Overall, our general view has stayed intact over summer. Unfortunately. The Ukraine war sees no end. The world is now clearly divided into spheres of influence with three strongmen – Xi, Putin and Trump – aiming to further strengthen their grip on power and increase their global influence. China has made strides in forming a China-led bloc to challenge the US. Europe is squeezed and must renew itself from a peace-building inward-looking organization to one which rebuilds military defence and external resilience. As right-wing parties are rising in a situation of budget deficits, it is an open question whether voters accept this change of strategy.

US economy slowing down
The tariff war rolls on; US tariffs on imported goods have now increased tenfold, to the highest level since the 1930s. Uncertainty prevails: Renegotiations may change that number – and the president’s use of reciprocal tariffs is itself questioned by American courts. The effects of the tariffs have not yet been fully felt. Nevertheless, we see inflation gradually creeping up in the US while strains in the American labour market are visible.

The risk of recession in the US is diminishing as interest rates are coming down and real wages rise. Markets are convinced that the Federal Reserve will cut substantially, in several stages. Partly because of the weakening of the labour market, partly because the White House is putting pressure on the central bank. It seems likely Mr Trump will command a majority in the FOMC comes spring.

Europe is lagging
As the US under the new president started to pull back from the Transatlantic co-operation to a state of affairs more looking like the Monroe Doctrine, European leaders for a while seemed willing to respond forcefully. Germany scrapped its conservative budget rules and European stocks rallied. However, these promises now look premature. The EU has not been able to pull together a convincing growth strategy. In trade negotiations, the EU caved in to the US, hoping for security guarantees. But the war in Ukraine rages on.

GDP forecasts have been revised down both for the Euro Zone and the UK. The previous continental engines France and Germany are both in dire straits. France is troubled by high debts and mounting interest costs. A political crisis is looming. Germany’s auto industry is challenged by American tariffs and the onslaught of Chinese EVs. Previous laggards like Spain and Greece are picking up speed but cannot fully compensate for the slowness of the centre. Outside the Euro Zone, the UK is suffering from a sinister combination of slow growth, large budget deficits and high inflation.

As fiscal problems loom, we are gradually losing faith in Europe’s capacity to build military defence and furnish Ukraine with sufficient security guarantees.

Financial markets: a mixed bag
Stock markets are happy, and the American market has broken records. Risk-taking has increased and credit spreads are at a record low. A boost is expected from lower interest rates. Earnings capacity is good, and the tariffs seem to be taken with a shrug. We are back to where we were before “Liberation Day” with focus on earnings in the Mag 7. The rally is fragile, as valuations are high, driven by a small number of tech companies. But momentum is strong and optimism should prevail for some time yet.

During spring, bond yields generally trended upwards, both in the US and in Europe, despite policy rate cuts. The main explanation is that the “term premium” has increased. In an uncertain world bond buyers demand higher compensation for holding long bonds. Heightened geopolitical uncertainty raises concerns about supply chains, costs and trade diversion. Yield curves have steepened, in particular for the long end of the curve.

Worries about the American budget deficit and government debt are on the rise. Large portions of debt need to be rolled over at higher rates. There are debt worries also in Europe, but inflation is lower. Recently, worries over tariffs and protectionism have caused the ECB to issue warnings that markets may be too optimistic. The bank is in a wait-and-see mode. Among the big economies, markets are losing faith in both France and the UK, with yields rising sharply.

Sweden still hesitant
In Sweden, growth has stalled. Economists projected that private consumption would move up as real incomes rose again after inflation fell back. But inflation has been sticky, remaining above the Riksbank’s target and consumers have obviously been scared by previous high price increases. Consequently, consumers’ fears of new bouts of inflation are making households cautious. Manufacturing has been doing better, but the tariff wars are nevertheless taking their toll on investment.

Looking ahead, economists are still hoping for private consumption to return and drive total demand. For the election year 2026, fiscal policy will become expansionary, through tax cuts and defence spending, which should bolster the economy. The Riksbank may cut one last time. But that will be the end of the easing cycle. The krona should strengthen somewhat, courtesy of the economic recovery.

Our conclusions

• The macro situation is rather bleak, with the US economy slowing and Europe stalling. The big engines of Europe’s economy are stalling and political/financial crises threaten.
• The Fed will cut its key rate to prevent a US recession, but long yields will remain high, and the yield curve stays positive. In Europe the ECB will stay put.
• From a fundamental point of view, this should weaken the USD; however, we believe that most of this is already priced in, which means currency markets should stay rather calm.
• Stock markets are driven by solid earnings and momentum may carry American indices even higher, even if the bull market is based on a narrow segment.
• The Swedish economy will finally recover in 2026, thanks to tax cuts which support consumption. The Riksbank is close to the floor, and the SEK will strengthen.

A final warning: The economic outlook is uncertain, not least since geopolitical risks abound. Wars in Ukraine and the Mid-East, tariff wars, autocratic leaders flexing their muscles. Only in the last year many previously unthinkable events have occurred. That might happen again…