Although financial markets may seem overheated, Deutsche Bank warns it would be misleading to say they are “priced for perfection.”
In its latest Mapping Markets report, the bank highlighted an apparent contradiction: “Equities are around all-time highs, and US IG spreads closed on Friday at their tightest since 1998,” reflecting strong investor optimism.
At the same time, analysts noted that “over 100bps of Fed rate cuts are priced for the next 12 months, a scenario that’s more consistent with a slowdown or recession.” This juxtaposition has led some to believe there’s little room left for market gains.
Deutsche Bank, however, sees a different picture: “It’s wrong to suggest markets are priced for perfection. For instance, the recent US jobs report showed there’s still concern about an H2 slowdown, with payrolls barely positive in May and June. So if growth picks up, just like we saw after summer 2024, then a relief rally is very plausible.”
The bank also emphasized inflation trends as another potential market driver: “Markets are still pricing in a decent amount of inflation risk given the tariffs. So again, if that surprised on the downside like in late-2023, that would be another positive catalyst across multiple asset classes.”
Overall, Deutsche Bank concluded that “the current outlook is more balanced than many give it credit, and the risks aren’t just skewed to the downside.” While persistent inflation remains the main short-term challenge, the analysts added that if fewer rate cuts reflect stronger growth rather than higher inflation, “we know from recent history that risk assets can keep doing well in that setup.”
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