Executive Summary
Dear Readers,
Trump continues to make noise on all fronts – yet global equity markets remain unfazed, pushing steadily to new record highs. Even the traditionally weak stock market month of September has proven many investors who had anticipated a seasonal correction, wrong.
Once again, it is the US tech giants that are dominating the US equity market almost relentlessly, following a brief pause in the first quarter. The key driving force remains artificial intelligence (AI), which continues to be supported by solid earnings growth in the sector. Hopes of interest rate cuts by the US Federal Reserve are also supportive of equity markets.
Against this backdrop, the stabilisation of the US dollar over the past quarter is particularly noteworthy – despite ongoing concerns surrounding high government debt, which for the time being has not exerted further downward pressure on the greenback. For European investors, exposure to US equities and the US dollar has paid off since the first quarter.
Gold has also performed positively, and its inclusion in portfolios has buoyed investor sentiment. This current momentum is by no means unusual: both the gold bull market of the 1970s and the rally that began in 2001 lasted around ten years and showed similar strength. Whether this trend can continue at the same magnitude is explored in detail by Oliver Watol, our Chief Strategist for Alternative Investments. He also addresses the growing doubts surrounding the independence of the US Federal Reserve.
With Stephen Miran, the new Fed Governor appointed by Trump, and his unconventional economic stance, concerns over the potential politicisation of US monetary policy are not unfounded. All the more reason to take a closer look at this issue.
In this edition, we therefore recommend reading the special feature “In focus: The independence of the US central bank” by our Chief Economist, Dr Jörn Quitzau.
I hope you enjoy reading this latest issue of our Reflexions.
Yours sincerely,
Maximilian Hefele
Deputy Chief Investment Officer
Compass
Donald Trump’s economic policy remains erratic. Even though the US government has meanwhile concluded “trade deals” with many countries at more moderate tariff rates, several countries still face very high tariffs on exports to the US (including Switzerland at 39% and Canada at 35%). The tariff pause with China was extended by 90 days in mid-August. Even after the deals were concluded, it remains unclear how reliable the agreements are from the American side. Donald Trump is also making negative headlines with his massive pressure on the central bank. Overall, the Trump administration’s economic policy is becoming a burden. The economy is now cooling down. However, the negative consequences of the economic policy are likely to be felt primarily in the long term – and also outside the US. In Europe, fiscal policy is becoming more expansionary, partly due to rising defense spending. This is providing a positive boost to the sluggish growth in the eurozone. The trade agreement could also offer a little more certainty. However, structural problems persist and continue to limit European growth. France’s budget problems remain a latent risk that could become a burden on the monetary union. The high budget deficits and government debt in the US could also become a major issue for the financial markets – particularly if Donald Trump further undermines the credibility of the United States.
Inflation data paint a mixed picture. In Switzerland, the inflation rate has been almost continuously within the Swiss National Bank’s (SNB) target range (0-2%) for over two years. In the eurozone, the inflation rate is close to the ECB’s target at 2.2%. In contrast, inflation rates in the US and the UK are well above 2%. Central banks must also keep an eye on future tariff-related price increases. In view of increasing political pressure on the Fed and the economic slowdown, the Fed lowered its federal funds rate in September. Two further rate cuts of 25 basis points are likely by the end of the year. The ECB, the SNB, and the Bank of England, on the other hand, are likely to keep interest rates constant for the time being and probably until the end of 2025.
Efforts to end the war between Russia and Ukraine have still not yielded any results. Meanwhile, Russia continues to provoke NATO countries through various actions. Most recently, Russia violated NATO airspace several times. The other well-known trouble spots also continue to smolder.
Macro: US and Europe on different paths
Europe and the US are failing to fully realize their growth potential – for very different reasons. Europe has become entangled in regulatory overreach and is still searching for ways to respond to the challenges of our time. Many European countries often appear barely capable of reform (for example, France and Germany). Will Chancellor Friedrich Merz’s proclaimed “autumn of reforms” in Germany deliver a surprise? Or will the possibly last opportunity for fundamental, growth-oriented reform be wasted?
