Strategy Update: June 2025
Equity indices as a reflection of structural change
REVIEW
THE FINANCIAL MARKETS IN MAY
Back and forth – this probably best de-scribes the events surrounding US Pres-ident Donald Trump‘s ‘tariff policy’. At the beginning of the month, the US and China agreed to reduce the previously set trade tariffs for the next 90 days. Chinese goods exported to the US will now be subject to 30% tariffs (previously 145%), and American goods imported into China will be subject to 10% tariffs (previously 125%). Just how chaotic the whole situation is was demonstrated recently by Trump‘s announcement that goods from the EU would be subject to a 50% tariff from 1 June, only to make a U-turn two days later after a phone call with EU Commission President Ursula von der Leyen. A 10% tariff on goods from the EU remains in place and the negotiation period has been extended until 9 July.
Since ‘Liberation Day’ and the escalation of the tariff dispute, the Trump admin-istration has been anything but suc-cessful. So far, only an unspectacular deal with the United Kingdom has been reached. All other actions are and were damage control. The suspension of tariffs for a certain period of time is not a ‘deal’ as the media has called it, but merely a pause. The damage has al-ready been done: loss of confidence, a volatile US dollar, broken supply chains and planning uncertainty. Repairing this damage with a pause is not enough. Retailers have already implemented price increases, investors have reallo-cated capital, and companies are real-locating their supply chains. The pause merely gives the economy time to adapt, or at least to try to do so. Compa-nies have 90 days to shift their supply chains and evaluate new production sites.
There is disagreement on the financial markets about how all this back and forth will affect the global economy. According to the stock markets, every-thing will be ‘not so bad’. Most stock markets have risen significantly since the end of April, with American tech giants leading the way. New an-nouncements from Donald Trump are causing less and less turmoil in the markets. On Wall Street, an attitude known as TACO has long since taken hold. This acronym stands for ‘Trump always chickens out.’ The bond markets have come to a different conclusion. They see the high level of US govern-ment debt and the inflation triggered by tariffs as a problem – as does the rating agency Moody‘s, which stripped the US of its last remaining AAA rating. As a result, US government bonds have lost value and interest rates in America have risen significantly across the entire yield curve. Investors are now demanding higher interest rates from the US gov-ernment to lend it money than they do from Microsoft. US interest rates with a 3-year maturity are currently at 3.94% – Microsoft only has to pay lenders 2.3% interest over a similar term.
The US Federal Reserve has once again left key interest rates unchanged. Je-rome Powell warned of rising economic risks triggered by tariff policy and pre-pared investors for a phase in which the central bank intends to wait as long as possible before making further interest rate decisions. The Fed is in a real di-lemma due to its dual mandate (control of the labour market and inflation). Ac-cording to Powell, both the risks of rising inflation and the risks to the labour mar-ket have increased.
OUTLOOK
ADVANTAGE FOR EUROPE AND SWITZERLAND?
Following the Trump administration‘s ‘deal’ with the United Kingdom, it is clear that tariffs will be set at 10% in the best-case scenario. The Yale Budget Lab expects the final effective US tariff rate to be 18%. As is often the case, the truth probably lies somewhere in between. This means that the globalisation of the last 75 years will be reversed in one fell swoop and that, in the best-case scenario (10% tariff), the US tariff rate will be comparable to that of the 1940s. This will lead to a significant increase in inflationary pressure, especially in the US. Growth rates will also suffer in this environment driven by trade barriers. The International Monetary Fund recently revised its growth rates downwards. According to its forecast, the US, the global growth engine, will only see real growth of 1.8% in 2025 – in January, the forecast was still 2.7%. This adjustment represents the highest growth downgrade outside of crises. This makes stagflation in the US seem almost inevitable. Corrections to the expected growth rates in Europe and Switzerland were less dramatic, albeit at lower levels. As already explained in the review, the dual mandate of the US Federal Reserve is increasingly posing problems for monetary policymakers. If they respond to the threat of inflationary pressure with interest rate hikes, this could threaten the stability of the labour market. If, on the other hand, they stimulate economic growth with interest rate cuts and thus strengthen the labour market, there is a risk of even more inflationary pressure. Meanwhile, the market is currently pricing in two interest rate cuts by the end of the year. In Switzerland, on the other hand, key interest rates are expected to return to negative territory by the end of the year. This is not a projection by economists, but is priced into forward contracts (swaps). Refinancing in the US is becoming increasingly challenging.
