A question asked by many recently is why equity markets have continued to trade in a positive direction against a backdrop of persistent geopolitical uncertainty and the negative headlines that dominate the news cycle. At the halfway point in the year, we have seen an escalation in global tensions, including renewed conflict in Iran, the ongoing wars in Ukraine and Gaza and the introduction of an aggressive tariff regime in the US. At the same time, anticipated US rate cuts have not materialised. Taken in isolation, none of these developments would typically support rising equity prices. Yet markets have remained surprisingly resilient. This resilience is partly a function of investor expectations around policy and corporate profitability. In the US, Donald Trump’s re-election campaign—and the market’s interpretation of his likely policy agenda—has played a central role. We should probably view Donald Trump's agenda through the lens of game theory. It has become quite apparent that while Trump is prone to ‘shoot from the hip’ and make threats with little provocation, he views the tariffs as a negotiating point and leverage to coerce countries into offering better terms of trade with the US. Whilst we do not expect wholesale trade deals with the major trading partners of the US, we would expect some progress on the terms of trade on an outline basis. There is an expectation that the 9th July deadline will be extended for all countries that have shown a willingness to advance a trade agreement with the US.
Beyond trade, the market continues to anticipate that a second Trump term would bring familiar pro-growth policies: tax cuts, deregulation, and looser monetary conditions into the second half of the year and into 2026. We have seen some evidence that the pace of economic activity is slowing and Trump has already applied significant pressure on the Federal Reserve to begin cutting rates. Should that materialise, dollar weakness may persist—a tailwind for both emerging markets and globally diversified US-listed companies. However, Trump has also cast a large shadow over recent G7 and NATO summits. Secretary General Mark Rutte appeared to fawn over Trump, full of praise and delighted to deliver Trump’s agenda, pushing member states to raise their spending on defence and security to 5% of GDP by 2035.
In a sense, this acquiescence did not come as much of a surprise, given Germany’s recent announcements of planned budget easing. Yet, the optics of Europe grovelling before ‘the king’ in order to try and keep him within the NATO tent will have gone down badly in a number of European capitals. This could feed back into upcoming trade negotiations, where it may appear that the EU will be prepared to take a stronger line. At the same time, the EU is moving forward with a more integrated policy framework in response to the Draghi report. Initiatives around defence spending, infrastructure investment, joint procurement, and capital market integration are all expected to support growth and reduce dependence on third parties.
Augmenting these positive developments is the weakness of the US dollar, which benefits some economies and asset classes. Trump is piling pressure on the Federal Chairman Jay Powell to deliver rate cuts and this would reinforce the idea that dollar weakness may be a feature of Trump’s second term. Long-dated sovereign bonds, particularly in the US, may carry significant risk and offer insufficient compensation for structural deficits and inflation volatility. The Trump administration’s budget plans further reinforce the lack of political appetite to address those imbalances, which in turn suggests that longer-dated yields will need to rise to provide greater compensation to reluctant lenders.
Turning to the UK, the government’s failed attempt at welfare reform is set to raise questions with respect to its commitment to the OBR fiscal framework. Ongoing fiscal slippage in the UK means that pressure will come on the government to raise taxes, leaving it stuck between a rock and a hard place. Up to this point, markets have been inclined to give Labour the benefit of the doubt. However, the hangover from the Truss tantrum remains in investors’ minds. In this context, the UK must continue to demonstrate its commitment to fiscal restraint, but the government’s inability to push through reform, even with a strong majority, points to further fiscal tightening in the form of tax increases rather than spending cuts.
In that context, policymakers hope that the gilt market does not decide to throw a tantrum. In our eyes, ongoing concerns with respect to UK inflation, as well as the fiscal position, point towards a more negative outlook for long-dated gilts and tend to favour shorter maturities.
Despite macro headwinds, the UK equity market has delivered solid returns and outperformed the US year-to-date. Part of this outperformance reflects an increase in takeover activity, with UK-listed companies still trading at a notable discount to global peers. This trend may continue, especially in the mid and small-cap space, where valuations remain attractive and earnings momentum is improving.
Looking ahead to the second half of the year, a more constructive backdrop may emerge if any of the following materialise: interest rate cuts, signs of diplomatic resolution in the Middle East, stabilising data from China, or a broader improvement in global trade dynamics. While the US consumer is beginning to show signs of strain—particularly in the face of cost inflation from tariffs—selective opportunities remain and there is scope for further positive returns through the second half of the year. We hope for fewer shocks and a more market friendly policy from the US administration as monetary conditions ease.
The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
