Last week, Washington and Bern reached an agreement reducing tariffs on Swiss goods from 39% to 15%, following several months of trade tensions. In a bid to ease the considerable strain on the Swiss economy, Bern offered concessions, including lowering its own tariffs on certain US products and committing to $200 billion in private Swiss investment in the United States by 2028. The impact of this agreement is clearly positive: exporters, particularly in the watchmaking, agri-food, and industrial sectors, now face diminished threats to their competitiveness.
Market reaction was neutral, indicating that the agreement had been largely priced in. This lack of volatility confirms that investors had already anticipated the development, though it does not detract from its significance. A renewed interest in Swiss equities may now be expected, given their substantial underperformance relative to global equities since the announcement of these prohibitive tariffs last April.
Technically, US equity indices advanced last week, with the Dow Jones even posting a new all-time high midweek. Nonetheless, the US market is clearly entering a consolidation phase, as mounting signs of stress become apparent. The VIX index, a gauge of equity volatility, has risen, and investor sentiment indicators are deteriorating, clear evidence of market fragility heading into year-end.
One might have expected the end of the longest government shutdown in US history to boost equities. However, the resolution of this standoff between Democrats and Republicans has yet to restore the regular flow of macroeconomic data and statistical releases. Notably, the October inflation figure, which plays a critical role in guiding the Federal Reserve’s policy decisions, was simply omitted.
This lack of visibility on inflation dynamics and labour market conditions is unsettling investors. In just two weeks, the probability of a Fed rate cut has plummeted from 100% to under 45%. At the same time, internal divisions within the Fed committee are widening between members favouring continued monetary easing and those advocating a more cautious stance.
It is worth recalling that the prospect of significant monetary easing has been a key performance driver for US risk assets in recent months. As previously noted, US equity valuations remain elevated and are sustainable only under two key conditions.
First, robust earnings growth exceeding trend levels, accompanied by a consistent ability of companies to beat analyst expectations. This condition has been met: the current US earnings season, now drawing to a close, has largely confirmed the strong momentum of Corporate America.
Second, the case for valuation multiples nearing 30-year highs hinges on continued Fed easing, still considered overly restrictive by many, including President Trump. This assumption is now being challenged, explaining the recent uptick in equity market volatility and the profit-taking seen in recent weeks.
Nevertheless, our outlook remains constructive. We continue to anticipate a 25-basis point rate cut in December. November's inflation and labour market data should offer sufficient reassurance to Jerome Powell and his colleagues ahead of the Fed’s final meeting of the year. A gradual softening of the US economy is expected to become more evident, while inflation, although still exceeding the Fed's target, remains contained. This macroeconomic backdrop should justify further rate cuts in the coming months. As such, the current market consolidation is healthy and, in our view, unlikely to evolve into a more pronounced correction.
Despite exceptionally low interest rates in Switzerland, the Swiss franc continues to appreciate, recently surpassing the 0.92 threshold against the euro, a level previously reached only during the abandonment of the currency floor in 2015.