Weekly Capital Market Watch

US data points to a late-cycle slowdown. GDP growth for 4Q25 was revised down to 0.5%, reflecting weaker investment, while consumer sentiment dropped sharply amid concerns over prices and asset values. Inflation remains elevated, with CPI at 3.3% y/y driven largely by energy costs. Despite this, equities continue to find support from AI-related investment and easing geopolitical tensions, with recent gains following a ceasefire in the Middle East and falling oil prices. The near-term outlook remains a balance between slowing demand and still-robust corporate investment.

The Fed is approaching an easing cycle, but sticky inflation constrains policy. Core inflation remains above target and inflation expectations have increased to 4.8%, limiting the scope for aggressive rate cuts. While growth is weakening, the persistence of services inflation and energy-driven price pressures suggests that policy normalization will be gradual. This keeps real rates relatively high and supports short-duration yields.

European markets are benefiting from improving sentiment and policy support. The STOXX Europe 600 rose over 3% recently, supported by geopolitical de-escalation and lower energy prices. Fiscal expansion and defense spending continue to underpin industrial activity, while lower energy volatility improves margins. Europe enters 4Q25 with stronger cyclical momentum than earlier in the year, although growth remains sensitive to external demand.