Inversis warns of the risk of stagflation in the US as Europe gains momentum

Madrid, 02 July 2025 - Inversis has offered its global and regional view of the current macroeconomic scenario, based on which it is preparing its investment strategy for the third quarter of 2025.  Thus, from its chief macroeconomic strategist, Ignacio Muñoz-Alonso, the entity warns of a growing probability of stagflation in the US as a result of the tariff policy promoted by the Trump administration, coupled with still high inflation and economic growth in decline.

The US economy is showing worrying signs. The contraction of GDP in the first quarter (-0.5% after the latest revision) and the downward revision of growth estimates for 2025 -which the World Bank has put at 1.4%- coincide with an aggressive trade policy that has already started to drain net exports as a result of anticipated purchases in the face of the new tariff regime. Core inflation (2.8%), still high, could worsen in the autumn when the price effects of the new tariffs start to unfold. The same is true of anti-immigration policies which, although in the short term may reduce unemployment, in the long term they put pressure on the labour market through rising wages while partly reducing domestic demand in some states.

The Federal Reserve (FED) has opted for prudence and is keeping rates in the range between 4.25% and 4.5%, anticipating a possible significant drop at the end of the year. Moreover, the institution has revised down its growth forecasts for 2025, from 1.7% to 1.4%, while raising its inflation estimate from 2.8% to 3.1%.

Consumer confidence is waning, and sentiment indicators remain low. Investment is artificially supported by construction and inventories, while the US stock market undergoes a rotation towards defensive assets, reflecting a clear decline in risk appetite.

Reduced tension in the Middle East eases pressure on oil prices

The energy market has reacted with relief after the US attack on Iran, which has brought oil prices back to levels before the first Israeli bombing. The geopolitical premium has been significantly reduced on the perception of a more contained scenario.

Although Iran remains a limited player in terms of production and exports due to international sanctions, the key factor for prices is not its direct supply, but the risk of regional destabilization. The current distension, with signs of possible negotiations, has led the market to discard the worst-case scenario - such as the closure of the Strait of Hormuz, which placed oil prices between $120 and $130 a barrel - and to read that the region is heading towards a phase of relative stability.

Europe regains its confidence

The European Union, on the other hand, is beginning to show more positive signs. Although the impact of US tariffs will be felt, their cumulative effect on European GDP between 2025 and 2027 would be moderate, -0.65% according to the European Central Bank (ECB). Germany, for its part, has approved an unprecedentedly ambitious fiscal package that will provide a stimulus of one trillion euros over the next decade.

This structural change comes at a critical time: Germany is trying to regain competitiveness after years of industrial disinvestment, rising energy prices and demographic decline. The new policies are starting to have a positive effect on confidence indices and could translate into growth of close to 1.5% by 2026.

The ECB has its work cut out for it. The deposit facility is at 2% after the last rate cut, already in line with the inflation target. Although price stability remains to be determined in view of the tensions ahead, Europe will gradually match its economic pace with that of the US by 2026.

Asset Allocation: European preference and quality focus

In fixed income, the yield curves are steeper in both the US and Germany, but with different motivations: inflation in the case of the US and higher issuance in the case of Europe. German bonds are expected to yield more in the medium term, supported by the fall of US bonds as a safe haven value.

Therefore, general asset underweight, with a European bias, reducing exposure to US sovereign debt. Also underweight in investment grade, again with a European bias, but compensating with an overweight in global high yield, where good opportunities are seen, with a focus on higher quality BB bonds. Short durations are maintained, due to optimism about European growth.

In equities, the divergence between the two regions is even more pronounced. Underweight in the US and overweight in Europe. The exhaustion of large US stocks, exemplified by the Magnificent 7, contrasts with the improvement in European corporate earnings (+5.3% in the first quarter).