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The five crosscurrents shaping European equities right now

Between structural tailwinds and trade tremors, investors face a contradictory map of risks and rewards.

The Allocatr Editorial Team

Europe’s equity landscape has rarely felt this split-screen. On one side: rising defence budgets, infrastructure splurges, and grid upgrades promising structural uplift. On the other: a return of tariff wars, weaker growth expectations, and fractured central bank messaging. Investment banks, caught between long-term optimism and short-term shock risks, are offering diverging roadmaps. What emerges is not a clear signal, but a vivid tension—one that investors must navigate with uncommon precision.

1. Strategic tailwinds: big budgets, real spending

JPMorgan, the most bullish of the pack, is leaning into Europe’s fiscal awakening. The bank has pinpointed six investment themes it believes could drive sustained equity outperformance over the next 12–18 months. They read like a manifesto for industrial revival: a €500 billion infrastructure programme in Germany, rising defence outlays, and energy-intensive sectors—like chemicals—gaining from structurally lower relative input costs. Add to that a valuation bounce in neglected German small caps and a utilities sector bolstered by the urgent need to reinforce electrical grids, and you have a case for Europe’s return as a capital magnet.

Barclays supports part of this view, particularly in utilities. Their analysts see substantial capex flowing into grid resilience, favouring names like Prysmian and NKT. But even they draw a red line: wind equipment manufacturers, including Vestas and Nordex, are out of favour, as policy and investment shift from flashy renewables to pragmatic infrastructure.

2. The trade trap: tariffs as a wrecking ball

The opposing view—championed by Citi and Goldman Sachs—centres on the growing storm over transatlantic trade. Citi, in particular, warns that Trump’s proposed 50% tariffs could slash European EPS growth from the current 2% consensus to -4%. That kind of earnings hit, they argue, would knock 7–8% off the Stoxx 600. Goldman, while less precise in its forecast, echoes the alarm. Their base case for 2025: zero earnings growth in Europe, and a potential 1% GDP drag by 2026 if tariffs go unresolved.

The broader point is simple: while structural themes matter, near-term earnings are hostage to political cycles. And here, the outlook is grim. EU and US trade positions remain fundamentally at odds, not just politically but institutionally. Trump’s unilateralism thrives on speed and optics. Europe’s rule-bound consensus-building model—slow, legalistic, and allergic to big trade-offs—stands no chance of keeping up. As Politico notes, the EU cannot—and will not—offer the kind of environmental rollbacks or purchase guarantees Trump is likely to demand. That makes a clean deal almost impossible.

3. Monetary murk: rate cuts, dissent, and disinflation

If macro policy were expected to cushion the blow, that cushion is looking thinner than expected. The ECB is still leaning toward a June rate cut, with most economists expecting another in September—bringing the deposit rate to 1.75%. But dissent is growing. Austria’s Robert Holzmann, a long-time hawk, has called for a pause until September, citing limited policy traction and geopolitical uncertainty. He’s in the minority for now, but his warning reflects deeper concerns: if trade shocks or a strong euro begin to erode prices, monetary support could lose its bite.

ECB staff expect inflation to hit the 2% target by early 2026. Yet even that path is exposed. Weaker demand, a stronger euro, or trade diversion effects could all pressure inflation downward, complicating the Bank’s path and investor expectations alike. If growth undershoots, some analysts see a year-end deposit rate as low as 1.5%.

4. Market pulse: flatline optimism, hidden volatility

European equities show a tentative upward drift that masks a deeper fragility. Bond markets are jittery. A weak 40-year JGB auction sent ripples through global yields. In the UK, the IMF has flagged renewed concerns about Gilt volatility. And in Japan, the finance ministry is considering rolling back ultra-long issuance after last week’s rout—a move that could push Japanese investors to repatriate capital, pressuring global bond markets further.

Currency and commodity signals are also scattered. The dollar is firmer. Oil and gold are climbing. Industrial metals are weaker. Inflation surprises continue to play out across regions: Australia’s CPI was flat in April, but trimmed mean inflation ticked up. In contrast, French Q1 GDP was revised down, and PPI undershot expectations. The upshot? No clear macro signal.