Last month, around USD 450 billion in government bonds had to be refinanced. Interest in purchasing these government bonds was low, to say the least. As a result, the central bank had to purchase around 14.4% of the volume itself, partly to prevent interest rates and refinancing costs from rising too sharply. By way of comparison, USD 395 billion was refinanced in the same period last year, with the central bank‘s share amounting to just 3.8%. The role of the US dollar as a global reserve currency is crumbling. However, it is still too early to see a clear structural break. Technical factors such as the Fed‘s reinvestment rate or atypically high emissions due to a higher budget deficit cannot yet be ruled out as the main drivers. In summary, we see the US economy facing a stagflation scenario, with limited consumption due to rising prices and debt, an unpredictable interest rate policy by the Fed and persistent inflation. We believe that Europe and Switzerland are structurally better positioned for the coming quarters. A more sustainable debt policy, coupled with government investment, could help Europe and Switzerland.
In times of unpredictable interest rate policy, we are focusing on short-term bonds to minimise interest rate risk. Due to low risk premiums, we are selecting credit risks very carefully. We expect a slight increase in default rates for corporate bonds. European equities can expect more tailwinds structurally. Corporate earnings growth is coming under increasing pressure. Sectors and companies with high pricing power remain attractive as they can pass on rising costs to customers. Commodities offer good protection in an inflationary environment and contribute to portfolio diversification. Foreign currency risks should be hedged selectively, taking costs into account.
FOCUS
EQUITY INDICES AS A REFLECTION OF STRUCTURAL CHANGE
STOCK INDICES AS CONTEMPORARY WITNESSES
They tell the story of the economy – from industrialisation and globalisation to the digital revolution. The idea of making the stock market tangible through indices is an old one: the Dow Jones Industrial Average was launched in 1896, the Japanese Nikkei dates back to 1950, and the S&P 500 was launched in 1957. In Europe, the DAX and SMI followed in 1988, and the Euro Stoxx 50 was added with the introduction of the euro in 1998. Originally, indices were primarily barometers and benchmarks for markets. Today, they are much more than that: they control billions in capital in funds and ETFs. Passive investing means following the index – and thus also its composition. This makes it all the more exciting to take a closer look: who actually dominates an index? And how much does that change over the years?
INDICES IN TRANSITION
Some indices are here to stay. The S&P 500, Dow Jones Industrial Average and Nikkei have been established for decades and are now indispensable as important benchmarks for investors worldwide. They have become firmly established and are an integral part of the financial market. The same applies to the somewhat younger SMI, DAX and Euro Stoxx 50. They have long been recognised benchmarks that guide funds, ETFs and investment strategies. Over time – particularly as a result of globalisation – many useful additions have been made. One example is the MSCI Emerging Markets, which continues to provide insight into emerging markets.
Some indices, on the other hand, have disappeared again. One example is the NEMAX 50, an index for growth and technology stocks from German-speaking countries. It was introduced during the dot-com boom in 1997 – and disappeared without a trace after the bubble burst in the early 2000s. And for nostalgics, here‘s a little look back: when the SMI was launched in 1988, the largest stocks included Nestlé as well as names such as Ciba-Geigy, Schweizerische Bankgesellschaft, Schweizerischer Bankverein and Schweizerische Kreditanstalt – companies that continue to exist today as Novartis, UBS and part of UBS, respectively. But what is really fascinating is that even if an index remains, its members and weightings often do not.
SURVIVAL OF THE FITTEST
An index does not just reflect a market – it tells the story of economic change. Companies come and go, industries rise and fall, entire sectors rise to prominence and then disappear into insignificance.
