- Europe’s market divergence
- Bond yields rise
- AI and productivity
By Daniel Morris, Chief Market Strategist; Alessandro Tentori, Chief Investment Officer, Europe; Nathalie Benatia, Senior Market Strategist
Selectivity in European equities
Received wisdom has it that the energy shock triggered by the Iran war is worse for Europe than for the US, as the former is an energy importer while the latter an exporter. This is true from a GDP point of view, but it matters little to a company or an individual if the energy that now costs them more was imported or produced domestically.
Nonetheless, Europe does seem to be doing worse economically than the US. European Purchasing Managers’ Indices show a deterioration in both the services and manufacturing sectors while activity has increased in the US. Equity markets seem to tell a similar story. The MSCI Europe index was in negative territory at the end of May relative to its level before the war started, while the S&P 500 was up 10%. This gap, however, was driven largely by strong returns for technology stocks. Excluding tech, Europe still lags, though by less. Looking only at companies that are expected to benefit from the European Union’s ‘strategic autonomy’ initiative1, the gap largely disappears. Selectivity will be key to potential success in investing in European equities this year.
Long-term interest rates redux
Long-dated government bonds yields have increased substantially since the global pandemic. For example, 30-year US Treasury yields are up by about 300 basis points since the end of 2021. Both Japanese and German government bonds display a similar increase, while UK gilts stand out with over 400bp. In a 2013 speech, former Federal Reserve Chair Ben Bernanke outlined the factors he saw influencing long-term interest rates. Compared to that period, long-term growth, inflation and real yield expectations have all risen. Furthermore, we have witnessed a reflation of the term premium, which seems to be supported by higher bond volatility and a positive stock/bond correlation.
In addition to cyclical factors, the equilibrium between bond demand and supply has been challenged as central banks scale back asset purchase programmes and as price-sensitive investors need to find extra balance sheet space for growing issuance. International Monetary Fund data shows advanced economies’ public deficits will average 4.6% over the next five years, driving the debt-to-GDP ratio from 108% at the end of 2025 to around 115%. Fixed income is going through a period of transition and so is the relative value between government and corporate bonds in strategic asset allocation.
The AI productivity debate
The Federal Reserve Bank of San Francisco’s (FRBSF) latest Economic Letter addresses a recurring question: Is the US economy entering a high‑productivity‑growth era driven by artificial intelligence investment? The answer is not straightforward, partly because measuring productivity is intrinsically difficult. Labour productivity (output per hour worked) has risen sharply in recent years. Total factor productivity (TFP) reflects efficiency gains in the overall economy and not only the fact that a new technology can raise labour productivity. FRBSF’s latest estimates show that TFP growth has lagged far behind labour productivity growth, implying that recent AI gains stem more from intensified use of existing tools rather than from a fundamental improvement in overall efficiency.
Productivity matters not only for academic debate but also for economic policy. New Fed Chair Kevin Warsh has said AI will deliver large productivity gains and considers the technology to be “structurally disinflationary”. The underlying narrative is that a higher potential output would allow the economy to grow faster without breaching the inflation target. Nonetheless, the FRBSF concludes it is premature to declare a sustained high‑growth productivity regime. Comparisons with the early‑1990s tech boom offer hope but no certainty yet.
Asset Class Summary Views
Opinions draw on investment team views and are not intended as asset allocation advice.
| Rates | ||
| US Treasuries | \ | Lower rates expectations bolstered by Kevin Warsh’s Fed appointment, but risk of higher long-term rates given fiscal outlook |
| Euro – Core Govt. | \ | Yields have stabilised at a higher level with the ECB pricing two rate hikes this year |
| Euro – Govt Spreads | \ | Limited fiscal response to Iran crisis so far with Italy and Spain in better financial position than in 2022 |
| UK Gilts | + | Continued underperformance on overdone inflation and fiscal concerns. Political risk may keep long-term gilt yields elevated but market rate expectations look too aggressive |
| JGBs | \ | Bank of Japan cautious on rates hikes in crisis environment |
| Inflation | + | Inflation carry will be elevated through the summer; short-duration strategies potentially effective |
| Credit | ||
| USD Investment Grade | \ | Spreads wider than pre-Iran crisis but subject to rates and growth risks. Short duration preferred |
| Euro Investment Grade | \ | Yield buyers support positive technical backdrop but relative value worsening again as spreads tighten |
| GBP Investment Grade | + | Attractive yields for long-term sterling investors but gilts an ongoing source of volatility |
| USD High Yield | + | Income attractive with market shaking off earlier concerns about software exposure |
| Euro High Yield | + | Yields close to 6% provide attractive relative value opportunities versus investment grade |
| EM Hard Currency | \ | Solid performance since March with attractive yields but macro risks remain |
| EM Local Currency | + | Scope for local rate cuts once energy outlook becomes clearer |
| Equities | ||
| US | + | AI-related momentum in US equities remains elevated and increasingly extended, although the underlying fundamental backdrop continues to justify the structural investment case |
| Eurozone | + | High oil and gas prices remain a headwind to growth. We like banks, electrification and defence themes |
| UK | \ | Higher interest rates remain a drag on growth momentum. Defensive sectors are likely to fare better |
| Japan | \ | Fiscal expansion should support domestic demand sectors. Banks remain attractive as the Bank of Japan appears closer to another rate hike |
| China | \ | Technology stocks are supported by US-China decoupling. Potential for targeted stimulus, particularly in strategic industries |
| Global Emerging Markets | + | Earnings momentum in technology and materials, but tensions in the Gulf region are weighing on energy-importing Asian economies, calling for a selective approach |
| Investment Themes* | + | Long-term positive on AI hardware, grid electrification and carbon transition strategies |
* BNP Paribas Asset Management has identified several themes, supported by megatrends, that companies are tapping into which we believe are best placed to navigate the evolving global economy: Automation & Digitalisation, Consumer Trends & Longevity, the Energy Transition as well as Biodiversity & Natural Capital; source: BNP Paribas Asset Management.
Source for all data: FactSet, Bloomberg, BNP Paribas Asset Management as of 29 May 2026, unless otherwise specified. Past performance should not be seen as a guide to future returns.
[1] EU strategic autonomy 2013-2023: From concept to capacity | Think Tank | European Parliament