Ask the experts: What is stirring our clients (and moving the financial markets) in February 2025

We are always available to our customers for concerns and questions about their portfolios. As a representative of this, once a quarter we summarize the most frequently asked customer questions and the answers provided by our experts, thus giving you direct insights into our asset management and investment advisory services.

Equities

At the start of Donald Trump’s second term in office, the US equity market is richly valued as seldom before. Can US stocks stay great and continue generating double-digit percent annual returns under the Trump 2.0 presidency?

Kaiser Partner Privatbank: The list of things that Donald Trump encountered upon his return to the White House included a pricey stock market, or more precisely, the most expensive US equity market of all time as measured by the cyclically adjusted Shiller price-to-earnings ratio (37.8x). No other president has ever come across a higher Shiller P/E upon moving into the Oval Office. At the same time, Trump has inherited a stock market that delivered an above-average annualized return of more than +13% over the last ten years. Unlike many other things that he can decree or rescind by executive order, Trump has no direct influence on the future trajectory of US stocks, and his indirect leverage is also very limited. That’s just one of the reasons why the odds are rather poor that another golden decade will dawn for the US equity market under the Trump 2.0 presidency.

Bigger is better (?) | Probably not in this case

Cyclically adjusted S&P 500 price-to-earnings ratio at start of presidency

Sources: Bloomberg, Kaiser Partner Privatbank

That’s because a “law of physics” that has held true for decades on the stock market is likely still valid: i.e. the price that an investor pays today is a prime determinant of his or her future earnable return. The higher the price, the lower the expected return. The longer the investor’s time horizon, the stronger this correlation is. If the investment horizon is extended to ten years, valuation (at the time of purchase) becomes an extremely important factor. The statistics on the S&P 500 index for the last 100 years are striking in this context: when the Shiller P/E was in the priciest decile of the historical valuation range, the next ten years delivered an average annual return of just +3.1%. Even entirely negative ten-year returns could subsequently result if the markets were extremely expensive beforehand.

The purchase price is crucial | Particularly for long time horizons

Cyclically adjusted S&P 500 price-to-earnings ratio and average annual return over next ten years

Sources: Bloomberg, Kaiser Partner Privatbank

So, should investors anticipate just a +3% return on US large caps for the next ten years? It obviously isn’t as simple as that. Formulating return expectations (or capital market expectations, as they are often called) is normally much more complicated. Most banks and research firms at least put a lot of diligence and developmental work into their forecasting models, which often incorporate other factors besides valuation, including projected economic growth, inflation expectations, the interest-rate level, and assumptions about future corporate earnings, profit margins, and dividend policies, to name a few. The annual study conducted by Horizon Actuarial Services, in which 41 different investment firms took part last year, provides a good overview of current capital market expectations. On average, the financial professionals surveyed anticipate an annualized return of +6.5% for the S&P 500 index over the next ten years (lowest projection: +4.1%; highest projection: +10.2%). Like in recent years, they thus expect to see a return much lower than the historical average, which has amounted to around +11% per annum since 1930. Arguably the only explanation for this large discrepancy is that although the current rich valuation of the US stock market is not the only factor inputted in the forecasting models, it ultimately nonetheless has a heavier weight than other factors.

Not pessimistic, just realistic | Return expectations below historical average

Historical 10-year return and (10-year) return expectations for S&P 500 index

Sources: Bloomberg, Kaiser Partner Privatbank

The lofty valuation isn’t the only thing increasingly giving some market participants – most of them “old hands” – an upset stomach. The hyperconcentration in the US equity market, which increased even further last year, is also causing headaches. The ten largest US stocks by now have a combined weight of more than 35% in the S&P 500 index (a strict compliance department would soon file a complaint about a portfolio of that kind being insufficiently diversified…). That, too, could become a burden for US equities if a certain return to normal or reversion to the mean sets in. The analysts at Goldman Sachs tried to incorporate this issue as an additional factor in its model for capital market expectations for the next ten years, and the effect is large: the return forecast drops from +7% to just +3%. If that projection were to come true, stocks in the next decade would not only underperform US Treasury bonds, which are likely to yield more than 4% over that same period, but would also hardly deliver much of a positive real return once inflation is subtracted.

