Financial markets: Analysis and convictions of CPRAM - April 2025

Malik Haddouk, Director of Diversified Management, and Juliette Cohen, Strategist, decipher the markets, and Julien Levy-Kern, Diversified Portfolio Manager, shares his convictions on the themes to follow.

American markets continued to experience a technical correction in March, losing more than -10% from the peaks reached in February. These profit-taking actions are particularly explained by the corrections suffered by the Magnificent Seven, which continue to face investor concerns.

Uncertainty regarding trade policies remains the main short-term driver of the markets. This explains the nervousness of investors as the average tariffs in the United States have already increased by 5%. This environment explains the significant correction in equity markets, with the MSCI World index down -8%, impacted by the sharp decline in American markets, with the S&P 500 down -9.18% in euros.

European and Chinese equity markets are holding up better, averaging only a -3.5% decline, as investors seem to be turning towards structurally positive themes such as the fiscal shift in Germany and the rise of artificial intelligence in China. The budget expansion in Germany and the end of the debt limitation rule could support stronger growth in Europe.

On the bond front, nominal government rates have remained quite stable across the Atlantic, with 10-year rates at 4.20, while in Europe, investors are concerned about the upcoming supply of securities, leading to a uniform increase of more than 30 basis points in 10-year rates, with the German 10-year closing at 2.74%. On the credit front, the market seems to be in a wait-and-see mode, with the primary market in "stop and go" mode, and volumes declining by 20% in March.

Regarding spreads, we are witnessing a widening movement but without any particular panic. Finally, gold continues to set new historical records beyond 3100 dollars an ounce, and the dollar has depreciated by more than 4% against the euro over the month to 1.08.

April is generally one of the best months of the year for stocks. However, the additional increase in tariffs threatens to reverse the trend.

Investors must now question whether they should remain invested or increase the hedging of their portfolio. While positioning, technical factors, and valuations are no longer the obstacles they once were for the US stock market, the possibility of a recession is raising growing concerns across the Atlantic.

The customs sanction has just been announced, and the weighted average tariff rate stands at 18.3%, 3 points above the worst anticipated rate of 15%.

Caution remains advisable for the moment as long as we do not know more about the impact on economic growth and corporate profits. Negotiations will surely begin now, but the possibility of escalation in the event of a likely retaliation cannot be ruled out. In summary: higher aggregate tariffs than anticipated, uncertainty that remains pervasive, and certain taboo words resurfacing.

The hypothesis of a stagflationary and/or recessionary scenario remains the main risks for equity investors. In our opinion, capitulation has not yet begun, but the impact of this blow to confidence could prove to be more significant than the tariffs themselves.

In the United States, an era of budget frugality seems to be opening, with the added impact of tariffs. In a context of high P/E ratios, positioning, and still high expectations for American Tech and the Mag-7, we remain cautious about themes related to Innovation, particularly in Artificial Intelligence.

Meanwhile, in the eurozone, after 15 years of austerity, Germany has modified its debt brake to allow for increased defense spending, accompanied by a 500 billion euro infrastructure fund, which is 12% of Germany's GDP; the German budget plan is equivalent to the sum of the expenditures of the Marshall Plan and Reunification. Add to this a potential decrease in gas prices due to a ceasefire in Ukraine and a reduction in key interest rates, and we have the beginnings of strong growth in European corporate profits. This framework adds to the EU's ReArm plan, which foresees 800 billion euros in military spending.

Regarding the defense theme, while the strong performance of 70% since the beginning of the year may lead to profit-taking, we remain constructive. The continued rise in profit forecasts, supported by military spending of 2 to 4% of European GDP and an increase in market shares of European players compared to American manufacturers, constitutes a favorable factor.

Finally, a barrier has fallen, "Investing in defense is responsible," said the French Minister of Economy. He added, "It protects our sovereignty and the principles we uphold: freedom, democracy, and sustainable development."

Our key points

We note from this month of March the climate of strong uncertainty regarding American trade policy, which has weighed on risky assets, particularly American stocks. In the bond markets, stability prevailed in the United States, while the widening of European rates was significant over the month due to announcements of fiscal stimulus.