After a phase of volatility and declines in early June, the news of an agreement between the US and Iran and the sharp drop in oil prices helped stock markets, particularly the Eurozone, the area probably most affected by downward revisions to growth estimates due to high energy dependence. The MSCI EMU index posted gains of over 4% since our last webinar, driven by Banks – also supported by the ECB’s interest rate hikes – Technology, and Consumer Discretionary stocks, among the most penalized so far this year.
For the United States, gains were more limited (1-2%), with once again a very positive performance by Semiconductors (+8%), despite strong volatility during the period and record dispersion in individual stock performances. Obviously, when talking about Artificial Intelligence, concerns about a bubble cannot be ignored, after gains exceeding 50% since the start of the year for the aforementioned Semiconductor sector, rising to 120% if we look at the last twelve months.
However, it should be noted that – unlike the Dot.Com bubble around the turn of the millennium – earnings growth has been equal to or even higher than stock price growth. The Price/Earnings ratio is around 22-23, a much less expensive multiple compared to levels above 30 seen last summer and autumn. The key to everything lies in profitability, which continues to set new records. That said, selection remains essential, as confirmed by the already mentioned record dispersion in performances.
Here, returns on the bond market remain positive but limited, due to the historically high carry offered by this asset class, but constrained by the prospects of central bank rate hikes and high inflation.
The most significant event of the last month is the divergent trend of rates depending on maturities. The long end of the curve saw yields fall by about 5-10 basis points for 10-year Bunds and Treasuries, respectively just below 3% and 4.5%. Conversely, the short end saw rates rise, particularly in the United States, leading to a flattening of the curve. We can say this is the Warsh effect: a commitment to a more decisive fight against inflation means higher policy rates in the short term, but can lead to greater central bank credibility and a lower premium for longer maturities. It is still early to say if this will be the path, but it is worth keeping this possible development in mind.
GROWTH: BRIGHTER UNITED STATES, SEEKING STABILIZATION IN THE EUROZONE
Despite positive news in the US-Iran negotiations, it is still early to see a positive impact on growth figures, especially in the Eurozone. Before seeing the benefits of lower oil prices, a few months may pass and we might even see weak real economy data for some time, particularly in the Eurozone, while confidence indices for households and the services sector should show a quicker recovery.
Eurozone, the overall picture remains weak. The economic surprise index remains in negative territory, albeit recovering since early June. An important figure is the downward revision of GDP growth estimates in the first quarter, with the quarter-on-quarter figure now showing a contraction of 0.2% compared to Q4 2025 (previously +0.1%) and annual growth of just 0.3%. Growth data is weighed down by a sharp slowdown in investments and exports, also affected by the anomalous data from Ireland, home to many multinationals, which saw GDP fall by over 12% in the first quarter.
Looking at higher frequency indicators, final estimates for business confidence indices in May show a marginal improvement. The PMI Manufacturing index rises from 51.4 to 51.6, the Services index from 46.4 to 47.7. The latter remains in territory consistent with a moderate GDP contraction, but it will be important to assess any improvements in the coming months. Regarding consumers, the unemployment rate remains low (at 6.3%), while household confidence – although slightly recovering – remains close to 2022 lows.
Looking at the United States, the scenario remains more dynamic, albeit with some slight negative notes. In particular, real GDP growth in the first quarter was revised down from the initial +2.0% (quarter-on-quarter annualized) to the current +1.6%. Consumption slows (only +1.4%), also due to reduced consumer purchasing power, with inflation eroding real wages. That said, higher frequency indicators show a positive trend. The ISM Manufacturing index rises from 52.7 to 54.0 in May, the highest level in four years, while the ISM Services index climbs to 54.5. For both indices, these levels are consistent with growth slightly above potential.
However, the positive news does not end here. The labor market confirms improvement signals from previous months, with the creation of 172,000 new jobs in May – practically double the growth expected by analysts – and upward revisions for previous months. The unemployment rate remains stable at 4.3% and the number of job openings for those seeking employment rises again.
These decidedly brighter data for the United States are reflected in growth estimates and their revisions in the last month. On one hand, US numbers are confirmed (+2.1% in 2026 and +2.0% in 2027), while estimates for the Eurozone continue to fall. Real GDP is now expected to grow by just 0.6% in 2026 (down from +0.8%) and 1.2% in 2027 (down from +1.3%).
INFLATION: THE REAL ACHILLES’ HEEL IS THE PERSISTENCE OF SERVICE INFLATION
Here it is very important to pay attention to the latest data and carefully analyze the various components to understand what future developments might be.
Starting with the United States, overall inflation in May shows a further acceleration, rising from +3.8% in April to +4.2%. Driving the increase is the energy component, which rose 23.5% year-on-year. This is very likely the peak of the energy component, which should start to decline from the next report thanks to the drop in oil prices.
Attention, however, is on core inflation – which rose from +2.8% to +2.9% – and in particular on non-volatile service inflation, which we monitor closely because it reflects the state of the labor market in the previous six months. And here is the most concerning note. Service inflation has started to rise again, marking +3.3% year-on-year, increasing for the second consecutive month (the low was in March at +2.9%). All this seems consistent with the gradual recovery of the labor market in recent months. As we will see shortly when discussing central banks, the persistence of service inflation is the main symptom of a structural problem in the fight against inflation. The new acceleration in service inflation, if confirmed in the coming months, would represent a clear warning sign for the Fed.
