The Environment
Global markets continue their ascent despite an increasingly uncertain economic and political environment. Recent events—new US tariffs, political instability in Europe, and a weakening US labor market—have led the Federal Reserve to initiate a monetary easing cycle.
Growth remains positive but uneven: 1.9% in the United States, 4.8% in China, and 1% in Europe, in a context where Artificial Intelligence has established itself as the primary driver of investment and productivity.
Valuations Under Pressure
Equity markets are being driven by extreme concentration around major US technology stocks—the “Magnificent 7” have surged by over 60% since last spring.
Valuations are reaching historically high levels: the CAPE ratio at 38x is approaching the peaks seen in 2000. While the fundamentals of tech leaders remain solid, the macroeconomic backdrop—US public debt exceeding 120% of GDP, high deficits, and limited monetary maneuverability—makes markets sensitive to any tightening of financial conditions.
The primary risk is now a multiple compression, which could result in a correction of 20% to 35% should earnings slow down or real rates rise.
Implications for Asset Allocation
We remain in a late-cycle environment, characterized by a slowdown accompanied by persistent inflation. In this context, AWAP and USS maintain a cautious and selective approach:
- Geographic Diversification: Strengthening exposure to Europe and Emerging Markets.
- Beyond 60/40: Increased valuation of real assets and alternatives (gold, commodities, real estate, infrastructure).
- Barbell Approach: Combining quality growth assets with asymmetric, low-correlation strategies.
- Protection Against Monetary Debasement: Gold remains a strong conviction, supported by central bank demand and geopolitical uncertainties, with a target exceeding $5,000/oz by mid-2026, alongside Crypto-assets.
- Key Themes: Defense, energy transition, re-industrialization, and European infrastructure. European small caps now offer an attractive entry point, supported by the German fiscal recovery.
The combination of moderate growth, persistent inflation, and high valuations calls for a balanced, diversified, and flexible allocation. In a world defined by debt, fragmentation, and monetary debasement, real assets and anti-fragile strategies remain the best vehicles for medium-term resilience.
Emmanuel Ferry