The purchase price is crucial | Particularly for long time horizons

S&P 500 price-to-earnings ratio and return over next one, five, and ten years

Sources: Bloomberg, Kaiser Partner Privatbank

What conclusions can investors draw from this analysis? First of all, one would be well advised to keep calm because, after all, these are capital market projections for a ten-year period. Particularly for shorter periods of a few months, but even for periods lasting a few years, the predictive power of pricey valuations (and of the high Mag 7 concentration) is weak. So, although it is not necessarily probable, it’s nonetheless quite possible that US stocks will indeed become a “greatest hit” under the Trump 2.0 presidency. However, those investors who think in long cycles should tend to temper their return expectations and must not simply extrapolate the high double-digit percent returns of the last decade into the future. Since it is practically impossible to time the market, the thing to do is to stay invested and to accept the likely lower future returns. On top of that, long-term investors can also do two other things. They can review whether they want to slightly prune their exposure to the US stock market, which has likely grown in recent years as a result of the strong performance, in favor of other regions. And they can align their passive exposure in the future with the S&P Equal Weight index, which looks destined to outperform the capitalization-weighted S&P 500 index if and when the air goes out of the biggest US stocks.

Rebound in sight? | The equal-weighted S&P 500 may outperform in the near future

Performance of S&P 500 Equal Weight index vs. S&P 500 index

Sources: Bloomberg, Kaiser Partner Privatbank

Equities

European stocks got off to a better-than-average good start this year. Was this (another) flash in the pan, or does it mark a long-awaited trend reversal?

Kaiser Partner Privatbank: European stocks, and the Swiss equity market included, started out this year with robust momentum. The Euro Stoxx 50 Index has risen by more than 10% since the beginning of the year, while the US S&P 500 Index has lagged significantly behind. However, a look at the European blue-chip index’s longer-term price charts brings disillusionment. To wit, a big performance gap versus the USA since the start of 2024 still exists despite the Euro Stoxx 50’s recent torrid rally. It becomes a glaring chasm if the observation period is extended back to the last 25 years: while the Euro Stoxx 50 has only recovered its all-time high hit in the year 2000 in the last few days, the value of the S&P 500 has quadrupled since then.

Enormous performance gap | The Euro Stoxx 50 is still below its 2000 high

Short- and long-term performance (in local currency)

Sources: Bloomberg, Kaiser Partner Privatbank

Is Europe now embarking on a comeback? A certain degree of skepticism is in order. For one thing, there have been recurring short-term outperformance phases over the last five years, but none have proven sustainable. Moreover, there have been good reasons for the superior performance of the US equity market, especially during the last 15 years: it has been mainly driven, most notably, by US companies’ stronger earnings growth and by the meteoric rise of the technology sector.

A flash in the pan? | Merely a rally in a downtrend thus far

Performance: Europe vs. USA (in US dollars)

Sources: Bloomberg, Kaiser Partner Privatbank

Investors are aware of those diverging fundamentals. Their scant interest in European stocks has expressed itself in recent years in the form of sustained net capital outflows and correspondingly low investment allocation ratios. The outcome of a survey taken at the Goldman Sachs investor conference in London in January epitomizes the sentiment picture: only 8% of institutional investors expect Europe to deliver the best stock performance this year while 58% are betting on the USA (see chart below).

A time for contrarians? | (Too) many investors are betting on the USA

Question: Which region will perform the best in 2025?

