DWS released its December 2025 market outlook, with Global Chief Investment Officer Vincenzo Vedda noting that while current tech stock valuations have reached extreme highs—akin to the "irrational exuberance" described by former Fed Chair Alan Greenspan in 1996—today's AI-driven surge represents a "rational exuberance." However, Vedda cautioned that post-initial AI hype, markets will scrutinize whether massive AI capital expenditures truly enhance corporate efficiency, necessitating more selective stock-picking.
Vedda emphasized that not all AI firms will emerge as winners. Unlike past bull markets ending in recessions, the current low recession risk—bolstered by steady earnings growth and anticipated rate cuts—supports his optimistic 2026 outlook. Still, he warned of potential corrections, citing stretched U.S. tech valuations and possible overcapacity in sectors like data centers. Elevated corporate debt from aggressive investments also poses risks, prompting Vedda to advocate diversified exposure across regions, sectors, and currencies.
For equities, European small- and mid-caps may benefit from expansionary fiscal policies in Germany and the EU. Despite favoring Europe, Vedda maintains a pro-U.S. stance. U.S. inflation is projected at 2.9% in 2026 (vs. 2.8% in 2025), while Eurozone inflation may ease to 2.0% (from 2.1%). The Fed, balancing employment and price stability, is expected to cut rates three times by 0.25% each, lowering the target range to 3.0–3.25%, whereas the ECB likely holds rates steady.
Geopolitical risks from the ongoing Russia-Ukraine war persist, with escalation threats if negotiations fail. While AI dominates markets, selective investor scrutiny could pressure underperforming stocks.
DWS forecasts: - **S&P 500**: 7,500 by December 2026, supported by AI investments, 10.9% earnings growth, and Fed easing. - **Stoxx Europe 600**: 600 (8% total return), with 7.0% earnings growth lagging U.S. peers. - **MSCI Emerging Markets**: 1,480 (9.5% return), leveraging 13% earnings growth despite higher risk. - **U.S. 10-Year Yield**: 4.15% by end-2026; EUR/USD stable at 1.15. - **Gold**: $4,500/oz, offering diversification but slower gains versus recent years.
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