Looking at the situation in the Eurozone, dynamics are not too different. Overall inflation rose to +3.2% in May from the previous +3.0%. Core inflation also jumped – from +2.2% to +2.6% – driven by service inflation accelerating from +3.0% to +3.5%. This sharp rise is partly explained by temporary factors, mainly linked to the pass-through of higher energy costs on transport and more cyclical services. However, it is not just this: service inflation remains at structurally high levels – never below +3% annually in the last four years – signaling that part of the inflationary pressure is persistent. Once again, this is the focus for the ECB, and one of the key reasons for the decisive hike a couple of weeks ago.
Looking at analyst estimates, there are no significant changes to report for the United States. Overall inflation is expected to average +3.5% in 2026, before falling to +2.4% in 2027. For the Eurozone, numbers remain unchanged for 2026 (+2.9%), but rise for 2027 (from +2.1% to +2.3%).
THE ECB RAISES RATES. FED MORE HAWKISH: THE CHANGE OF PACE WITH WARSCH
Now turning to central banks where the starting point is common: inflation numbers – and particularly the services component – are surprising on the upside, forcing central banks to maintain a less accommodative approach.
In the June meeting, the ECB decided to raise interest rates by 25 basis points, bringing the deposit rate to 2.25%, in line with expectations. The decision comes in a complex context: on one side, inflation – as we have seen – shows signs of persistence in the core component; on the other, an economic cycle that remains weak and characterized by downside risks to growth.
The ECB’s message was quite clear: the work on inflation is not finished and the risk of second-round effects remains, especially through the wage and services channels. At the same time, however, greater caution compared to previous months emerges. The drop in oil prices and the improvement in the geopolitical picture could reduce inflationary pressures in the coming months, opening the door to a possible assessment phase after the June hike.
In other words, the ECB finds itself today in a more “uncomfortable” position: it must maintain credibility in the fight against inflation, but with much narrower margins than the Fed due to the weakness of the European cycle. The result is an increasingly data-dependent approach, with any further moves largely depending on the evolution of service inflation. The market currently prices in another 37 basis points of hikes by year-end, equivalent to about one and a half hikes.
For the Fed, the change in tone was even more evident. From an operational point of view, the Fed left rates unchanged as expected.
However, it was the communication that represented the real novelty in the first meeting led by Kevin Warsh. The Fed moved from long, nuanced texts designed to keep multiple options open, to much shorter, direct, and selective messages. This implies greater clarity on priorities: the focus today is almost exclusively on inflation and its persistence above the 2% target, a factor that calls into question the central bank’s credibility. It is not just a stylistic choice, but a sign of a more decisive and consistent approach with a restrictive monetary policy for longer.
Then there are the famous “dots,” i.e., interest rate forecasts compiled by each individual FOMC member. Compared to the previous meeting, there is a rather clear upward shift in the entire distribution. In other words, the median now indicates higher expected rates, with only one board member seeing a cut by year-end compared to the 12 favoring a cut in 2026 recorded in March. Nine out of 18 board members see at least one hike, with another 8 expecting rates to remain unchanged.
An additional interesting – and somewhat unusual – element concerns Kevin Warsh himself. In his first meeting as governor, Warsh decided not to include his own rate forecast. This is a choice with a precise meaning: it avoids anchoring market expectations on a single specific forecast and, at the same time, reinforces the idea of a Fed that wants to maintain maximum flexibility at this stage, with inflation as the central objective.
All these changes converge on a scenario of higher rates for a longer period. Market expectations have adjusted accordingly, with the market now pricing 39 basis points of hikes by year-end, with a second hike priced in by March 2027. This is an adjustment of almost 20 basis points compared to pricing before the June 17 meeting.
FINANCIAL MARKETS AND OUTLOOK
The picture remains characterized by opposing forces. On one side, the improvement in the geopolitical context and the drop in energy prices represent a supportive element for markets in the short term. On the other side, the persistence of inflation – particularly in services – and the change in tone of central banks, especially the Fed, keep uncertainty high on the macro-financial scenario.
Weighing these elements and reflecting on portfolio positioning, in the short term the macro and microeconomic scenario still seems supportive for risky assets. Growth in the United States appears solid, also thanks to large investments related to Artificial Intelligence, while the Eurozone should benefit from the reduction in oil prices.
Consequently, we maintain a constructive stance on equities, remaining invested in the technology sector (semiconductors) and favoring the Eurozone, which could continue to recover the relative underperformance suffered since late February, also thanks to the good performance of the banking sector.
Regarding the bond sector, we remain in a complex environment. On one hand, real rates are already sufficiently high and this supports carry strategies. However, prospects of further central bank hikes and persistent inflation could cause additional temporary increases, as already happened in recent weeks. We therefore continue to favor European Investment Grade credit for shorter maturities, while for longer maturities we adopt a tactical approach, exploiting market rate rises to increase duration on the government side, particularly in Europe. We do not rule out further widening of the transatlantic spread, while maintaining an overall neutral view on US Treasuries.
