Next Wednesday (July 9th), the 90-day tariff truce will expire and the original tariffs will come into effect unless agreements are reached. So, there’s a rush, and it’s clear that agreements won’t be reached with all trading partners, and the US has indicated it will settle for “narrower” agreements, which sounds like Trump is just throwing some numbers on the table.
For example, Trump just threatened Japan with new tariffs:
Ray Dalio …I’ve long wondered why this isn’t discussed more. Have return expectations and the rising stock market climax blinded many investors??? A state economy living on steroids will sooner or later have a heart attack.
Another weekend read for premium subscribers. This time, the topic is the historical weakening of the dollar, its underlying causes, and the opportunities it creates for the euro:
Regarding stock markets and companies, a weakened dollar and a strong euro can have several implications:
Increased demand for the euro has caused interest rates to fall in Europe, which means lower borrowing costs for European companies. For example, junk bonds in Europe were sold in record numbers in June, with approximately 23 billion euros worth of loans granted. A decreasing cost of capital can encourage investments that were previously not as attractive.
A strong euro can also have disadvantages: A strong currency makes imports cheaper and thus, at worst, lowers inflation below the ECB’s target. A strong euro also makes exports more expensive, which could hinder Europe’s economic growth, which is already sluggish (2025e 0.7%).
Regarding the United States, the situation is interesting as federal bonds yield almost the same expected return as stocks, and the return differences between various asset classes are very narrow. On the other hand, interest rates are high for a reason, as political risk has increased in the United States, and investors demand compensation for this risk in the form of higher interest rates, but the stock markets do not seem to be interested in this risk, and valuations are high.
Investors must also remember currency risk and exchange rate changes: Investments denominated in dollars have not performed as well in euros as the price curve shows in dollars. For example, if the S&P 500 rises by 5%, but the dollar falls by 5%, the return in euros is 0%. Currency risk also applies to some Asian currencies whose value is pegged to the US dollar, such as the Hong Kong dollar (HKD).
Brave investors also now have the opportunity to take a view (or speculate) on the dollar: by investing in dollar-denominated securities now, one can gain additional returns if the dollar strengthens in the future. At the other extreme is hedging one’s investments against currency risk.
We are living in interesting times. Have a good weekend!
Weekend greetings! I’ve compiled the events of the past week into a macro commentary. Trump’s big and beautiful contains the winner’s curse, which Daniel also mentioned in his good article. Additionally, it’s worth asking again what motivates investing in the S&P 500 index with a 4.7% expected return and current valuation levels, when a 10-year bond yields 4.4% with less risk. There’s also a story about US job figures, which partly postponed interest rate cut expectations.
“In May 2025, companies received more new orders than a year ago in the chemical industry and the metal industry. New orders decreased in the manufacture of paper and paper and board products industry.”
How advanced math was used in calculating that 4.7% expected return for the S&P 500 index? It doesn’t seem to be E/P (earnings yield), as per my own check, the S&P 500 P/E is hovering around 29.
One often sees financial influencers pointing out that the index is expensive now and it’s not worth investing because the index’s P/E is high. However, Tesla and Palantir are good investments because earnings grow year after year, and a P/E of 300 doesn’t matter today, as it will only be 200 next year.
So, this was not a criticism of the information you shared, but rather my interest was piqued as to where that 4.7% expected return came from.
Thanks for the observation, I’ll have to make my own, completely up-to-date table for this when I mention the matter next time (E/P ratio in question for the S&P 500 index). That WSJ chart is from three weeks ago, which I tried to highlight in the article’s text, and of course the numbers have changed somewhat since then. In my opinion, the big picture still holds true, meaning that asset returns in the USA have converged in a historical review. But I’ll get back to this once I move from this hammock back to my laptop
I had enough time to check. According to Bloomberg, the current S&P500 P/E is 24.7x and the 12-month forward-looking P/E is 23.8x. Using the forward-looking figure, we get an earnings yield of 4.2%. Additionally, Damodaran calculates the market risk premium for the United States as 4.33% with his own model, and his figures are also used by professionals. So, we are not terribly far from the economic figures Marianne used. Damodaran’s table is visible here: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html
Edit: However, you are right that earnings (E) can grow strongly, and in that case, the P/E decreases and the expected return increases.
The first half of 2025 has been anything but smooth in the stock markets. The trade war, geopolitical tensions, and interest rates remaining higher than expected have created an exceptionally volatile investment environment.
The US Federal Reserve (Fed) has repeatedly postponed interest rate cuts, which has been reflected in weakness in US small-cap companies and, at times, in other interest-rate-sensitive sectors. However, the S&P 500 reached a new peak at the end of June, driven by large technology stocks (e.g., Nvidia, Microsoft, Meta) – but the rally has once again been narrow-based.
Is there really any other reason for these coveted interest rate cuts than to make the “eternal” rise continue for a while longer in various asset classes? Curbing indebtedness with interest rates sounds like a perfectly valid decision to me, considering that stocks, housing, precious metals, and even cryptocurrencies are hovering at ATH figures. Commercial real estate seems to be one of the few that have corrected. Employment is hot, the tariff mess in the short term certainly doesn’t bring down inflationary pressures… Just grifting, or what am I not getting?
The ECB’s mandate is price stability, with a target of 2% average inflation in the medium term. The US Federal Reserve, on the other hand, has a dual mandate, meaning they are interested in maximizing employment in addition to price stability.
If a central bank believes that public debt is alarmingly high, it has a good reason to try to keep interest rates low – a high interest rate combined with a large debt burden is a dangerous combination.
A lower interest rate level encourages various economic actors to take out loans and invest, thereby stimulating economic growth. If the economy grows and there is an appropriate level of inflation, managing debts is relatively easy – conversely, if growth is lacking and there is deflation instead of inflation (i.e., the general price level falls), managing debts becomes more difficult.
So, if growth is lacking (as is currently the case in the Eurozone), a lower interest rate level should help generate it.
Additionally, it’s worth remembering that one person’s debt is always another’s asset, and the interest paid by one is income for another.
Things are indeed complex, and not all cause-and-effect relationships can fit into one post.
Below is a link to Sijoittaja.fi’s Europe review, which can be read in a few minutes.
EDIT: Jukka7, yeah, it probably wasn’t meant to be a big drama, but an interesting point.
In addition to trade policy uncertainties, a weakening dollar poses challenges to earnings development. The value of the US dollar has fallen sharply against the euro during the current year. The euro’s exchange rate has risen by about 13% against the dollar this year. Some market analysts believe that the euro could strengthen further and even reach the 1.20 dollar level in the coming months, instead of the current approximately 1.17 dollars.
…I’ve long wondered why this isn’t discussed more. Have return expectations and the rising stock market climax blinded many investors??? A state economy living on steroids will sooner or later have a heart attack.
