Tighter European Financial Conditions Tactically Favors US Equities

Dollar softness has had little growth impact, and European equities should keep lagging. A key 2025 trend has been USD depreciation, but the associated easing in financial conditions has offered minimal support to US growth, reflecting higher term premia rather than a genuine liquidity boost.

Yields remain sticky relative to fundamentals, and dollar weakness reflects diversification out of US assets rather than a stimulus-driven liquidity impulse. US economic surprises have recovered, yet the tailwinds from easier conditions are unlikely to be meaningful, although they are at least not a headwind. In Europe, by contrast, EUR strength and higher Bund yields have tightened financial conditions, compounding headwinds from weak global growth.

These factors have already weighed on relative equity performance versus the US and should continue to do so in the near term. Our negative convexity base case for the US still points to an AI-driven rally absent clear recession signals. With the DXY having tactically bottomed, the path of least resistance is further European underperformance, which strategic investors can use as a buying opportunity.