5. Boardroom reshuffles and capital shifts

Corporate developments paint a picture of capital rotation and executive recalibration. Givaudan shareholders led a $4.1 billion wave of secondary stock sales across Europe. UniCredit’s CEO Andrea Orcel quashed rumours of an Intesa takeover, despite rising stakes. Stellantis is reportedly close to naming Luca Filosa as its next CEO. And in Paris, Renault’s board has appointed Luca de Meo’s successor at RCI Bank.

The real theme here is not the headlines—it’s the undercurrent: European corporates are adjusting for a more fragmented, competitive, and capital-sensitive world. Cash is getting costlier. Strategic clarity matters again.

No consensus, more like crossfire

There is a tug-of-war between bullish structural themes and bearish macro shocks. Every optimistic thesis—from infrastructure to energy arbitrage—carries a caveat. Every downside risk—from tariffs to tightening financial conditions—has its counterforces. For now, the European market are without conviction, not in freefall, but not in resurgence. More like suspended between two radically different futures.

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From Balkan banks to Italian small caps: what ties the top performers together.

Top five equity funds with 20%+ annualised returns and Sharpe above 1

In a year when much of global equity performance has clustered around mega-cap AI and european defense stocks, a group of actively managed European and emerging markets equity funds has delivered standout results. Each has posted more than 20% annualised returns while maintaining a Sharpe ratio above 1.0 over the past three years. The common denominator? A meaningful overweight to financials and a willingness to stray far from benchmark country weights.

Here are the five funds that stand out, and what drives their returns.

1. Axiom European Banks Equity (Luxembourg)

Annualised return (3Y): 45%
Sharpe ratio (3Y): 1.39
AUM: EUR 230m
Key exposures: European financials (75%), benchmarked to STOXX Europe 600 Banks

Axiom’s fund doesn’t hide its intent—it’s benchmarked to the European banks index and sticks to it with conviction. What separates it from a passive tracker like BNP Paribas’ offering is active stock selection and tactical overlay through derivatives. The fund is heavily tilted toward large-cap banks across the EU, Iceland and Norway, with room to hedge currency risk when needed. In a year when rising net interest margins and cost control have powered bank earnings, Axiom’s focused strategy has paid off.

Source: Factset

2. Lemanik High Growth (Italy)

Annualised return (3Y): ~25%
Sharpe ratio (3Y): 1.05
AUM: €136 million
Key exposures: 48% Italian equities, 34% financials, 30% industrials

Despite its generalist “high growth” label, Lemanik’s top holdings reveal a bias toward financials and industrials in Italy. While it’s benchmarked against MSCI Italy, the manager actively excludes much of the FTSE MIB in favour of smaller and mid-sized companies—at least 21% of holdings are required to be outside Italy’s top indices. That tilt toward under-researched, locally rooted firms appears to have created alpha, particularly in a recovering domestic economy.

Source: Factset

3. Apollo Balkan Equity

Annualised return (3Y): ~21%
Sharpe ratio (3Y): 1.14
AUM: €3 million
Key exposures: 24% Slovenia, 23% Croatia, 35% financials

While small in terms of market cap, it turns out the Balkans have been a quietly explosive pocket of equity performance. With strict minimums for direct stock exposure (at least 51%) and a regional focus few others attempt, this fund has benefited from strong bank earnings, relatively low inflation, and some repricing of country risk. The fund’s volatility is high, but so is its upside. Notably, over 50% of the portfolio is invested in just three countries.

Source: Factset

Portfolio Exposure

Source: Factset

4. BNP Paribas Finance Europe ISR (France)

Annualised return (3Y): ~28%
Sharpe ratio (3Y): 1.23
AUM: EUR 96m
Key exposures: Insurance 50%, Banks 35%

Unlike the other funds, this product has the specific mandate to replicate the STOXX Europe 600 Banks index. That makes it a pure play on the sector’s cyclical revival. Investors who simply wanted clean, low-cost exposure to the rising rate environment and improving European credit cycle have been rewarded. Its returns track the benchmark tightly, with tracking error capped at 1%, and only minimal use of derivatives for hedging.

