June 2025 Index Market Overview: Global Equities Rally, But Headwinds Remain

Equity markets have continued their upward trajectory over the past month, with major indices nearing or reaching all-time highs. However, this bullish sentiment is tempered by concerns about stretched valuations and a range of economic and geopolitical uncertainties.

Key Highlights:

• A collapse in bearish sentiment, a fall in theS&P500 VIX index, and a fall in the put-call ratio to levels last seen in January-February is consistent with renewed investor exuberance in the US, but economic and political uncertainty persists
• A softening services sector, tighter credit availability and weaker CEO confidence points to slower US EPS growth amid a reversion to stretched valuations
• The US Federal Reserve looks set to remain on hold for now
• The outlook for FTSE100 earnings appears clouded given trade risks
• The performance of the DAX40 is becoming increasingly tied to SAP SE and the Siemens Group

US Markets Approaching All-Time Highs Amid Rebound

In the United States, both the Nasdaq100 and S&P500 have demonstrated significant strength, rising by +4.8% month-over-month (MoM) and +3.0% MoM, respectively. These indices are now close to their historical peaks, being just -1.4% and -2% away, respectively. The S&P500 has seen a notable 24.6% rebound since its early May trough, driving the VIX index below 20% and leading to a sharp decline in bearish sentiment and the equity put-call ratio. This rebound has been associated with a rise in earnings multiples, even as economic policy uncertainty remains extreme, reflected in increased household precautionary savings, slower business investment, and employment growth.

Despite solid earnings reports, tightening credit conditions, weaker CEO confidence, and a negative skew to the earnings upgrade/downgrade ratio all point to increasingly stretched valuations and potential headwinds for future performance. The S&P500's 12-month forward PE ratio is currently estimated at 21.7x, well above its post-millennium average of 16.7x. The Nasdaq100, while performing well (+4.8% MoM), is increasingly dominated by large-capitalization IT firms, with the top ten companies comprising 50.1% of the total basket. This concentration creates a rising wall of worry, making earnings growth expectations highly dependent on a few companies and vulnerable to disruption.

The US Federal Reserve is set to hold its Open Market Committee meeting on June 18th. The probability of an imminent rate cut has faded to near-zero, with futures pricing only around a 20% probability of a 25bp rate cut by the 30th of July FOMC meeting with the first full cut not priced until October. The Fed is likely to pivot slightly more hawkishly, reflecting a projected deviation of core inflation above target that is larger than the rise in unemployment from full employment. While near-term monetary policy is a headwind, longer-term projections suggest scope for the federal funds rate to fall by year-end 2027 if the economy continues to slow and tariff-induced inflation proves transient.

European Bourses Hit Record Highs, Driven by Specific Sectors

European markets have also experienced a strong month. The FTSE100 index has reached an all-time high, while the DAX40 index has made a series of all-time highs over the past month.

In the UK, the FTSE100 index has been buoyed by the strength of High Street banks and defense equipment makers, despite a decline in overall earnings, leading to rising valuation multiples. The market capitalization of the FTSE100 index is up by £161.7 billion year-to-date, with the five High Street banks accounting for £50.1 billion of this gain and three defense contractors for £53 billion. The FTSE100's 12-month forward PE ratio has climbed to 12.6x, close to its post-millennium average of 13.3x, suggesting ample room for multiple expansion before valuation becomes a concern. While domestic monetary easing by the Bank of England is supportive, the FTSE100 remains vulnerable to global trade dynamics.

In Germany, the DAX40 index remains supported by SAP SE and the Siemens Group, which appear to be increasingly driving overall index performance and valuation metrics. The DAX40 rose 3.4% last month. Over the past year, SAP SE's market capitalization has grown significantly, now representing 16.2% of the DAX40 index, exceeding its 15% company ceiling. This has led to the launch of new uncapped and 20%-capped DAX indexes. While economic sentiment in Germany remains subdued, with a net 82% of respondents describing current conditions as "bad," the European Central Bank (ECB) cut its Deposit Facility Rate by 25 basis points to 2.0%, citing "weaker prospects for the remainder of the year." This rate cut, coupled with lower inflation forecasts, suggests a cautious but potentially supportive monetary environment for German equities, although concerns about a possible EU-US trade war persist.