Davy to focus more investment on European markets amid volatility in US

High valuations in US markets leave it 'more vulnerable' to correction, the Irish wealth management firm said

Davy noted that in the first half of the year, the European Stoxx 600 index beat the S&P 500 by the biggest margin this century.

Despite the fallout from US president Donald Trump’s trade war being “much milder” than expected, Irish wealth management firm Davy still plans to “bias away” from US markets as high valuations make it “more vulnerable to correction if the economic picture changes”.

In the firm’s latest Wealth View report for the third quarter of the year, it noted that US equity markets have rebounded from the turbulence caused by Mr Trump’s tariff announcement on April 2 and that Europe has shown strength with markets across the bloc ahead of where they were last year.

It attributed the rebound in the US markets to investor confidence that the administration would retreat from policies that disrupt the market, and by optimism surrounding the stimulative effects of the One Big Beautiful Bill Act passed recently by the US Congress.

The report said that the economic fallout from the trade war has been “much milder” than expected “as tariffs have been paused or have yet to make an impact”.

“Unfortunately, the better-than-expected news is mostly factored into equity valuations already, which have recovered rapidly to multi-year highs, led by the US and the tech sector,” the report said.

We note that high valuations are not enough to move markets on their own, but they do make a market more vulnerable to correction if the economic picture changes. 

"For this reason, we maintain our bias away from the US and towards Europe and emerging markets.” 

Davy said that the eurozone and China are currently doing better than forecasted but the UK remains in a tight spot.

The rising value of the euro against the dollar has also been a significant development for investors this year, according to Davy. However, it cautioned that too strong a euro could cause issues for the European Central Bank (ECB).  

“A weaker dollar will push up prices in the US just when tariffs may be doing the same. Also, foreign central banks may push back if the exchange rate interferes with their mandates. For example, the ECB has identified €1.20 as a threshold for concern for the euro-dollar exchange rate,” the report said.

The report said that while the S&P 500 hit new highs in June, it has delivered negative returns, after accounting for the depreciation of the dollar. In the first half of the year, the European Stoxx 600 index beat the S&P 500 by the biggest margin this century.

Chief investment officer at Davy, Donough Kilmurray, said the last six months show the importance of diversification across investment portfolios.

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“We are investing through a period of unusually high uncertainty, and all sorts of assets have played a role already this year, from less-favoured equities to alternative strategies to gold, both by adding to returns and by cushioning declines,” he said.

“Given the incumbent in the White House, we intend to stay diversified.” 

In a bid to protect against this volatility, Davy has made changes to its Strategic Asset Allocation (SSA) which shifts how it manages long-term portfolios.

These include reducing equity exposure in cautious and moderate portfolios, increasing allocation to bonds to help protect against market volatility and macroeconomic risks, as well as increasing the use of alternative investments, including hedge fund-style strategies and gold.