Recent economic data, particularly from the United States, continue to suggest a resilient macroeconomic backdrop. Corporate earnings remain robust, investment activity is substantial and markets still appear supported by expectations linked to artificial intelligence. Yet, beneath this constructive surface, the risk of a more fragile financial equilibrium is increasing.
A key element of the current cycle is the central role played by credit. Growth in the US economy, and to a lesser extent in Europe, has been materially supported by borrowing. Governments continue to run sizeable deficits, while companies are investing heavily, particularly in AI-related infrastructure and technologies. At the same time, investors have increasingly used credit to participate in equity markets. This has created a self-reinforcing dynamic: stronger growth supports asset prices, higher asset prices improve collateral values, and stronger collateral allows for further lending.
This mechanism is powerful in favourable market conditions, but it can become highly destabilising when the cycle turns. The assets that have appreciated significantly, especially equities, are increasingly used as collateral for loans across the economy. As long as prices rise, balance sheets appear stronger and credit remains available. However, if equity prices begin to fall and credit spreads widen, collateral values decline, lending conditions tighten and forced selling may accelerate the downturn. In such an environment, financial market weakness could rapidly transmit to the real economy.
The artificial intelligence investment boom is another important factor. Many companies are committing significant capital to AI not only because expected returns are clear, but also because they fear becoming less relevant if they do not invest. This creates a distinction between strategic necessity and economic return. If competition, including from international players, reduces profitability, investors may reassess the valuations attached to AI-related companies. Should this happen, financing for further investment could become more difficult, weakening one of the key supports for current economic momentum.
At the same time, inflation risks are again becoming more relevant. Higher energy prices, import tariffs, supply-chain reconfiguration and tight labour markets are all contributing to a less benign inflation outlook. In this context, central banks may have limited room to maintain an accommodative policy stance. Our central scenario anticipates that Federal Reserve may need to maintain a restrictive policy stance and could raise rates further. Similarly, the ECB may also need to tighten monetary policy beyond current market expectation. This would mark a more restrictive monetary policy environment than markets had previously expected.
The implications for financial markets are significant. Higher long-term yields, particularly in the United States, could place pressure on equity valuations and increase the cost of financing. For Europe, higher energy costs may weigh more heavily on growth, although inflationary pressures may still oblige the ECB to act. Currency markets may also reflect this divergence, with the US dollar potentially remaining supported in the near term.
Overall, the current environment does not necessarily imply imminent market correction. However, the asymmetry of risks is becoming more pronounced. When asset prices, credit creation and economic growth depend heavily on one another, the system becomes more sensitive to shocks. For investors, this calls for prudence, selectivity and a renewed focus on balance-sheet quality, liquidity and resilience.
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