Sources: Goldman Sachs, Kaiser Partner Privatbank

On financial markets, the “herd” is rarely right (for long). The recent bearishness toward Europe may very well have facilitated the strong stock-price rally in the last few weeks. It is uncertain, though, whether it will seamlessly continue and if Europe is capable of sustainably overtaking the USA. Although the Euro Stoxx 50 index’s recent breakout above its April 2024 high sends a positive signal from a technical analysis standpoint and the European Central Bank’s more accommodative monetary policy than that of the US Federal Reserve provides an additional tailwind, corporate earnings in Europe are likely to lag behind US profits again this year. Moreover, the valuation of the European market, at a price-to-earnings multiple of around 15.7x, is slightly above the average for the last 20 years, so it is not necessarily “cheap” in absolute terms. And finally, also there is no shortage of lingering uncertainties in the near term. It is uncertain whether the Europeans will reach a quick trade agreement with the new US administration, but it is also unknown to what extent China will implement further economic stimulus measures this year. Altogether, it appears inadvisable for investors to chase the recent rally or to tactically play the European equity market.

An investment horizon of five or ten years yields a different perspective, though. In the longer term in particular, Europe’s valuation advantage versus the USA can hardly be ignored. Whereas the Euro Stoxx 50 is trading at a Shiller P/E of around 17x, the S&P 500 is valued at a multiple of over 37x. Even when sectoral differences between the two markets are taken into account, Europe’s valuation discount remains large in historical terms. At the same time, expectations for long-term earnings growth for Europe are at a low point (8.6 percentage points below projected long-term earnings growth for the USA). This means that just like they did during the last 15 years, investors are proceeding on the assumption that corporate earnings in Europe will grow much more slowly over the next ten years. The pessimism is very grim, and equity risk premiums are accordingly high. This not only provides long-term investors with a large safety margin, but is possibly even inappropriate in this magnitude.

High risk premium… | …leaves a lot of room for upside surprises

Equity risk premium (earnings yield minus 10-year government bond yield)

Sources: Bloomberg, Kaiser Partner Privatbank

Europe’s weak earnings and productivity growth in recent years is attributable not just to structural factors, but also to adverse cyclical influences. While enormous budget deficits fueled growth in the USA, growth in Europe was hamstrung by austerity and debt deleveraging coupled with a jump in energy costs and an increase in economic policy uncertainty. This picture, though, could flip in the years ahead. The heretofore unbridled spending growth in the USA will likely be restrained eventually, either because the financial market demands it or because President Trump and his new Treasury secretary, Scott Bessent, decide themselves to go that route. Europe, in contrast, presumably will step up investment spending, particularly if Germany signals its willingness to do so and eases it debt brake rules. An increase in liquefied natural gas imports could mitigate Europe’s energy-cost disadvantage. Moreover, policy uncertainty has increased in the USA under the Trump 2.0 presidency, whereas it may subside in Europe after the Bundestag elections in Germany. And last but not least, the demographic dividend in the USA will diminish if the government closes the country’s borders to immigration. The tide in Europe seems to be slowly turning at last also on the regulatory front. Whether inspired by the new US Department of Government Efficiency (DOGE) or by last year’s Draghi report, the EU Commission now seems intent on seriously addressing Europe’s competitiveness problem.

Altogether, these factors add up to a constructive picture. Euphoria admittedly is out of place, but investors should examine whether they might want to gradually raise their strategic weighting of European stocks in the medium term. Particularly in portfolios benchmarked to the MSCI World Index, Europe possibly seems underrepresented at a current weight of only around 13% (versus roughly 74% for the USA). Moreover, a certain home bias can make sense for those investors that use the euro or the Swiss franc as their reference currency, mainly because the US dollar appears to be overvalued by 20% or more, depending on the model consulted. Even if US stocks continue to outperform on the back of relatively stronger earnings growth, the excess return earned (in US dollars) could quickly vanish upon conversion into euros or francs if the greenback depreciates.

Fixed income

Bond yields have risen in recent months despite interest-rate cuts by the US Federal Reserve. Why has that happened, and how long will the bond bear market last?

Kaiser Partner Privatbank: The US Federal Reserve (the Fed) has already lowered its policy interest rate by 100 basis points since its initial rate cut in September. The yield on 10-year US Treasury notes has also moved by around 100 basis points since then, but upward instead of downward. The divergence between short- and long-term interest rates seems abnormal, and it in fact is unusual. However, it is not a first, and it is attributable to specific circumstances in the current macroeconomic and rate-cutting cycle.

