Outlook for the third quarter: markets driven by the AI boom

Bond markets: Easing inflation provides a tailwind for Europe’s bond markets

European bond markets showed their positive side in the second quarter. According to ICE BofA indices, German government bonds posted a gain of 1.4 percent, while euro zone government bonds rose 1.9 percent. At the end of March, inflation concerns were exaggerated and financial market participants were even pricing in up to four ECB rate hikes by year-end. However, easing tensions in the Middle East and declining energy prices over the course of the quarter led to a calming of inflation concerns, so that by the end of the quarter, financial market participants were expecting only two ECB rate hikes in 2026. The ECB’s interest rate hike in June therefore had no significant impact on the bond market, as it had already been largely anticipated. At the same time, the European economy showed a certain degree of resilience, as leading indicators pointed to stagnation rather than recession. Accordingly, corporate bond spreads narrowed somewhat again. Consequently, corporate bonds outperformed government bonds, posting a return of 2.3 percent. European high-yield bonds performed even better, at 3.7 percent. Both performance figures are based on ICE BofA indices.

Inflation in the euro zone is likely to have peaked at 3.2 percent in May. By June, it had already fallen to 2.8 percent. Through March 2027, it is expected to fluctuate between 3.0 and 2.5 percent, depending on energy price trends. By April 2027, it could even fall back below 2.0 percent. This is due, on the one hand, to the continued moderate downward trend in inflation in the services sector and, on the other hand, to a mechanical consequence of base effects in energy prices. At the same time, economic data from the euro zone has been rather weak so far. Against this backdrop, we no longer expect the ECB to raise its key interest rate any further this year. This means there is a good chance that the positive trend in the European bond market will continue in the third quarter. At the same time, the economic outlook for the European economy has brightened again, giving corporate bonds a good chance of outperforming the market. 

Equity markets: Price surge thanks to an AI investment boom and political easing

In the second quarter, international equity markets staged a veritable rally. The MSCI Europe gained about 11.8 percent and the MSCI World about 14.1 percent, while the MSCI Emerging Markets Index even shone with a gain of 24.2 percent. All indices are quoted in local currency. Political détente in the Middle East and the resulting decline in energy prices were a key driver of this positive performance. In addition, the AI investment boom fueled euphoria in the stock markets. As recently as November 2025, the big 5 hyperscalers in the USA were planning to invest approximately USD 400 billion in AI infrastructure in 2026. By June, the level of planned investments for 2026 had already reached an incredible USD 800 billion. For 2027, investments totaling approximately USD 1.1 trillion are currently planned. The global AI investment boom has not only swept the USA but is increasingly spreading to North Asian countries like South Korea, Taiwan, Japan and China.

A look at the MSCI World and MSCI Emerging Markets indices shows that the performance of both indices is determined almost exclusively by the “AI investment boom.” Consequently, neither index offers good diversification across many different sectors and countries. The major challenge for investors, therefore, is to construct a portfolio that can reasonably keep pace with the major indices during an uptrend but loses significantly less in the event of a price correction resulting from disappointments among AI companies. However, the acceleration in global economic growth that we anticipate should continue to provide a fundamentally positive environment for international equity markets for the time being. Negative surprises are, however, possible at any time—whether from the USA in the run-up to the midterm elections, from geopolitical developments, or from the private debt and private equity sectors. Furthermore, the issue of “share supply” could come increasingly into focus in the USA in the next few months. Significant volumes of new shares will enter the market, whether due to initial public offerings (IPOs) or through existing publicly traded companies. According to estimates, the outstanding volume of US stocks could rise for the first time in many years. Until now, the limited number of IPOs and the high level of share buybacks have led to a declining number of outstanding shares. The rising supply of US stocks could lead to underperformance of US stocks from the second half of the year onwards.

Euro zone economy: Why Germany’s new stimulus package promises more growth than recession

The European economy struggled with difficult conditions in the second quarter. Leading indicators point, at best, to GDP stagnation. Higher energy prices weighed on purchasing power and unsettled households. Furthermore, unlike in Japan, South Korea, and Taiwan, there are only a few companies in Europe benefiting from the global AI boom. At least the German government has launched a surprisingly substantial reform package. The goal is to future-proof the social security systems and increase incentives for companies to invest more in Germany again. In addition, funding for state, occupational, and private pensions will be strengthened. As a result, more money is expected to flow into the German equity market in the long term, which will bolster the financing of initial public offerings (IPOs). Sweden shows how it can be done. According to the Deutsche Aktieninstitut, there were about 190 IPOs in Sweden between 2016 and 2020, but only 42 in Germany, even though the German economy is significantly larger. This has provided young, innovative companies in Sweden with financing prospects, which strengthens the economy’s innovative capacity. Now these reforms must be translated into legislation and actually enacted. Unfortunately, reforms take effect only after a certain time lag. For example, Gerhard Schröder’s 2004 reform agenda did not have a noticeable positive effect on economic growth until 2007. This experience shows that, for political reasons, a phase of reforms should be accompanied by a phase of demand-side policy. In addition to higher spending on defense and infrastructure, the planned tax relief for lower-income groups is expected to provide a positive boost to consumption of about 0.1 percentage points of GDP next year, as lower-income groups tend to have a high consumption ratio. It is entirely possible that the reforms could raise trend growth from the current level of about 0.5 percent to 0.7 percent. Encouragingly, inflation in the euro zone appears to have peaked at 3.2 percent in May. In June, it fell to 2.8 percent. In the coming months, we expect it to move sideways between 3.0 and 2.5 percent. For April 2027, we even forecast an inflation rate of less than 2.0 percent. Against this backdrop, we do not expect the ECB to raise interest rates again this year.

