Solid fundamentals against elevated market expectations
5 mins to read this article
Daniele Antonucci
Daniele Antonucci is a managing director, co-head of investment and chief investment officer at Quintet Private Bank. Based in Luxembourg, he jointly chairs the investment committee, owning decision-making and performance outcomes. Daniele oversees the investment research and strategy feeding into portfolios and the teams of specialists across macro, fixed income, equities, private markets, fund solutions and structured products. He leads the network of chief strategists, formulating and communicating the house view on the economy, markets and investing to financial advisors, clients and the media.
Prior to joining Quintet in 2020 as chief economist and macro strategist, Daniele served as chief euro area economist at Morgan Stanley in London. He completed the High Performance Leadership Programme at Saïd Business School, University of Oxford, holds a master’s degree in economics from Duke University and graduated from the Sapienza University of Rome. A lecturer at the Luxembourg School of Business, Daniele is a published author in economics journals, a frequent contributor to investment media, a speaker on CNBC and Bloomberg TV, and an ECB Shadow Council member.
What matters to you in 30 seconds:
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US inflation eased in June, but underlying price pressures remain. We continue to expect interest rates to stay higher for longer as economic growth and labour markets remain resilient.
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Strong technology earnings failed to lift share prices, as investors questioned AI investment returns and rotated into other sectors after a prolonged tech rally.
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China’s growth slowed, but supportive policies and export strength remain positive for emerging markets. Recently, we slightly trimmed exposure to emerging market equities to manage rising concentration risks.
US
Is inflation really falling?
The June US inflation print came in lower than expected, including a rare dip in core inflation, which strips out volatile components such as energy and food prices. While this supported both equities and bonds on the day, market performance was more mixed over the week.
Here’s why:
First, we don’t think the June inflation print changes the broader outlook. The decline was driven largely by a sharp fall in energy prices and several technical factors within the Bureau of Labor Statistics (BLS) methodology. Renewed tensions in the Middle East may continue to put upward pressure on energy prices, which are climbing just above USD90/bbl at the time of writing. At the same time, seasonal adjustments by the BLS were unusually large, reducing inflation to a greater extent relative to past periods.
Second, the US economy continues to perform well, supported by AI investment, albeit with pockets of weakness. Labour market strength is supporting wage growth, while structural AI demand is putting upward pressure on software and related prices. More discretionary spending sectors remain under pressure from elevated borrowing costs.
Third, taking these factors together, we think the Fed will raise interest rates this year by 25 basis points. The latest inflation data doesn’t mark the start of a sustained return to the Federal Reserve’s (Fed’s) 2% target. Fed Chair Warsh struck a cautious tone, noting the Fed has “no tolerance for persistently elevated inflation” and warning against reading too much into a single softer report. As we expect fewer rate increases than the market, we reduced our US Treasuries underweight in June.
Earnings season
Why did solid results disappoint?
Last week, TSMC reported the best quarter in its history, with net profit up 77%, revenue up 36% and gross margins above 67%. It also expects to improve further next quarter. Yet its share price fell. The reason is that TSMC raised its annual capital expenditure, alongside heavy spending by US hyperscalers, prompting questions about returns on investment.
Netflix also posted a 13% increase in revenue, with higher earnings and advertising growth. Yet the stock declined following results as they were widely expected, but also reflecting third quarter guidance that was only good, but not exceptional.
Below the surface, this may rather point to some profit-taking and a degree of sector rotation, after strong performance from tech and semiconductors in 2026. Questions around returns on investment are also emerging. Last week, seven of the S&P 500’s 11 sectors rose, even as the index declined, as it remains heavily influenced by tech.
Within US equities, we have remained exposed to the S&P equal weight index, which places less emphasis on tech. We think AI investments may generate positive spillovers across the economy, with fiscal easing also providing support while the US economy remains on a resilient path.
Emerging markets
Are there new risks?
We do not think so, despite data showing that China’s economy grew less than expected in the second quarter of 2026. Growth was held back by higher energy costs, slower government spending and adverse weather. While domestic conditions in China have weakened, exports and manufacturing remain strong, particularly in cars, semiconductors and green technology.
The consensus is that exports and manufacturing are driving China’s growth, rather than government support. Slower growth could lead to further policy measures to support the economy, including lower borrowing costs, help for the housing market and policies to encourage spending. At the same time, China is still focused on longer-term goals such as improving industrial and technological capabilities and strengthening supply chains.
In short, the factors that supported our decision to overweight emerging market equities more than a year ago remains in place. Since then, emerging markets have risen by almost 50%. Most equity markets have posted double-digit returns over the same period. However, a growing share of the emerging market equity index is now concentrated in just three semiconductor companies, which now account for nearly one-third of the index, making it more sensitive to the AI investment cycle.
This concentration risk, combined with strong performance, is why we reduced our overweight position in emerging market equities in June, locking in some profits. Despite reducing our allocation, we are still overweight emerging market equities, supported by policy tailwinds in China and continued AI-related spending. We also remain overweight emerging market bonds in local currency.
This week
ECB to hold rates
We don’t expect the European Central Bank (ECB) to change policy rates on Thursday. Officials have noted that risks of higher inflation remain following renewed tensions in the Middle East, but none of the members have called for a July hike. Barring a protracted conflict, we do not expect further ECB rate increases in 2026.
Earlier in the week, UK inflation may have eased in June, but this is unlikely to change our view that the Bank of England will raise the Bank Rate to 4% by year-end. If momentum remains weak, focus will turn to flash purchasing managers’ indices on Friday. Andy Burnham, the new Labour Party leader and frontrunner for prime minister, could adopt looser fiscal measures to support the economy.