In 1990, the S&P 500 was dominated by industrial conglomerates, consumer goods and oil giants such as IBM, Exxon and General Electric. The technology sector – hardly worth mentioning at the time – now accounts for around 30% of the index. The index is led by Apple, Microsoft, Nvidia, Amazon, Meta and Alphabet – some of which have a weighting of more than 6%. The former top dogs? Left behind or no longer represented in the index at all.
This dynamic is also evident in Europe: the DAX started in 1988 with industrial stocks, banks and insurance companies. SAP, now the most valuable DAX member with around 15%, was not included at the time. Many telecoms and technology stocks that rose in the late 1990s disappeared again after the dot-com bubble burst. In the Euro Stoxx 50, SAP and ASML are also two tech companies at the top – but overall, the sector distribution here is more broadly diversified.
Switzerland presents a different picture: the SMI has been dominated for decades by heavyweights Nestlé, Roche and Novartis. But here, too, it is worth taking a look back: many big names from 1988 are now history – or continue to operate under different names. It is striking that rotation – i.e. the change in the largest stocks – is much more pronounced in the US than in Europe or Switzerland. This also reflects economic dynamics. It is not size that is decisive, but adaptability. Those who master structural change stay ahead. Those who miss it disappear. True to the principle of ‘survival of the fittest’ – change is the only constant.
SECTOR AND COUNTRY WEIGHTS
This change is evident not only at the individual company level, but also at the sector and country level. In 1990, energy stocks still accounted for a significant share of the S&P 500, while technology was a minor player. Today, the technology sector dominates, with energy falling far behind.
Globally, too, the balance has shifted dramatically: in the MSCI World Index, Japan was the heavyweight at the end of the 1980s, accounting for around 40–45% – a reflection of the stock market bubble at the time. Today, Japan‘s share is only 5%. The US, on the other hand, has expanded its dominance from around onethird to over 70%. Europe, which also had a high weighting at the turn of the millennium, now plays a minor role with around 13%. These shifts make it clear that index weightings are not a law of nature. They follow the markets – and thus economic change.
TOP 10: OPPORTUNITY OR RISK
Is it wise to simply invest in the largest index members? A look at the past shows that this strategy can be successful – but not necessarily. There have been repeated phases in which the top 10 companies in an index have lagged behind the broader market. This was particularly striking in the 2000s: the ten largest S&P 500 companies at the turn of the millennium – including GE, Cisco, Intel, Exxon, Pfizer and Citigroup – performed significantly worse than the index itself in the following decade. While the S&P 500 stagnated overall during the ‘lost decade’ (2000–2010), many of the top giants at the time even suffered losses.
This does not mean that the top 10 always underperform. In other phases – such as in the 2010s – the largest companies were also able to outperform the overall market. But history shows that focusing on the current stars carries the risk of missing out on the next structural change. The stock market thrives on change. Those who invest broadly are not only betting on today‘s heavyweights, but also on tomorrow‘s rising stars. Diversification and a willingness to take economic changes into account are crucial.
GROWTH OF THE GIANTS
Another sign of structural change can be seen in market capitalisation: some of the world‘s largest companies today are many times larger than the leaders of 20 years ago. Apple, Microsoft and others are now worth several trillion US dollars – a scale that was unheard of back then. This is also made possible by the economies of scale of digital business models. While traditional industrial groups often grow organically and more slowly, tech companies can scale their revenues almost indefinitely – at comparatively low additional cost. This accelerates development – and further drives concentration at the top.
CONCLUSION
Indices are more than just series of numbers – they are chroniclers of structural change. Their composition shows which industries and companies are shaping the transformation of the economy. The rule here is that only a few remain at the top for decades. It is a case of ‘survival of the fittest’, not consistency at any price. That is precisely why it is worth investing broadly – across regions, sectors and company sizes. This automatically allows you to participate in the success of tomorrow‘s winners. Diversification therefore remains the best way to participate in the long-term transformation of the economy and its beneficiaries. In short: indices are changing, as is the economy – and that is a good thing.