks. In recent years, hedge funds have shed technology stocks from their portfolios more rapidly than ever before, with exposure falling to its lowest level since mid-2023. We must remember that these funds operate on a short-term basis,” adds Christopher Dembik.
Then an index compiled by the Federal Reserve in Atlanta, produced with a myriad of economic data in real time and considered to be predictive of the current quarter’s GDP, came along to dampen the mood a little further. Previously only observed by a few economists, this index has suddenly gained in popularity. At the very start of February, this index was still forecasting a 2.9% rise in GDP (at an annualised rate) in the first quarter, before predicting a 2.8% fall a month later! Christopher Dembik moderates. “This index only gives a trend. And one of the main contributors to its deterioration is the record increase in the trade deficit published on 6 March, with a sharp rise in imports. But we need to put this deficit into context. With the fear of higher tariffs at the start of the year, American companies have been in a hurry to increase their purchases abroad and build up their stocks of products whose price is set to rise. “Never has a rapid deterioration in a trade deficit led to a recession”, says Christopher Dembik, who does not wish to give too much weight to this index.
Another fear is Elon Musk’s eagerness to reduce public sector employment and cut public spending. Christopher Dembik estimates that up to one million jobs could be lost in the civil service and among subcontractors. But here too, the strategist puts this figure into perspective, comparing it with the five million Americans who, on average, change jobs every month.
Central banks still present
At the start of this year, central banks remain on a path of rate cuts, and 24 of the 30 major central banks plan to continue this policy. This freed-up liquidity continues to be a groundswell of support for equities and the microeconomy. The ECB’s key rate is expected to approach 1.85% this summer, while the Fed’s experts at Pictet AM continue to anticipate a single rate cut in 2025, in contrast to the money market, which has seen three rate cuts in recent weeks as the economy has deteriorated. However, Pictet AM’s experts are still forecasting inflation of 3% in the United States, with pressure on property prices and rises in certain agricultural prices such as eggs and coffee. In the eurozone, this forecast is 2.3%.
Risks of recession overplayed
“The talk of an American recession is overplayed. Growth in the United States is likely to be around 2%”, says the strategist. Donald Trump’s latest decisions and rapid reversals in terms of tariffs are doing damage and creating uncertainty. And markets abhor uncertainty.
“The key point is to perceive the Trump administration’s tariff policy differently. The strategy of raising customs duties is painful in the short term but generally proves positive in the medium to long term. It’s a blessing in disguise,” agrees the strategist at Pictet AM.
Meanwhile, consumer spending, a pillar of US growth, is showing few signs of weakness.
Today, the momentum of the equity markets is in favour of the European markets, which have attracted flows at the start of the year, but these movements are considered to be rather tactical. Growth is still estimated at 1% in Europe (compared with 2% in the USA). The 800 billion plan to strengthen European defence is still a long way from a real war economy, and insufficient to give a substantial boost to European growth.
While outflows from US equities are a safety valve, investors across the Atlantic are still buying US equities.
Amid all this fog and market fever, we need to focus on the essentials: the long-term trend, with a growth/inflation mix that remains favourable and a liquidity environment that remains favourable. Admittedly, valuations remain stretched, but there is nothing to worry about in the current long-term economic climate.
Over the long term, the latest solid and reassuring results published by NVIDIA are a positive sign. And innovation remains an important key. In the space of a decade, productivity (including the contribution of innovation) has risen by 40% in the United States, compared with 0% in Europe.
DeepSeek” will also create winners in technology stocks, with the price of inference falling, with beneficiaries including Apple, Microsoft, Meta and Amazon. The lower cost of AI via DeepSeek will be an advantage for these companies.
Over the long term, the annual performance of US equities is in excess of 10%. The US economy continues to outperform, although momentum is currently in Europe’s favour. Over the coming months, European equities are likely to outperform US equities. In this type of scenario, European luxury goods can benefit from this trend, even if they are already considered a little expensive.
China
The wisest way to gain exposure to China is to take advantage of volatility and manage it with a long/short strategy. Frequent intervention by the authorities ends up fuelling volatility. Retail sales remain weak and inflation has recently turned negative. Stimulus plans will not provide a way out of stagflation.
Alternatives to protecting against volatility include hedging or taking long/short positions (via a fund), or allocating a higher weighting to the bond market or private equity. Finally, Christopher Dembik continues to favour gold.
