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Stock markets on both sides of the Atlantic have reached new record highs. However, the economic divide between the United States and Europe continues to widen. “The US is showing dynamism, while Europe is left hoping for further interest rate cuts,” explains Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. “However, risks are building up for the US market.”

For months, stock markets have been buoyed by the prospect of falling interest rates in the US and Europe, which could stimulate the economy. Stock market records in Germany stand in stark contrast to the weak economy. “This highlights that DAX companies now generate, on average, less than a fifth of their revenues in Germany,” Gerlinger explains. The outlook for Germany remains bleak: this year, economic output is expected to stagnate or shrink slightly, with only modest growth predicted for 2025.

Not just Germany but also France is grappling with recessionary trends. Both countries are under considerable political pressure. “The political landscape lacks solutions to stimulate the economy, particularly as budget constraints limit room for manoeuvre,” says Gerlinger. Manufacturing is suffering from extremely high energy costs and weak demand, particularly from China. Additionally, a potential trade war with the US poses a significant competitive disadvantage for Europe. Should the presumptive President Trump impose a general tariff of ten per cent, this could reduce European economic output by one per cent. “These factors should already be largely priced into low stock valuations and profit expectations,” Gerlinger notes. His conclusion: “Europe’s hopes rest on more substantial interest rate cuts.”

The situation across the Atlantic is different: US stock markets are expected to reach new record highs in the coming weeks, driven by hopes of stronger growth momentum. Corporate profits reported for the third quarter of 2024 confirm that business is thriving. “Further drivers include the prospects of tax cuts and deregulation, which particularly support financial stocks and small-cap companies,” says Gerlinger. US small caps generate three-quarters of their revenues domestically, and they still trade at a 25 per cent discount compared to large caps. In addition to financials, the technology sector remains attractive: profits are strong, and AI remains a megatrend.

“Overall, US stocks remain the most promising despite persistently high valuations,” concludes Gerlinger. However, he identifies potential tipping points that could cause a shift: firstly, the deportation of illegal immigrants, which would strain the labour market and the economy. Secondly, Trump attacking the independence of the US Federal Reserve. “However, this is unlikely before 2026,” Gerlinger explains, as a Fed board position is set to become vacant at the start of 2026, and Chairman Powell’s term runs until May 2026.

Gerlinger has a more positive longer-term outlook for the Japanese stock market. Although further interest rate hikes are expected in the coming months, substantial wage increases are likely, which would support consumption, alongside a tax reform. “Attractive stock valuations, strong balance sheets, and corporate governance initiatives such as increased share buybacks argue in favour of Japanese stocks over the long term.” From a euro investor perspective, the prospect of a stronger yen reduces risk.

At present, there is little to recommend investments in emerging markets. While China is attempting to stimulate its economy to counter the persistent property crisis, “so far, we’ve only seen brief sparks,” says Gerlinger. The loss of confidence caused by the property crisis still outweighs the potential positive effects of monetary policy measures. “There is a significant question mark over the success of further stimulus programmes,” Gerlinger adds, “as well as over Beijing’s growth target of five per cent for 2024.” In the coming years, a more or less continuous slowdown in growth is likely – not least due to a potential trade war with the US, which would hit China hardest.