Source: Factset

Portfolio Exposure – Heavy on insurance

Source: Factset

5. T. Rowe Price Emerging Europe

Annualised return (3Y): ~30%
Sharpe ratio (3Y): 1.29
AUM: USD 677m
Key exposures: 27% Turkey, 19% Greece, 63% financials

The outlier in terms of geography, T. Rowe Price’s Emerging Europe fund is a concentrated bet on banks and growth stocks in politically complex markets. Turkey and Greece dominate, but the fund also touches on frontier exposures like Kazakhstan and Ukraine. With at least 80% of assets in emerging Europe and a heavy emphasis on bottom-up stock selection, the fund has found strong upside—at the cost of elevated volatility. The high financials weighting reflects a belief that banks remain the most reliable growth lever in the region.

Source: Factset

The takeaway

All five funds differ in strategy and structure, from Luxembourg UCITS to Austrian retail funds, from passive replication to deep regional conviction. But most share a common thread: exposure to financials, tolerance for regional or index deviation, and a willingness to look beyond large-cap comfort zones. Whether by choice or mandate, that positioning has delivered both strong absolute returns and solid risk-adjusted performance, something few large-cap global equity funds can claim in today’s crowded field.

Hardly a signal of recession or rate cuts.

Atlanta Fed GDPNow: Q2 2025 growth estimate raised to 3.8%

Resilient spending, nervous sentiment, and the shadow of fiscal reckoning.

CEO conf calls: Three contradictions at the heart of the U.S. economy

Despite a year marked by geopolitical volatility, stubborn inflation, and rising long-term yields, the U.S. economy continues to confound expectations. Consumers are spending, employment is holding, and the dreaded recession has yet to arrive. But beneath the surface of these strong headline numbers, three contradictions have emerged—each shaping investor behaviour in different ways and exposing fault lines that may not hold forever.

1. Consumers are spending like it’s 2021, but feeling like it’s 2008

The most striking tension lies between consumer sentiment and consumer behaviour. According to executives at American Express and Mastercard, spending trends through May are almost indistinguishable from Q1—solid and consistent. Visa, too, confirms that U.S. payments volume is tracking better than expected, and Bank of America reports that $1.7 trillion has moved out of consumer accounts into the broader economy year-to-date, a 6% increase from last year.

Yet this activity is set against a backdrop of deep pessimism. As Amex put it bluntly: “Consumer sentiment is in the toilet, but they’re just complaining as they go spend.” TransUnion adds that while employment and wage growth remain strong, “the consumer is very worried.” It’s a paradox that underscores the stickiness of post-COVID wealth buffers and behavioural inertia—consumers may not feel good, but they’ve learned to keep moving.

2. The labour market is tight, but not overheating

Employment remains the bedrock of the U.S. economy. From Equifax to Mastercard, corporate leaders see little weakness in the jobs market. Unemployment remains low, wage growth is outpacing inflation in some areas, and delinquencies are “reasonably controlled” according to TransUnion. Even elevated interest rates haven’t dramatically dented consumer borrowing habits—many have adapted to higher costs after the zero-rate COVID years.

KeyCorp, whose retail clients boast an average FICO score of 790 and wealth AUM of $61 billion, sees no signs of financial strain. Non-interest-bearing accounts are still 26% above pre-COVID levels. The picture is of a workforce that is employed, creditworthy, and still engaging with the economy—even if uneasily.

3. Resilience masks a growing fiscal drag

While short-term indicators are encouraging, long-term risks are quietly building in the background. Goldman Sachs highlights a shift in bond market focus from inflation to the U.S. fiscal deficit. As deficits persist and debt issuance grows, there’s rising concern that long-term yields will continue to climb—not due to growth expectations, but because of supply and fiscal uncertainty.

The risk is straightforward: higher long-term rates increase the cost of capital, which could act as a structural brake on future investment and economic expansion. If the consumer is the wind in the sails of the economy, the budget may soon become the anchor.

The takeaway

The U.S. economy isn’t in a soft landing or a hard one—it’s flying on one engine while the other sputters. Spending holds, jobs remain plentiful, and corporate earnings show resilience. But the data also reveals an uneasy balance between strength and strain: confidence is brittle, fiscal risks loom, and monetary tightening hasn’t finished echoing through the system. Investors and policymakers alike are navigating a landscape defined less by immediate crisis than by the slow erosion of certainty.

