CONTRIBUTORS
Michael Browne
Senior Investment Strategist,
Franklin Templeton Institute
Macro
European Central Bank (ECB) policymakers could pat themselves on the back as the latest European Purchasing Managers’ Index (PMI) data suggested a gentle recovery is gathering pace.1 Spain and Italy are leading the way, with France consistently lagging. German data is an interesting mix of optimism over the outlook and caution about today.
In the United Kingdom, the Monetary Policy Committee seemed to spend more time arguing about the long-term neutral rate and less about current policy, so rates remained unchanged. Tuesday, the Chancellor of the Exchequer, holding an unprecedented press conference, signalled she will be raising income tax rates. But two days later, the key plank of her growth policy—building homes—received a stark warning via the PMI data: the steepest decline since the COVID-19 pandemic, alongside the ‘longest period of continuous decline since the global financial crisis.’2
Bonds
With the better PMI data and the ECB’s self-congratulatory slap on the back, it’s no wonder the bond market took a step back. The lack of reliable US data is not helping either, as US bonds cruise in the dark. There are some fears that the German fiscal boost may well evolve more slowly than expected, with the short-term success of social measures outweighing the lack of activity in physical measures, namely the rebuilding of Germany’s creaking infrastructure.
We mentioned last week the significant economic threat to Europe from the cessation of automobile semiconductor chip exports from China due to the row over Nexperia in the Netherlands. This action had threatened to shut down production at VW, BMW and others at the start of December. It seems as if the Dutch government is looking to roll back its enforced control order and retrieve the situation.
Equities
Amid worries in the United States over the artificial intelligence (AI) economy being in a bubble (a K-cycle to go K-‘Pop’?) it’s worth reviewing the European quarterly reporting season so far. It’s a near repeat of last quarter, where we have solid earnings-per-share performance, with companies beating estimates by around 5%, except this quarter results are backed up by companies beating sales estimates as well.3 But as in the second quarter, analysts are not raising estimates for this year but are raising them for the second half of 2026. It’s not so much ‘jam tomorrow,’ but rather, how far can we push out upgrading earnings in case we are wrong? Sooner or later, this reluctance will catch up with equity analysts. Companies that issue warnings are falling more than those that beat expectations rise, but that’s hardly a surprise in this atmosphere.
Results last week were mixed. Telefonica cut its dividend for the third time in a decade, and the stock still managed to fall 18%. When a stock yields more than 8%, as Telefonica has on a number of occasions since 2015, it is an illusion. The market is predicting a dividend cut, yet still some don’t see it.
Siemens Healthineers gave an insight regarding the US tariff system, with the firm having paid more than US$200 million this year while predicting a cost of US$460 million in 2026. So far, it has taken no action to mitigate this through price or moving production: ‘We will take action only once there is sufficient planning certainty and it makes economic sense,’ said CFO Jorgen Schmitz.4 Is that hesitation or merely sensible caution?
Parting shot
As the US equity market has grown as a percentage of global indexes since 2008, one trend we are monitoring is how other markets have become more, not less, correlated to it (except China). The biggest single change has been Japan’s move from 0.32 to 0.88 (a perfect correlation being 1, with 0 having no relationship). As AI and the Magnificent Seven have come to dominate the United States, why does the world not differentiate from the United States more rather than less? Or will it?5
Endnotes
- Source: “Euro zone economy grows at fastest pace in more than two years, PMI shows.” Reuters. 5 November 2025.
- Source: S&P Global UK Construction PMI. S&P Global. 6 November 2025.
- Source: European Equity Strategy Earnings season monitor, net beat unchanged revisions. Morgan Stanley. 31 October 2025.
- Source: Fourth-quarter results and preliminary figures for fiscal year 2025, press conference call transcript. Siemens Healthineers. 5 November 2025.
- Source: Capital Markets Outlook. Franklin Templeton Institute. October 2025. Available on request.
Terms
Magnificent Seven (Mag 7) refers to the stocks of Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla.
Purchasing Manager Index (PMI) tracks activity in across sectors of the economy.
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