Back to school, with a lot of homework ahead.

August 18th, 2025

For those of us living in Switzerland, today is indeed the first day of the new school-year. But besides being parents, we are also investors and we find ourselves back at work, with a lot of homework to do. This includes following closely the macro-economic data as well as the companies' news and guidance, and always monitor the geopolitics in an effort to predict what the last four months of the year will bring. But at this stage, this appears to be a mission impossible, for reasons I will explain below. To recap what has happened during my absence, equities corrected towards the end of July, but since August 1st, the S&P500 rebounded to a new record high very quickly. European equities also rebounded from the July low by 4-5% on average, but they still remain below their February highs. Asian markets have followed the rebound with Japan's Nikkei hitting a fresh record high and Hang Seng posting a new 2025 high, with a 27% return ytd.

The US market is increasingly driven higher by retail investors and momentum traders, a crowd which is insensitive to valuations. Flows move the markets (in both direction) and as the pandemic has produced a new generation of day traders and momentum chasers, it seems futile to use fundamental analysis in order to make necessary investment adjustments. Just as an example, one of the hottest stocks in the US currently , Palantir, has reached a 400bn$ valuation, trading at 200 times earnings and 100 times its sales, while the media (social or not) still pitch it as a great buying opportunity . Even Cisco at its 2000 bubble peak, then the most valuable company in the world, traded at half of these valuation metrics. We all know what happened next. Another example of mania is Robinhood, the on-line broker catered for the teenagers and traders which came into life during the pandemic. Its stock has skyrocketed to 100$ per share, from just 10$ little more than a year ago, as traders have flocked back to its platform to trade. Just as a reference, the stock had reached a high of 60$ in the pandemic bubble, only to crash to a low of almost 6$ in 2022 and now back to north of 100$.

The algorithmic programs (CTAs) have also played their role in the rebound, as they invest more and more when the market is moving higher with the volatility index (VIX) moving lower. But according to the available data the CTAs have now maxed-out and no more inflows are to be expected from current levels. That same crowd (momentum traders and algorithms) will also indiscriminately sell on the way down, just as it happened in March and early April, where the big opportunities arose and they were selling despite very favorable valuations. Hence, it could be beneficial to be contrarian at these extremes, the big success being to understand when these extremes are in place. We might not be there yet at the index level , but in many cases it definitely feels like it.

And the medium-term picture of the US economy is going from bad to worse. The worst possible outcome of a stagflation scenario is very much alive with the economy slowing down according to most metrics (labor market, GDP growth, consumer companies' own forecasts during Q2 results) at the same time that inflation is moving higher. The huge fiscal deficit is also there to haunt us, but I guess it is only us who think about it. It is funny to read journalists and analysts saying that the recent rally is justified because the FED will cut rates by 75bp in the next three meetings, in an effort to boost a slowing economy. Our first pushback to this is that the FED is highly unlikely to cut interest rates so aggressively with inflation moving higher. Then again, the stock market of a slowing economy, where inflation is moving higher should not really trade at 23 times earnings, which is the current valuation of the S&P500. But we should also acknowledge the fact that the AI theme overshadows any other concern or issue, and equity markets could have their late-1990s moment again, which means that stock prices can shoot up much much higher, beyond any fundamental analysis. Hence, it is a mission impossible to try predicting what happens in the next few months. However, the probability of a short-term 10% pullback into late August and September has increased, if flows dry up.

The US labor market data were significantly revised down and President Trump immediately fired the Head of the Statistics bureau, in response. If someone did not know who Trump was, one would think that the news concern a small, forgotten country with an authoritarian regime in Africa or Central America. At least Mrs. Erika McEntarfer was just fired and not executed or vanished in some desert, as it would have happened perhaps in North Korea, if the president was not happy with the numbers. What triggered Trump's outrage was the unprecedent 258k negative revision in the May-June monthly non-farm payrolls, while the 73k jobs growth for July was also below expectations (100k). The unemployment rate rose 0.13 pp to 4.248% in July, just shy of rounding up to 4.3% which would have been the highest level of the unemployment rate since 2021. We also need to clarify that we too have been very skeptical of the credibility of the jobs data, as we have mentioned several times. But this has to do with an outdated methodology of phone surveys to gather data, in which the participation of the public has been decreasing steadily.