Across the S&P 500, analysts are slashing earnings expectations at a pace not seen in years. This reflects growing discomfort over sticky inflation, rising trade friction, and a creeping sense that the earnings rebound is stalling before it truly began.

Analysts slash Q2 earnings forecasts at fastest pace in years

EPS estimates under pressure across the board

In the first two months of Q2, analysts lowered earnings per share forecasts for S&P 500 companies by 4.0%, from $65.55 to $62.91. That’s not a routine adjustment. It exceeds the average cut seen over any comparable period in the past five, ten, fifteen or even twenty years. For reference, the 20-year average cut for this stage of the quarter stands at 3.1%.

Not a single sector escaped the knife. Energy bore the brunt, with analysts slashing Q2 EPS estimates by 18.9%. For the full year 2025, the picture doesn’t improve. EPS forecasts have dropped by 3.5% since December, again more than the typical five-month downdraft. Materials have been hit hard too, down 11.8%, while Energy again leads the decline at -17.6%. The only sector where optimism hasn’t eroded? Communication services, where EPS estimates actually rose 2.3%.

This isn’t just cautious housekeeping. It reflects real concern that pricing pressure, weakening demand, and higher input costs, some policy-induced, are colliding at precisely the wrong time. And the street is finally pricing that in.

S&P500 Earnings revision trend

Source: Factset

Markets digest tariff whiplash and mixed macro signals

US equity markets, while choppy, ended May on a broadly positive note. The S&P 500 and Nasdaq clocked their best monthly performance since November 2023. Yet the path there was uneven. Big tech couldn’t hold its footing late last week, Nvidia and Tesla both declined, and cyclicals like energy, semiconductors, and asset managers fell behind. Treasuries firmed, the yield curve steepened, and safe havens like gold lost ground.

Trade politics are dominating the risk conversation. A fresh volley from Donald Trump accused China of violating trade agreements and floated new tech sanctions. At the same time, whispers of a possible Trump-Xi phone call suggest the usual choreography of escalation and détente. But markets have seen this playbook before, and patience is wearing thin.

Meanwhile, macro data is sending mixed signals. April’s core PCE inflation landed at 2.5% year-on-year, a post-2021 low, but personal spending came in soft, up just 0.2% month-on-month. Consumer sentiment ticked up, aided by perceived trade optimism, but inflation expectations remain unstable. The May Chicago PMI slipped to its weakest since January, further complicating the picture.

Europe braces for tariffs and a final ‘easy’ cut from the ECB

European equity markets opened the week on a softer note. The DAX gave back 0.3% after hitting record highs last week. Broader indices, including the STOXX 600 and CAC 40, nudged lower. The European Commission made clear it is ready to retaliate against Trump’s plan to double tariffs on steel and aluminium, warning that the move threatens to unravel months of trade diplomacy. That threat, initially aimed at 1 June implementation, has been temporarily shelved, but not resolved.

This week’s European Central Bank meeting is shaping up as a pivotal one. The ECB is expected to deliver a 25 bp rate cut, bringing the deposit rate to 2%. But it’s likely to be the last straightforward move for a while. Inflation data supports easing, but rising consumer inflation expectations and ongoing supply chain frictions muddy the outlook. The market expects the easing cycle to end by September, pricing a year-end deposit rate of 1.75%.

Structural factors—such as a tight labour market and ageing demographics—may continue to exert upward pressure on inflation, even as near-term growth slows. Some analysts warn that without a material growth undershoot, future cuts could become politically or economically costly.

A market groping through fog

The broader picture is one of dislocation. Earnings expectations are falling, not just adjusting. Trade threats are headline material again. Central banks are nearing the end of their room to manoeuvre. And yet, market sentiment hasn’t broken, just softened.

This is not a crisis moment. But it is a pivot. Investors, analysts and policymakers alike are facing a more complex backdrop than they were even six months ago. The soft landing narrative still exists, but it’s starting to feel like a theory waiting to be disproved.