US economy: AI as a growth driver – US economy on the upswing

The US economy performed solidly in the second quarter. So far, however, the upswing has been based almost exclusively on the AI boom, while other sectors have tended to stagnate. Toward the end of the quarter, however, there were increasing signs that the upswing is gaining breadth and spreading to other sectors as well. There is therefore strong evidence pointing to a “capex super cycle,” as the technological revolution in many sectors—such as AI, robotics, transportation, and green energy—will require significant capital expenditures from companies. Accordingly, we have significantly raised our growth forecasts for the US economy and expect growth of 2.5 percent this year and next. This puts us above the consensus forecast. While investments increase supply in the medium term and thus have a dampening effect on inflation, in the short term they boost demand and contribute to higher inflation. Greater optimism among households regarding future productivity gains driven by AI and other technological breakthroughs is also likely to lead to expectations of significantly higher incomes in the future. The robust stock market reflects this optimism, among other factors. Rational households will already be using a portion of their expected future income gains today to increase consumption. Accordingly, it is not surprising that the rising stock market goes hand in hand with a declining household savings rate. Of course, not all households benefit equally—only those with high incomes do. This could become a source of political tension in the future, as income distribution becomes increasingly unequal. Stronger growth momentum means greater price pressure. We therefore expect inflation to remain above the inflation target in 2027 as well, at 2.8 percent. The new Federal Reserve Chairman, Kevin Warsh, has repeatedly emphasized that the inflation target is currently the focus of monetary policy, as it has not been met for five consecutive years. If the Federal Reserve were to take the inflation target more seriously, it would actually have to raise the benchmark interest rate in two steps of 25 basis points each this year. We’ll be watching closely.

Asian economy: Japan’s boom amid a weak yen, China’s growth without prosperity

The Japanese economy is benefiting significantly from easing tensions in the Middle East and falling energy prices. In addition, the global AI boom is increasingly taking hold among Japanese tech companies, which are benefiting from strong order intake. Overall, the current picture is one of economic strength. Interestingly, this economic strength is accompanied by significant currency weakness. A similar situation can also be observed in South Korea and Taiwan. The Japanese yen is currently trading at its weakest level against the US dollar in more than 40 years. Monetary policy is clearly one reason for the currency’s weakness. Due to an economic upswing, the neutral policy rate is rising noticeably, while the Bank of Japan has been very hesitant to raise its policy rate. The gap between the actual and the neutral policy rate is thus widening. This initially leads to asset price inflation, with noticeable price increases in the stock and real estate markets. With a time lag of two to three years, this could result in a significant acceleration of consumer price inflation.

Now seems to be a good time to reflect fundamentally on the Chinese economic model. Neither households nor businesses are benefiting. China’s consumption rate—at 40 percent of GDP—is unusually low (the OECD average is about 60 percent), and the profits of companies in the MSCI China A Index have been stagnating since 2014. The fact that there are no reform efforts whatsoever in China shows that the government is fundamentally satisfied with the system and benefits from it. The focus here appears to be more on geopolitical influence than economic prosperity. The “dual-circulation strategy” can likely be understood in this context as well. The goal is to establish a self-contained domestic economy without any dependence on foreign countries, while simultaneously building a strong export sector that makes other countries dependent on China. A comparable situation already existed in China’s economic history when, in the 18th and early 19th centuries—particularly under the Qing Dynasty—trade was highly one-sided. Europeans—especially the British—wanted to buy large quantities of Chinese goods: tea, silk, porcelain, and lacquerware. China, however, had only limited interest in European manufactured goods. As a result, Europe ran a massive trade deficit with China. Payments were made primarily in silver, often in Spanish silver dollars. Today, China receives mainly government bonds, bank deposits, corporate shares, and raw materials in exchange for its immense trade surplus. Foreign governments have not yet found an effective solution to protect their industrial companies and prevent the deindustrialization of their economies. Germany is particularly hard hit by this.
Ideally, several major economies would join forces and pursue a unified customs policy.