German asset manager DWS set out its latest outlook and asset allocation against the background of volatile markets, maintaining a preference for European over US equities. 

“The prevailing mood is cautiously optimistic in times of high risks", according to German asset manager DWS chief investment officer Vincenzo Vedda (pictured). Despite the rebound in US equities, he believes European equites are still more promising than US titles.

The EuroStoxx 600 has only slightly underperformed the revived S&P 500 but DWS does not see a change of favorites in the near future. Due to the momentum and the more attractive valuations, DWS prefers European stocks versus US titles. This holds true for both blue chips and small- to mid-caps.

As the US becomes less predictable, Ronald Temple, chief market strategist at New York-headquartered Lazard also recently highlighted that Europe is becoming invigorated to make important structural changes that could lead to a more dynamic economy.

However, Switzerland-headquartered Michaël Lok, group chief investment officer (CIO) and co-CEO asset management Union Bancaire Privée maintains a preference for US equities on a relative basis. DWS also highlighted that US equities had a successful rebound, but uncertainties remain. “The short-term outlook remains uncertain even if markets have obviously stabilized. The tech sector remains the backbone of the index. We see little price potential from the current level,” DWS continued.

However, Vedda has a positive aspect of very highly valued US shares: the list of the winners of this year is much more balanced than in the last few years when markets were almost exclusively driven by the Magnificent Seven, leaving only minor roles to all other stocks. "This increased balance certainly is a benefit," Vedda said.

“Apart from that, there are, several factors sounding notes of caution,” Vedda continued. “Fiscal boosts the markets had hoped for did not realize the way markets had anticipated. The topic of future public debt is increasingly assessed as a burden. Corporate profits of the companies forming part of the S&P 500 could well disappoint, except for the sectors of technology and finance,” he said. “Valuations on the stock markets but also of corporate bonds are reflecting very high expectations. And they leave hardly any space for disappointments. In other words: should disappointments wait round the corner, prices could very quickly head south.”

Meanwhile, emerging markets are hit by geopolitical uncertainty. “The geopolitical situation remains tense, and the US tariff policy continues to entail significant risks,” DWS said. Emerging markets are particularly impacted by the relationship between the US and China. In spite of several uncertainties, China remains one of DWS’s focus markets but it remains cautious and very selective in its investments.

Fixed income
On bond markets, for the US and for the eurozone, Vedda expects rising prices, this means falling yields. “This holds true for short- as well as long-dated sovereign bonds. Since the most recent US labor market data turned in rather poor, the US Federal Reserve might be prompted to cut rates shortly after all,” he said. He also believes that it is premature to announce the end of the attractiveness of US government bonds for international investors. In the eurozone, the potentially escalating conflict between the US and Russia and the continuing uncertainty in tariff and trade conflicts could encourage the European Central Bank to cut rates further.

At the end of July, the US Federal Reserve left rates unchanged at 4.25 per cent to 4.50 per cent. After recently rather weak labor market data, markets now anticipate a rate cut in September. After a series of rate cuts and a current level of 2.0 per cent, the European Central Bank is having a break. Vedda forecasts two further rate cuts by June 2026.

DWS portfolio manager Per Wehrmann highlighted that high-yield bonds offer low risk premiums and careful selection is needed. Yields of 10-year US government bonds have fallen moderately recently and he continues to expect yields slightly trending downwards. “German government bonds (10 years) yields have also been slightly decreasing of late. Growing demand by global investors and further rate cuts by the ECB could continue to further weigh on returns,” he said. On emerging market sovereign bonds, increased risk is compensated by higher returns. “Yield spreads for emerging market sovereign bonds are set to widen a little. The risk/reward profile continues to appear promising due to relatively high interest rates,” Wehrmann said.

On currencies, DWS said all signs are pointing to a continuously weak dollar. “The dollar weakness has not accelerated recently but it should not be over yet since global investors continue to increasingly reduce their dollar positions in favor of the euro,” DWS said. However, the asset manager does not join in the swan song on the US dollar as international reserve currency. There is no other currency in sight for DWS which could take over this role at short notice.

Gold
DWS said that gold is continuing to sparkle, gaining roughly 24 per cent year-to-date. Political uncertainty is set to continue boosting demand. The Chinese central bank, for example, is systematically building up gold reserves. Flows into gold exchange-traded funds (ETFs) also continue unabated. DWS still sees further potential for a higher gold price by June 2026.  

Lok also believes that gold, which is in the midst of a secular bull market, remains the foundation of inflation-adjusted wealth preservation and risk management for investors’ portfolios.