In recent weeks, many capital market participants in Europe felt like sailors who had fully hoisted their sails, only to find that instead of a strong gust, there was merely a faint breeze. The much-anticipated tailwind of an economic recovery in Europe, which investors had been counting on in the early months of the year, failed to materialize. Most recently, the German economy even contracted by 0.3% in the second quarter. With the announcement of the German government’s stimulus package, hopes for a swift economic upswing had risen. However, many of these expectations were dashed by the ongoing tariff disputes with the United States.

Economic Sentiment Stabilizes as Outlook Improves

This broad uncertainty among consumers and businesses led to subdued economic activity. Economic confidence indicators also showed little optimism. Only the inflation rates, which came in within expectations, provided a slight boost to the battered sentiment. Equity markets, however, have not given up hope and continue to hold at high levels despite numerous uncertainties. Meanwhile, the U.S. government has reached agreements on tariff levels with many of its trading partners, including the European Union. Investors, like sailors, may want to take another look at the weather charts – and indeed, there are signs of a change in conditions.

Indicators for economic sentiment, such as the Ifo Business Climate Index, still point to a rather cautious outlook regarding the current situation. In August, the ifo Index reached 89 points – barely higher than the 88.6 points of the same month last year. While assessments of the present remain largely unchanged, expectations paint a different picture: since the beginning of 2025, the index has been rising month after month, with forecasts for future economic development now significantly above those for the current situation.

From Tightening to Easing: Interest Rates as a Catalyst

The reporting season on both sides of the Atlantic can also be described as largely satisfactory. The majority of companies exceeded expectations in terms of revenue and profit growth.

One key reason for greater optimism on the horizon is a factor that has recently been more of a headwind: interest rate developments.

After recovering from the interest rate shock caused by inflationary pressures in the post-pandemic period, central banks now feel more confident in supporting the economy through rate cuts. For example, the ECB lowered its main refinancing rate from a peak of 4.5% in November 2023 to 2.15% most recently.

Global Markets Gain Tailwinds from Policy Shifts

Following Europe’s lead, the U.S. Federal Reserve cautiously joined in last fall. With inflation continuing to ease, however, additional room for manoeuvre is emerging. At Jackson Hole, the annual gathering of leading central bankers, strong signals in this direction were sent, supported by consistent commentary from the U.S. government. Further tendencies toward rate cuts, coupled with improved economic signals, provide additional upside potential for global equity markets.

So, the message is clear: set sail!