There is USD 7.2 trillion in Money Market Funds right now

Over USD 7 Trillion on the side line-lines

Why the bond market is flashing warnings, inflation isn’t going quietly, and portfolio strategy must adapt fast.

Three hard truths about rising yields and how to position in the new regime

The world is waking up to a new bond market regime, one where long yields are on the march, inflation is not done with us yet, and traditional hedges behave in unfamiliar ways. The steepening of global yield curves—led by the US, Germany, and Japan—reflects deeper tremors in the economic bedrock. The comforting fiction of transitory inflation has expired. Now comes the reckoning.

A world of steepening curves and sticky prices

In the past year, 30-year yields in Japan have risen more than 80 basis points. That may sound tame by Western standards, but in a country where rates barely twitched for decades, it marks a seismic shift. The US 5s30s curve has steepened nearly 95 bps since mid-2023, while Germany’s curve is up almost 100 bps. Japan leads the pack with a staggering 208 bps steepening, a clear sign that yield repression is dead, and duration is no longer a safe harbour.

This is not a clean reversion to normalcy. It’s a recalibration under stress. Inflation is proving far more stubborn than central banks expected. Japan’s core CPI (ex fresh food) has now clocked in above 3% for five straight months. That’s after nearly three decades of disinflation. In the UK, food inflation just hit its highest level in a year at 2.8%, nudged up by policy-driven cost increases—from higher national insurance to a living wage hike and a looming £2bn packaging tax. Across markets, “base effects” have faded. What remains is structural.

Yield Curve Japan

Source: Factset

BOJ governor Kazuo Ueda calls it a narrowing gap between underlying inflation and the target. Translation: excuses for inaction are running out. Inflation expectations in Japan have quietly climbed to 1.5–2%—their highest in 30 years. The BoJ’s insistence on ultra-loose policy is looking increasingly disconnected, especially with the yen under pressure and global capital starting to reprice Japanese debt risk.

Inflation: the escape hatch no one wants to talk about

Paul Tudor Jones, never one to mince words, recently told CNBC: “All roads lead to inflation.” It’s a point worth dwelling on. Every major civilisation that has inflated away its debt did so not because it was easy, but because it was the only politically viable option left.

Governments are spending like they’ve forgotten the 2010s ever happened. The US faces trillion-dollar deficits even in a “soft landing” scenario, with Moody’s already flashing warning signs. The UK is layering costs on retailers and workers in the name of fairness, but at the price of higher end-user inflation. Japan’s fiscal maths has long been fantasy, but now the bond market is starting to call the bluff.

Yet central banks remain caught in a strange purgatory. The Fed, despite cooling CPI prints, has seen markets price out more than 50 bps of 2025 rate cuts in just a few weeks. Labour markets are still tight. Corporate earnings don’t show stress. And retail sales—like in the UK this April—are rising, not falling. Whatever cracks exist in the consumer story are being patched by wage growth and liquidity still sloshing in the system.

Positioning in a regime with no easy hedges

This is where things get tricky. Traditional portfolio construction tools are creaking. Duration risk is no longer protection, it’s a source of volatility. The idea of bonds rallying in a downturn assumes a rate-cutting central bank. But if inflation proves sticky, that assumption falls apart.

So what’s working? Gold, for one, has surged 27% year-to-date. Investors clearly see it as an escape valve. More intriguing, Bitcoin has clawed its way back, now up 18% YTD after lagging earlier this year. In the past month, BTC and gold have rallied in tandem, a rare correlation that suggests both assets are being treated as stores of value in a world of degrading fiat credibility.

Source: Factset

This co-movement isn’t a vote of confidence in the monetary status quo. It’s the opposite. It says investors are preparing for a world where inflation is not just higher, but more erratic. Where policy choices, on tariffs, fiscal spending, and trade, have second- and third-order effects. And where tail risks can no longer be offset by a simple 60/40 split.

The sharp steepening of global yield curves reflect a fundamental repricing of long-term risk. Inflation run a clear risk of not being transitory, and markets are adjusting to the reality that central banks may not return to aggressive easing cycles any time soon. For investors, this means traditional diversification strategies tied to duration are being tested. Assets once considered safe are now more sensitive to policy uncertainty, fiscal strain, and geopolitical friction.