Paris-headquartered Edmond de Rothschild Asset Management has released its investment outlook for the second half of 2025 set against a backdrop of a deteriorating geopolitcal environment and an economic outlook hampered by US policy.  

With a changing world and volatile markets, Edmond de Rothschild Asset Management is keeping a slight underweight in equities, notably US equities, and in the dollar. It is positive about European equities.   

“The US/China discussions could drag on, while those with Europe are likely to be complex. For the second half of the year, we have decided to maintain a slight underweight in equities, particularly US equities, and in the dollar,” Benjamin Melman, chief investment officer at Edmond de Rothschild AM, said in a note.

Melman highlighted that markets are monitoring the US 2026 budget discussions in Congress, which propose a stimulus of 1 per cent of GDP, offering hope for an economic rebound in the second half of the year. But US long-term interest rates remain threatened by efforts to maintain tax reductions without significant cuts in public spending, exacerbating deficits. “In response to geopolitical challenges, there is a growing need for public investments to strengthen security and sovereignty,” he added. In Europe, the Draghi plan on European competitiveness, which focuses on boosting innovation and reforming competition law, as well as the resurgence of German leadership and its hike in defense spending, could help bridge the continent’s gap and boost the growth of European equities.

European equities
Caroline Gauthier, co-head of equities, believes that European stock markets are back on the front stage. “After several years of doubt, investors are now rediscovering a continent that is undergoing deep transformation, driven by new political and economic ambitions,” she said. The turnaround in investor sentiment was spectacular during the first half of the year: +12 per cent for eurozone equities (+25 per cent in dollar terms). “This sharp rebound reflects the emergence of a new narrative as Europe is forced to transform to regain control over its economic destiny. As investors revise their reading of global markets, Europe, where the growth regime is about to shift, is now a credible option,” Gauthier continued. 

“After years of under-exposure to Europe, the gradual return of capital flows, boosted by a weaker dollar and the search for diversification, should offer durable support to the market,” she added.

Gauthier believes that European small caps offer a particularly attractive potential. “They are in the best position to benefit from the re-acceleration cycle expected in 2026. Owing to their more domestic profile, they are partly shielded from trade-related tensions and volatility on the dollar. Their exposure to the business cycle also implies greater sensitivity to the recovery of domestic demand. Finally, they lie at the heart of Europe’s production base and industrial innovation,” she said.

“While risks should not be under-estimated – notably political uncertainties in France and geopolitical tensions globally – deep structural levers are at play. Within the next 12 months, European equities, and small caps in particular, could be back among main performance drivers within a diversified allocation,” she added.

Meanwhile, Jacques-Aurélien Marcireau, co-head of equities, emphasized how markets should refocus on themes such as resilience and health, which are major structural trends that will profoundly shape the global investment landscape.

Fixed income
Alain Krief, head of fixed income, said the impact of new transatlantic relations has prompted Germany to reconsider its fiscal austerity, a major shift that could influence future growth projections and reshape the European yield curve. “The expected rate cuts in the coming months signal good performance for short and intermediate maturities. This performance is driven by the decline in risk-free rates and credit risk premiums (spreads),” he continued. “Short-term high-yield debts, financial subordinated instruments, and corporate hybrid debt are considered safe havens for investors, protected by high carry, the ongoing economic cycle, and their short duration.”

"As we enter the second half of the year, we are taking a cautious approach to US assets, while continuing to explore other asset classes. Positive surprises could emerge if the Trump administration turns its back on protectionism, favoring a climate of deregulation and tax cuts,” Melman said. “In Europe, the implementation of the Draghi plan could help to make up some of the lost ground. The rise of AI could gradually improve productivity, although its impact remains limited at this stage. However, caution is still called for in the face of high asset valuations, US policy uncertainty, geopolitical tensions, and the general economic outlook."

Other wealth managers, such as Guinness Global Investors, also prefer European over US equities in 2025. See more commentary here.