Vincent Mortier
Mounting concerns over large US fiscal deficits, along with consumers’ inflation expectations have started moving the markets. The issues around fiscal sustainability were further aggravated by discussion around the passing of the President Trump’s Big Beautiful Bill, the renewed interest in fiscal expansion in Europe (including German borrowing plans) and Japanese debt auctions according to Amundi in its monthly ‘Global Investment Views’.
Vincent Mortier, Group Chief Investment Officer at Amundi said, “Looking ahead, we could see some signs of weakness as markets start to focus on fiscal risks and tariffs. The big question is whether the allure of US assets is diminished by the fiscal issues, the challenge to the status quo by the US administration’s policies, and how that could affect US assets.
“We could very well see these old patterns changing in the future, but it is a long-term trend, not something that will happen within a short time frame. For now, trust in US institutions and their credibility remains intact – it may be questioned at various stages though.
“From an economic perspective, we see few themes playing out. We see economic activity decelerating in the US, with this year growth projections unchanged at 1.6%. Economic activity will be volatile due to net trade and consumption weakness. In the euro zone, we see credit growth and a continuation of improvement in the manufacturing sector. The defence and infrastructure push is likely to have positive effects on growth from 2026. The main question is how this will be financed.
“The impact of US tariffs on underlying inflation will be gradual. The tariffs’ impact on US inflation has been muted, and we haven’t seen higher consumer prices so far. But we are monitoring whether these are passed on to consumers and what impact they could have on corporate margins if companies are unable to pass on the costs. In the eurozone, the inflationary backdrop is slightly different, and inflation seems on track for deceleration.
“International trade negotiations will get increasingly difficult. The latest round of US-China talks in London indicated that China will remain a tough negotiator. Erratic trade policies may affect the appeal of US assets. Although section 899 (which we have always believed was a negotiation tactic) of the Big Beautiful Bill has now been scrapped, such provisions tend to increase uncertainty and volatility in the markets.
“We upgraded growth projections for some EM such as Brazil (2025), Mexico (2025), and India (2025 and 2026). In China, some recent data has been benign for example on retail sales. However, we would like to see a more sustained trend to convince us to upgrade our growth expectations. A boost to durable goods consumption from government subsidies should be supportive, but once the effect fades, this would weigh on growth. We stick to our projection of 4.3% for this year.
“We remain marginally positive on risk assets, with increased valuation discipline. Growth-inflation mix is less of a headwind, and we do not see a corporate earnings recession. But fiscal direction and the potential economic impact of uncertainty on tariffs and of geopolitical conflicts point to high volatility.”
Monica Defend, Head of Amundi Investment Institute and Chief Strategist added that “Our main investment convictions centre around the fact that debt and fiscal worries are rising, but curve steepening opportunities persist in fixed income. In an overall flexible stance, we moved to neutral on EU. Carry is attractive in corporate credit, but we acknowledge the bifurcation between high and low rated companies and large and smaller ones. We stay positive on investment grade, particularly through EU banks.
“Equities in US have been resilient, ignoring negative scenarios. Valuations have risen to rich levels, whereas those in Europe and Japan are close to their averages. As we enter into H2, the important point is to see which businesses are able to pass on the costs to consumers and preserve margins. Hence, valuations and quality both will become important.
“Emerging market at a time of strong growth and a weakening dollar. Volatility from international trade may be tackled by exploring domestic ideas. China presents a nuanced case where recent domestic data has been strong, but we stay neutral on equities, waiting for sustained improvement. For now, we explore other parts of Asia, LatAm and emerging Europe for equities and credit.
“In multi asset, we do not expect a recession in the US, and Europe, Japan and the EM world also show reasonable growth. But risks such as excess valuations, inflation resurgence, fiscal deficit and geopolitics remain. We rebalanced our stance slightly in duration and stay positive on risk but are doing so with more safeguards.”