US inflation rose further in July, but within expectations. The monthly headline CPI increased by 20bp, while 12-month inflation rose to 2.70%. Although these numbers were within the range of expectations and hence did not provide any meaningful market reaction, it is a fact that inflation has risen each of the past few months: from a post-pandemic low of 2.31% in April to 2.35% in May to 2.67% in June then to 2.70% in July. Core consumer goods (excluding transportation) have now risen four months in row — an unusual occurrence outside of the early 2021 to early 2023 inflation surge. If current tariffs are maintained and the economy does not slip into a notable recession, analysts expect that headline inflation to continue trending up and surpass 3% in the autumn. Core CPI prices rose to 3.06% in July on a yearly basis, after running at 2.78% from March to May and 2.93% in June.

The FED kept rates unchanged , as widely expected, but Powell chose to be hawkish during the press conference. Two governors (Waller and Bowman) dissented in favor of a 25bp rate cut, which was also expected as these had been quite vocal about their views in the previous days. In the policy statement, there was a dovish tilt with the phrase "growth of economic activity moderated in the first half of the year" replacing "economic activity has continued to expand at a solid pace". Chairman Powell, although acknowledging the softening of the economy, spent considerable time commenting on inflation. He said that inflation has not moved much since the beginning of the year, but its composition has changed: services inflation is easing at the same time as consumer goods prices are increasing primarily due to tariffs. He also said that the labor market is not weakening , but these comments came before the ugly jobs report a few days after their meeting.

The bond market is another "basket case" these days that we have difficulty to comprehend. The USD curve is moving lower, despite inflation moving higher as the market is convinced about many rates cuts ahead. But the EUR curve is moving higher although inflation in the Eurozone is contained and is finally sitting at the ECB's target. Even more strangely, every time there is inflation-related data out which are negative for the US, the USD rates barely move and EUR bonds sell off ... The German curve has moved 15-20bp higher in the last month or so, confirming our view since June that new purchases should be avoided for better buying levels. We are finally approaching now these levels.

In an effort to boost domestic demand, the Chinese government announced a plan to provide interest subsidy for personal consumption loans, effective from September 1, 2025 to August 31, 2026. The plan will subsidize 1 percentage point of the annual interest on loans, capped at 50% of the loan interest rate. Eligible transactions for the subsidy: 1) single purchases under Rmb50,000 (~Usd7,000); 2) for transactions exceeding Rmb50,000 subsidies are provided in priority sectors including household automobiles, elderly care and childbirth support, education and training, culture and tourism, home furnishings and decoration, electronics, and health and medical services. The news is another confirmation that China is willing to take measures to boost local demand, which would be very beneficial for European consumer companies, whose shares have been underperforming significantly for more than two years now.

Chart of the Week : US credit defaults continue to rise.

The above chart shows the percentage of loans in different categories which are considered 90+ days delinquent, or in simpler terms not being serviced by the borrowers. We note the big spike of student loan delinquencies (green line), which is the result of abolishing President's Biden CARES Act, which had paused payments of student loans and had set the interest rates to zero, to help borrowers. We should note that these loans are not held only by students but also mature adults who carry their student loan balances for decades in some cases, until they can repay them in full. Credit card delinquencies (blue) are now at the highest level since the 2008 financial crisis and Auto loans (yellow) are at the highest level since the pandemic. The bright spot is house-related loans (black, orange) whose delinquencies are still at multi decade lows. This is normal as a struggling consumer will pay his mortgage first , before he turns to fulfill his other credit obligations.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : First Trust