Monthly house view | June 2025

Context

US fiscal policy has moved centre stage for financial markets as concerns grow about the sustainability of US debt. The One Big Beautiful Bill Act (BBB) – promising sweeping tax cuts, budget cuts and spending increases – has heightened those fiscal concerns, which had already been fuelled when Moody’s stripped the US of its AAA rating last month. The bill has cleared its first legislative hurdle after being passed by the House of Representatives, and is now under review by the Senate. The key question for markets is the degree to which the BBB will affect the US deficit and the overall debt level. Sceptics expect it to cause a surge in the deficit; believers in the bill do not.

Put simply, the bill presents a make or break policy gamble for the US economy. The stimulus that the bill promises could support growth and reinvigorate equities. However, the outcome risks could be very different if investors are alarmed by the impact of the measure on the budget deficit and overall debt level. If they demand a yield approaching 5% to buy 10-year Treasuries, that would risk choking growth and markets. Bond auctions will now be the ultimate test of US fiscal policy. US policymakers have a range of policies at their disposal to try to keep a lid on Treasury yields. These includes a planned reform of the supplementary leverage ratio (SLR), which could unlock up to USD 2 trillion in balance sheet capacity for major US banks. One risk, however, is that foreign buyers – such as those in Japan – shun the US Treasuries market for rising yields in their home bond markets.Another is a provision in the bill that would allow the US to raise taxes on some foreign investors, which risks upending capital markets. Treasury Secretary Scott Bessent insists: “The United States of America is never going to default”.

Tech optionality

Given the uncertainty around US policy and yield levels, we remain cautious on US equities. However, we see merit in retaining optionality on US technology stocks given their earnings resilience and upbeat outlooks. US technology earnings are beneficiaries of USD weakness and the least sensitive to higher interest rates.In the euro area, slowing inflation has given the European Central Bank (ECB) scope to cut interest rates. This increases the appeal of Euro Investment Grade bonds. We also believe that lower interest rates are likely to support European private equity real estate. We favour European equities over US equities.

Investment implications

In turbulent times, it pays to assess the big picture and maintain composure. Our core positioning is crucial to portfolio resilience and is designed to make the most of the opportunities we expect our base case scenario to present. Our convictions regarding specific markets and segments should enable investors to generate additional value. Moreover, retaining some flexibility gives investors scope to respond to surprises.

3 things you need to know

1. It’s the fiscal, stupid

• The US House of Representatives has passed the One Big Beautiful Bill Act (BBB), which promises sweeping tax cuts, some budget cuts and spending increases.
• The bill has fuelled investor concerns about the sustainability of US debt.
• The Senate is reviewing the bill. A handful of Republican Senators want changes.
• The debate over the bill, and the US fiscal position, comes after Moody’s stripped the US of its AAA rating last month.

2. Make or break

• The BBB is a make or break policy gamble for the US economy.
• The stimulus that the bill promises could support growth and reinvigorate equities.
• However, its impact on the budget deficit and overall debt level will be crucial.
• If investors demand a yield approaching 5% to buy US 10-year Treasuries, that would risk choking growth and markets.

3. US tech optionality

• The uncertainty around US policy and yield levels keeps us cautious on US equities.
• However, we see merit in retaining optionality on US technology stocks given their earnings resilience and upbeat outlooks.
• US technology earnings are beneficiaries of USD weakness and the least sensitive to higher interest rates.