Markets Update July 2025 – Stock market rally continues – US monetary policy becomes a key factor

The positive trends on the global stock markets are continuing. The economic environment is stable and reinforces investors' risk appetite: the US economy is growing solidly and shows no signs of overheating, while the rise in inflation due to tariffs has so far been significantly lower than initially feared. Positive corporate data is also supporting share price performance. The current reporting season started with mostly solid corporate earnings - and should continue in this vein, not least thanks to the weakness of the US dollar. The global indices are largely dominated by large US companies. These benefit particularly strongly from the weaker greenback, as they make a large proportion of their profits abroad and a weaker US dollar makes their goods and services more competitive in other currency areas. Even US President Donald Trump's recent tariff threats against the European Union have not unsettled the markets. Investors expect an agreement to be reached, as both sides ultimately have a strong interest in an amicable solution.

On the negative side, it is noticeable that stock market valuations - particularly for large caps - are now close to new highs. This limits the scope for further price increases. However, it does not necessarily mean that a correction is imminent. From an empirical point of view, high valuations do indeed increase the drop and market participants react more sensitively if the fundamental data deteriorates. However, they alone are not a reliable indicator of an imminent market correction. In fact, high valuations can last much longer than many people think - especially if the overarching investment environment remains supportive.

US monetary policy shapes the second half of the year

In addition to trade policy, the US Federal Reserve's monetary policy will have a significant impact on the market environment in the second half of the year. While most major central banks are already in a cycle of interest rate cuts, the Federal Reserve (Fed) has so far been taking a wait-and-see approach - primarily due to tariff-related inflation risks. However, if the inflation rate in the US continues to develop more moderately than expected, the pressure on the monetary authorities to ease their monetary policy and make the first interest rate cuts is likely to increase. This would make global monetary policy even more expansive and create further price potential on the world's stock markets.

In view of the risks, Trump's political pressure on Fed Chairman Jerome Powell is likely to persist - and this would also increase concerns about the independence of the US central bank. In Germany, the experience of hyperinflation in the Weimar Republic, caused by the close intertwining of fiscal and monetary policy, has led to an almost obsessive attitude towards the political independence of the central bank. In contrast, this attitude is much less deeply rooted in US politics and civil society. Investors should therefore not underestimate the risk of the Fed's independence being seriously damaged.

For the US dollar, this means that the overarching downward trend - accompanied by high volatility - is likely to continue. Long-dated US government bonds could also exhibit increased volatility and be repeatedly affected by phases of so-called “buyers' strikes”.