July 21th, 2025 - Why we should remain vigilant during the summer.

Please note that this is the last weekly review until mid-August.

I take the opportunity to wish you an excellent and relaxing summer !

As a starter, we should mention that the next two months are traditionally not market friendly. Based on long-term historical data, August and September exhibit the worst average performance for equities. This means that we should not entirely blame it on and Trump and his erratic behavior, if we encounter the traditional summer turbulence again. After the sell-off in March and part of April, equities have rallied relentlessly, with the US main indices hitting new record highs. Europe has yet to recapture its early February highs, with the exception of the German DAX, which is the darling of traders, hedge funds and international investors.

The rally has been based on the hope that Trump will back down from the ridiculous tariffs proposed on April 2nd, as two days later he offered an extension to the 9th July deadline. That date has come and passed and now the 1st of August is the new deadline for deals. We do not see any reason why Trump will back down from imposing 15-20% taxes on all products imported by the EU for example , which is less than the 30% originally threatened but higher than the already imposed 10%. At the same time earnings estimates have been downgraded significantly, inflation has been picking up and the big beautiful bill which increases the fiscal deficit has been passed. This is not a healthy background for further gains in equity markets from already extended valuations.

We should also not underestimate the genuine effort of Trump to fire Chairman Powell from the FED and it seems that he has found a way. The president and his entourage are publicly accusing him for fraud and mismanagement of the 2.5bn$ building renovation, which could probably lead to formal investigations and of course at some point might lead Mr. Powell being forced to resign, as he would not want to spend his time with the FBI and other investigators. The momentum chasers, the algorithmic trading, the short-covering and the FOMO guys are driving markets higher with no intention to think about any of these risks. We should remain vigilant.

June US inflation numbers were ok on the surface , but the devil is in the detail.

• US consumer price inflation increased in June, as expected. On an annual basis the headline CPI increased to 2.7% from 2.4% in May and vs. consensus of 2.6%. The core CPI ticked up by 0.1 percentage point to 2.9%, a little lower than the 3% expected. Looking into the details, however, it is core goods where the signs of the tariffs impact are starting to feed through. At first glance, consumer goods' prices were up by "just" 0.2%. However, this includes used cars and trucks with prices down 0.7% and new vehicles also down 0.3%. Excluding autos, core goods prices actually rose by 0.5%. The items which are mainly imported showed the greatest inflationary pressures: toys, furniture, appliances, and apparel.

• The producer price index (PPI) was mostly stable in June, rising by only 0.1% after a 0.4% drop in May. This change was below the consensus expectation of +0.3%. Among the details, import prices for consumer goods excluding automobiles, rose by 0.4%, reversing a 0.3% decline in May. Overall the fact that these import prices are not falling suggests that the foreign exporters are not bearing the costs of risings tariffs, at least for now, contrary to Trump's campaign promise. The combined CPI and PPI report point to a rise in the PCE index, which is the FED's favorite inflation metric, to 2.5% from 2.3%, in the next publication.

Central banks will attract attention in the following two weeks. The ECB is meeting first on Thursday (24th) and is expected to cut rates again by 25bp. The recent deflationary rise of the EURUSD exchange rate as well as the CPI being very close to 2%, give space for a final rate cut. But it should also pass the message that they are done for now, especially since the increased German fiscal spending and the tariffs situation warrant monitoring before acting again. The FED is meeting next week (July 30th) and is widely expected to leave rates unchanged. Of course their official forecasts are for two more rate cuts this year and there are only four meetings left, including that of next week.

Equities had a rather mixed week, with Nasdaq (+1.5%) outperforming the rest of the indices. News that Nvidia will be allowed to export again its H20 chips to China sparked enthusiasm in the stock, which spilled into the broad Technology sector (+2%). European markets have lost momentum, as tariffs remain a threat, and (ugly) French politics attracted headlines again. On the positive side, the electrification theme was re-ignited after solid Q2 results by ABB and Legrand. China had a very positive week, with Hang Seng rallying almost 3% and local Chinese markets adding 1%.

Bonds remained weak. The bond market which is primarily inhabited by huge pension funds, sovereign wealth funds and central banks is pricing risks more correctly. The inflation risk is high, the very large US fiscal deficit is a reality and Germany is about to enroll on a spending spree, while the French are trying to make people work on Easter Monday to reduce their own large deficit. The German 10yr yield remained elevated at 2.70% while the US 10yr approached 4.50% again. More worrying is the move of the US 30yr yield to 5%, a breach of which will create volatility in financial markets.

Chart of the Week : The Mag-7 concentration approaches unsustainable levels again.

The above chart shows the total weight of the Magnificent-7 stocks in the S&P500 for the last six years. These stocks are Apple, Amazon, Alphabet, Microsoft, Tesla, Meta and Nvidia and they currently comprise about 34% of the total index, double what it was just six years ago. If you take the moment to think about it, the total market capitalization of the rest 493 stocks or so of the S&P500 is just double that of the seven stocks. If history is any guide this is unsustainable, at least in the short term. As can be seen in the chart the current total weight approached the dual peak of 34%, which happened in June 2024 and January 2025. After both cases, the index was pushed higher 4% in one month, but then we had a sell-off of over 9% shortly thereafter (within two months). Even if a sell-off does not occur, the market will probably rotate into other sectors and stocks in the months to come, perhaps small caps could be revived again. History will tell whether we break-out to new records with these seven stocks reaching eventually the 50% of the index.

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 : KSH/FactSet , Photo: iStock