Economic Environment - 5 takeaways from summer 2025

The summer of 2025 was not marked by a particular crisis on the markets, unlike what has happened in recent years. Nevertheless, a number of important events have occurred that could affect the coming quarters. Here we summarize 5 points to remember for the future.

The trade war was obviously one of the hot topics of the summer of 2025. And, as has been observed since the return of Donald Trump, the summer period has been marked by many (and often surprising) announcements and multiple reversals.

After extending the negotiation period, Trump finally signed an executive order on July 31 adjusting the level of the "reciprocal" tariffs announced on April 2 at the "Liberation Day" ceremony. Despite the trade agreements concluded at the last minute with their main partners (the EU, Japan and South Korea in particular), the level of customs duties applied by the United States has been revised upwards overall. Excluding China, the Peterson Institute now estimates the average level of tariffs on US imports at 20.4%, compared to 3% previously. The extremely rapid growth in customs revenues, which are expected to total $300 billion in 2025 according to Scott Bessent, testifies to this paradigm shift.

The trade agreement concluded between the EU and the United States at the end of July provides for customs duties of up to 15% on most European products. The joint declaration of 21 August specifies the provisions. As of 1 September, generic pharmaceutical products and their components, aeronautics, and certain natural resources benefit from a special most-favoured-nation (MFN) tariff regime. Cars and their components will see their customs duties reduced from 27.5% to 15%. The EU has refused the US administration's requests to review its digital regulations, but Donald Trump returned to the attack on 25 August, complaining that the European digital regulation unfairly targeted American multinationals. This included threats to restrict exports of U.S. advanced technology and semiconductors, and to raise tariffs in retaliation for digital services taxes on U.S. companies. Ultimately, while the trade agreement of 27 July avoids the scenario of a full-blown trade war, US trade policy will nevertheless remain a factor of uncertainty for the European economy.

As far as China is concerned, the truce has finally been extended in order to continue negotiations and lead to a potential meeting between Presidents Trump and Xi by the end of the year. While both parties are showing goodwill (in particular through the lifting of the respective restrictions on chips and rare earths), Chinese products remain heavily penalised by the new US trade policy: customs duties now at 58%, anti-circumvention measures, removal of the "de minimis" exemption on low-value parcels, etc. Beijing seems less isolated than before, because Trump's position has hardened significantly vis-à-vis other major economies in the South. This is particularly the case in Brazil (due to the prosecution of Jair Bolsonaro), India (due to its links with Russia) and South Africa. The BRICS are therefore largely targeted.

The last few weeks seem to be painting the contours of a new backdrop and have thus made it possible to partially remove the extreme uncertainty that caused the markets to fall in the spring. However, the trade war led by the US administration is certainly far from over, and several announcements of sectoral customs duties are expected, for example on pharmaceutical products and furniture. Moreover, its effects on the global economy are only just beginning to be noticeable.

The S&P 500 rose 4.3% in July and August, reaching a new all-time high on August 14. However, it is important to note that this index has risen mainly thanks to mega- caps: in aggregate, the "Magnificent 7" have risen by 8% while the rest of the index has only risen by 2.5%. Their share in the S&P 500 has returned to 35%, the highest level on record.

This difference in performance is largely explained by the fact that the profits of the "Magnificent 7" continue to grow at a rate of close to 30% per year while those of the other companies in the index are only growing at a rate of about 6% per year. Their share of total profits for S&P 500 companies is now 26%, up from just 15% at the beginning of 2023. Such an accumulation of profits has simply never been seen in recent decades.

Once again, the public cloud giants raised their forecasts for capital investment in the deployment of artificial intelligence-related infrastructure in Q2 releases, propelling the semiconductor sector to the top of the sector performance over the summer. On the software side, the observation calls for more nuance: the publication of GPT-5 by OpenAI has revived concerns about the ability of AI to make traditional software solutions obsolete. Since the beginning of the year, the sector has recorded a median performance of between -3% and -4%.

That being said, the positive stock market momentum of the tech giants was disrupted in mid-August by the publication of an MIT report on the use of generative AI by companies ("State of AI in business 2025") showing that they are still struggling to increase their profitability with this technology. While the report does say that generative AI can improve individual productivity, it indicates that companies generally do not yet have the right approach to take advantage of it. This report, along with scattered valuation statements, caused tech stocks to fall slightly while the rest of the stock market continued to rise. Jerome Powell's more dovish speech at Jackson Hole, however, stabilized the tech sector on the stock market. This has also benefited small caps, with the Russell 2000 performing much better in July/August than the S&P 500 and the Nasdaq.

In addition, geographically, it is worth mentioning the very good performance of Chinese equities during the summer of 2025, with the anticipation of additional support measures (see later in the text) and of Japanese equities with the US-Japan trade agreement and the depreciation of the yen. On the other hand, Indian equities were penalised by the sharp increase in customs duties decided against India.

After being driven by foreign trade in the first half of the year, China's economy has recently shown clear signs of slowing down. While the NBS explains this dip in particular by climatic events (floods and heat peaks), the trade war is certainly not for nothing. These developments seemed to remobilise the authorities, who have remained very wait-and-see in recent months.

Already mixed in June, China's macroeconomic figures for July clearly sent a negative signal. The latest PMIs thus show the weakness of activity: the "production", "new orders" and "exports" components have started to fall again, while employment remains very deteriorating and expectations at low levels. Against the backdrop of the trade war, the search for new outlets is fuelling deflationary pressures: in July, the CPI was still stagnating around 0% and the PPI was down -3.6% year-on-year. The contraction in bank loans in July - a first since 2005 - also signals that demand has run out of fuel. Household morale remains at an all-time low, according to the PBoC survey. Particularly worried about the employment situation, the majority of them remain inclined to save (64% according to a recent PBoC survey) rather than to consume or invest. Although still stimulated by subsidy programs, consumption has stalled. Retail sales have fallen over the last 2 months and the previous figures have been revised down sharply. Worse, property prices have fallen again after a short-term stabilization.

Beyond these alarming findings, the good news is that Beijing seems to be taking the measure of the situation. In July, the Politburo set the tone by maintaining a pro- growth tone and insisting on the need to rebalance China's industrial policy and strengthen support for the "new productive forces" dear to Xi Jinping. The fight against increased competition (described as "enormous waste of social resources" by the CCP at the beginning of July) and overcapacity in certain sectors took on a new dimension during the summer through the "anti- involution" campaign and is expected to gain in scope. In line with the guidelines at the beginning of the year, the authorities have also announced measures to stimulate consumption - in particular through an increase in household disposable income. Some are linked to structural issues (birth bonus, tuition fees, seniors with disabilities), while others are of a transitory nature, such as subsidies on new bank loans. While these announcements seem smaller in scope compared to the current (and future) issues facing the Chinese economy, they nevertheless acknowledge the continued support of the authorities - a necessary if not sufficient condition and they have enabled the Chinese equity market to achieve the best performance during the summer of 2025.