Markets at a Breaking Point: Calm or the Prelude to New Turbulence?
20 JUN, 2025
By Enguerrand Artaz Artaz
Barely two months have passed since the wave of panic triggered by Liberation Day, but it's already a thing of the past. Stock markets have returned to levels very close to February's highs, volatility is once again hovering at very low levels, and investors are barely reacting to the statements from various parties regarding tariffs. As summer approaches, markets seem to have caught their breath, relieved to have escaped the worst, but now standing on edge after a dizzying rise.
In many respects, the current situation resembles a breaking point. On the trade war front, little progress has been made since the de-escalation of recent months. The imminent trade agreements promised weekly by US officials are still awaited. The widely followed meeting between the US and Chinese delegations in London concluded with virtually no changes after two days of talks. The increase in tariffs on pharmaceutical products, frequently discussed in April and May, has not been mentioned for several weeks. On the contrary, tariffs on aluminium and steel have been increased, and Donald Trump has hinted at doing the same for automobile tariffs. Although the likelihood of a new escalation now seems distant, could this relative stability be the prelude to further easing—or the start of a prolonged period of stagnation where tariffs remain at their current level, the highest since the 1940s? The result would have a radically different economic impact.
On the economic front, the upcoming data (employment, consumption, industrial production) should reflect the first consequences of the trade war—if any at all! After defying forecasts for the past two years, will the US economy once again surprise with its resilience? Or will Donald Trump's numerous offensives finally cause the structure to wobble?
Here too, the response will greatly influence market trajectories, where the question arises whether current trends will hold. After making a historic breakthrough in the first half of the year, will European equities maintain or even widen their lead over their US counterparts, helped by the fall of the dollar? Will European domestic-oriented companiescontinue to outperform exporters, having reversed four years of relative underperformance in less than six months? The defence sector, which has nearly doubled since the beginning of the year, does it have enough momentum to keep rising in the coming quarters?
Although some answers won't rely solely on rational facts, in this scenario, it seems wise to diversify risks, particularly by looking again at neglected market segments such as European or emerging small caps, while also benefiting from the attractive risk-return profile still offered by European corporate bonds, bringing stability to portfolios.
