Q2 2025
The first half of this year has been dominated by uncertainty with Trump’s tariffs overturning previous trade relationships and re-shaping global trade relations, even as he backtracked on his ‘Liberation Day’ commitments. Markets recovered by the end of April, were in year-to-date positive territory by mid-May and US markets were at an all time high by late June. Markets gained around 12%, with emerging markets benefitting from a weaker dollar (it’s worst semi-annual drop since the 1970s). Tech stocks soared once again with the ‘Magnificent 7’ up 19%. Fixed income markets notched up a modest 1% gain, gold continued to perform strongly (up 5%) and bitcoin surged by 30%.
Geopolitical uncertainty has only increased with Israel’s attacks on Iran’s nuclear facilities and the US providing military assistance with targeted strikes. Military spending commitments have risen dramatically amongst NATO allies with a 5% of GDP commitment by 2035 and Germany has passed a paradigm shifting fiscal expansion plan, which will see huge spending increases on infrastructure and defence spending.
The outcome of tariff negotiations is still uncertain, with August 1 2025 (extended) marking the date regions, like the EU, face a 50% tariff if no deal is reached but for businesses the impact has already been very real. There is an unwillingness to commit to investment, consumption and stock purchases have been accelerated. There has also been a re-routing of Chinese goods to Europe. Outlook for the global economy remains at 2-3% through 2025 and into 2026 but with headline GDP shrinking in the US, this might be over optimistic. Q2 has seen earnings downgrades with earnings growth for the S&P forecast to be +5% rather than +9.4% at the start of the quarter.
Given events, it is surprising markets have held up so well with institutional investors broadly remaining cautiously bullish, looking to secular drivers such as AI. M&A activity has surged suggesting corporate confidence. If growth was to slow in the US, which would require a weakening in either consumption or employment (which are both currently holding up), then the prospect of stagflation could prove a real issue for the Fed keen to cut rates to encourage growth yet keep a lid on inflation.
Bond markets were also hit by market volatility with UK treasury yields rising and the US dollar falling as uncertainty built, yet in many markets yields ending the quarter almost unchanged. Spreads of corporates over gilts tightened to 0.87%, which has brought spreads back to levels not seen since the GFG as demand continues to be underpinned by attractive all-in yields.
For sustainable investors the impact of America’s culture wars is being felt with healthcare spending by the National Institutes of Health being cut by 10% versus last year, support for clean energy and electric vehicles being cut back and the US withdrawing from the Paris agreement is also a huge blow for global climate goals.