The US government, by contrast, is pursuing a disruptive policy approach. However, it often overshoots its targets – and frequently aims at the wrong ones. In addition to tariff policy, the attacks on the independence of the Federal Reserve must now also be mentioned. Notably, US President Donald Trump has been able to appoint his economic adviser Stephen Miran as a Fed governor. Miran holds unconventional economic views, at times far from the economic mainstream. Future discussions within the central bank council are likely to be lively. Combined with the ongoing political pressure from Donald Trump, the Fed’s monetary policy is likely to remain on the loose side for the time being.
Equities: Equity Markets continue their upward trend
Global equity markets are currently showing a positive tone, supported by robust corporate earnings in the US and sustained demand for AI-related investments. In September, the Federal Reserve cut interest rates by 25 basis points, continuing its easing cycle; further steps are likely, which particularly supports rate-sensitive segments. Analysts expect earnings growth of around 11% for the S&P 500 this year, while Europe remains stagnant due to political uncertainty and weaker data.
The S&P 500 continues to post new highs, driven by the “Magnificent 7” and solid smaller stocks, without major setbacks. At the same time, investor sentiment has brightened: optimism is increasing, pullbacks are consistently viewed as buying opportunities, and liquidity remains supportive. Despite ambitious valuations, the fundamental backdrop and monetary policy support suggest that the downside potential in global equity markets currently appears limited.
Bonds: Between deficit concerns and yield chasing: bond markets on the move
Although the European Central Bank (ECB) refrained from taking further rate action, there were notable movements in the yield curves of European government bonds. On one side, concerns about rising budget deficits and increasing public debt have grown – leading to expectations that governments will step up new bond issuance. France is particularly in focus, as its fiscal policy is increasingly raising doubts about fiscal discipline.
Across the Atlantic, the rate-cutting cycle resumed in the US after a longer pause – driven mainly by weaker labor market data. However, this move had been anticipated by markets for months, so the reaction along the Treasury curve remained muted. The surprisingly resilient economic performance in the US, the ECB’s wait-and-see stance, and the Fed’s rate cut coincided with continued strong demand for fixed-income investments, which pushed credit spreads sharply lower.
For instance, the average credit risk premiums of US investment-grade bonds versus Treasuries have fallen to their lowest levels since 1997. This development is not only statistically remarkable but also reflects a market environment in which investors are willing to pay increasingly higher prices for corporate bonds.
Alternative Investments: Gold on a record run
With an increase of more than 45% to above USD 3,800 per ounce, the precious metal has reached record levels in nearly all major currencies. The rally is being driven by continued central bank purchases – particularly in emerging markets seeking to reduce their dependence on the US dollar – as well as by geopolitical tensions, the global trade dispute, and a weaker dollar. Additional support came from the Federal Reserve, which, following Jerome Powell’s Jackson Hole speech in September, cut interest rates for the first time since late 2024, further reducing the opportunity cost of holding gold. The loose monetary stance of other central banks and rising allocations from private investors have also contributed to the momentum.
2025 stands out as an exceptional year for convertibles
Supported by low credit spreads, higher equity volatility – particularly around Liberation Day – as well as attractive issuance conditions and a genuine “primary market renaissance”, the asset class is increasingly moving into focus. Smaller and mid-sized companies, buoyed by the recent strength of small-cap equities, continue to shape market dynamics. The record-high issuance volume underscores that firms are making greater use of this form of financing, even without immediate capital needs. For investors, this has created a significantly broader investment universe with attractive entry opportunities into innovative, fast-growing companies.
Currencies: The weakness of the US dollar continues
The US dollar remains under pressure after its weakest first half since 1973. With its rate cut in September, the Federal Reserve responded to a cooling economy, while additional pressure from President Trump has increasingly called the central bank’s independence into question, weighing on the dollar.
In the eurozone, the economy is receiving a stabilizing boost from more expansionary fiscal policy and positive signals in the trade environment, which have recently benefited the euro. The Swiss franc, meanwhile, has defied the tariff shock and remains in demand in an environment marked by uncertainty. Switzerland continues to impress with political stability, a still-robust economy, low public debt, and strong international confidence.
While inflation in Switzerland has long been contained, the rate of price increases in the United Kingdom remains well above the Bank of England’s 2% target. This continues to be a source of concern, particularly as the British economy has recently weakened, putting pressure on the pound.