The Fed normally lowers interest rates during a recession or when the pace of economic growth suddenly decelerates sharply and a recession at least looms. The latest rate cuts, though, have been happening against the backdrop of reaccelerating US economic activity. A similar situation occurred during the rate-cutting cycles in 1995 and 1998 – those times as well, bond yields likewise rose temporarily or even for a protracted period after the initial rate cut. However, in the current cycle, the robust state of the economy isn’t the only cause of the rise in market interest rates. The term premium, i.e. the extra yield that investors demand for longer terms to maturity, has also risen, and there is no shortage of reasons why. Investors are demanding a higher yield because they expect inflation to tend to drift upward in the future and because macroeconomic uncertainty is elevated, the sustainability of the USA’s mountain of debt is increasingly being called into question, and the Fed’s independence is under fire. It isn’t entirely by happenstance that these issues coincide with Donald Trump’s assumption of office – the list of worries is closely connected with him personally. But there are also other reasons for the rise in yields. One of them is that the estimated long-run equilibrium rate of interest (r*) has climbed in recent quarters. In addition, market participants have dialed back their expectations regarding further Fed rate cuts this year by around 100 basis points since September.

Higher yields despite lower policy rate | Rare, but not unprecedented

Change in 10-year US Treasury yield after initial Fed rate cut

Sources: Bloomberg, Kaiser Partner Privatbank

Will yields go higher in the near future? The answer to that question likely depends especially on the future inflation trajectory and the new US administration’s future budget policy. On both of those matters, there is hope that things won’t turn out as bad as what the market in recent months has been pricing in. If no surprises occur, inflation looks set to drop to within eyeshot of the Fed’s 2% target in the quarters ahead. With regard to fiscal policy, new US Treasury Secretary Scott Bessent recently spoke out again in favor of reducing the federal budget deficit to 3% of GDP. In addition, consumers’ inflation expectations are to be lowered by ratcheting up oil production and driving down energy prices. Both of those measures ultimately are also indirectly aimed at lowering long-term yields to enable the government to refinance on cheaper terms. The Treasury secretary, though, does not want to influence the trajectory of short-term interest rates – that is to be left in the hands of an independent Fed. It remains to be seen whether Bessent’s approach works, but the stated intention of consolidating the federal budget by itself suggests that US 10-year yields close to 5% are on the excessive side, that a lot of risks are already priced in, and that further upside potential for yields (and further downside potential for bond prices) is constrained.

How long still? | Bonds in a bear market

Yield on 10-year US Treasurys

Sources: Bloomberg, Kaiser Partner Privatbank

The news flow around the topic of US public finances is – in Trumpian fashion – likely to remain volatile and unpredictable in the near future. However, it should be noted that the prospects for US Treasury bonds have improved considerably in the wake of the five-year bear market, particularly for those investors with a lengthier time horizon. Since bonds’ yield to maturity has very high explanatory power for forecasting their future asset performance, one can say with some certainty that US Treasurys should resume delivering yields above 4% over the next ten years. They thus not only become serious competition to richly valued stocks, but thus also promise a return to positive real yields in the future, in marked contrast to the experience that investors had to put up with during the last decade (see chart below). The upshot here is that the days of calling bonds “interest-free risks” are over. A balanced portfolio with an augmented allocation to bonds has become attractive again in the meantime, particularly for investors on the conservative side. Exactly how attractive, though, depends in no small part on an investor’s reference currency. Government bonds denominated in euros (German bunds) or especially in Swiss francs (Swiss Confederation bonds) are less attractive. Whoever “thinks” in European currencies and would like to profit from the higher potential yield on US bonds must be willing to accept currency (US dollar) risk.

Less on the bottom line | US bonds have destroyed value over the last decade

Rolling 10-year return of US Treasury Return Index

Source: Bloomberg, Kaiser Partner Privatbank

Sustainability

Why have the big US banks withdrawn from net-zero initiatives?

Kaiser Partner Privatbank: Three years ago, the hope that financial institutions would be able to transform the world economy toward net-zero emissions was at its zenith. At that time, former Bank of England governor Mark Carney initiated the Glasgow Financial Alliance for Net Zero (GFANZ) at the UN climate summit (COP26) in Glasgow in December 2021, which was to commit no less than USD 130 trillion of private capital to the transformation to a climate-neutral economy. Quite a number of financial firms euphorically jumped on the seemingly unstoppable decarbonization bandwagon and joined the GFANZ through their membership in sector-specific alliances. Those associations, operated in partnership with the UN, required their members to pledge a commitment to reaching ambitious climate targets and carbon neutrality by 2050. But they had to contend with criticism from all sides right from the start. Proponents of decarbonization criticized inadequate goals and the absence of specific actions to be taken. Moreover, there was a constant headwind mainly in the USA that came primarily from the oil and gas sector because energy companies feared that banks would invest less in fossil fuels or would completely shun the industry. A look at the situation today reveals that there is little left of the original euphoria. One sector-specific consortium in particular – the Net-Zero Banking Alliance (NZBA) – experienced an exodus in recent months as several big US banks exited the coalition.

Trend reversal | US pullout shrinks Net-Zero Banking Alliance (NZBA)

Evolution of number of members in Net-Zero Banking Alliance (NZBA)

Sources: Net-Zero Banking Alliance (NZBA), Kaiser Partner Privatbank

Since December of last year, Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo have all announced their exit from the NZBA. Although they made up only six of the more than 140 members worldwide, the exodus of those Wall Street giants reduces the total amount of assets managed by NZBA member banks by a whopping 14%. Other prominent members of the 2021 Glasgow initiative, including BlackRock, the world’s largest asset manager, have likewise quit the alliance in recent months.

Big fish, big waves | Six US banks accounted for 14% of the total assets managed by NZBA member banks

AuM of banks in Net-Zero Banking Alliance (NZBA)

Sources: Net-Zero Banking Alliance (NZBA), Commerzbank Research, Kaiser Partner Privatbank

This trend is being driven mainly by mounting legal pressure from Republican legislators and is thus a direct reaction to the regulatory risk that financial institutions in the USA face. They are being downright coerced into distancing themselves from initiatives that endorse reducing carbon emissions under the pretense that objectives of that kind constitute a violation of fiduciary duties and establish a “climate cartel” structurally beholden to the principles of “woke capitalism.” In the eyes of critics, sustainable and socially responsible corporate practices are first and foremost political activism that does not serve the economic interests of shareholders. But is addressing global challenges like climate change really a violation of fiduciary duty, or is it rather a responsibility that naturally falls to businesses in an increasingly interconnected world fraught with social and environmental issues? Taking climate-related risks into account cannot be neglected precisely in view of the increasing frequency of natural catastrophes like the recent flooding in Valencia and the devastating fires in Los Angeles.

Against this backdrop, it’s reassuring that the financial sector’s interest in a zero-emissions economy evidently hasn’t completely collapsed. JPMorgan Chase, for instance, declared that it would continue to work to advance the interests of the bank and its shareholders and clients, focusing on pragmatic solutions to support low-carbon technologies while advancing energy security. Other financial institutions like Citigroup and Bank of America likewise stressed that they would continue to strive to reach net-zero emissions despite exiting the alliance. Nevertheless, the signal effect of the exodus of leading US financial institutions from climate protection alliances shouldn’t be underestimated. It initially is bound to significantly weaken worldwide momentum toward a sustainable finance economy and climate protection in the private sector. Moreover, it is likely that the already existing divide between US and European banks will widen even further in the near future.

Despite the recent negatively connoted news, it should be noted that initiatives like the GFANZ have already made valuable, pioneering contributions to the global climate debate, to the ambitious climate targets, and to the necessary transition strategies toward a more sustainable future. They are an important step in the right direction. But a truly successful transition to a more decarbonized economy requires more than just voluntary commitments. It ultimately is the responsibility of governments and regulatory authorities to create the necessary legal framework and strong incentives that guide businesses onto the right path and put the urgently needed change into action. A transition to a more climate-friendly and sustainable world economy can only succeed through purposeful interaction between politics and business.

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