Global equities had a strong start to the year, reaching all-time highs in February as strong economic growth momentum was carried over from 2024 and US corporate earnings were healthy. However, market volatility rose markedly following a much more aggressive stance on tariffs from the Trump administration than was expected. With the focus on tax cuts and deregulation pushed back to later in the year, trade and immigration policy – the more growth negative aspects of Trump’s policy agenda – took centre stage.
US equities sold off sharply after President Trump’s April 2nd announcement of reciprocal tariffs which, if implemented, would bring the overall effective rate to 25% on US imports. Moreover, the parallel tit for tat trade war with China delivered tariff levels which, if sustained, would make trade between the two largest economies all but unfeasible.
Whilst investors are concerned that these tariffs will create a major supply side shock to the US economy, raising prices, damaging supply chains and depressing business and consumer confidence, the Trump administration has several goals it wishes to achieve via its trade policy. It wants to strike better trade deals with its trading partners and recalibrate its unbalanced trading relationship with China. Elsewhere, Trump wants businesses to relocate their activities to the US, lower prices and generate additional revenue to support tax cuts. Clearly some of these objectives are inconsistent, but at their heart is the desire to boost the domestic economy in a way which aligns with the aspirations of blue-collar workers.
However, following President Trump’s subsequent comments that he was minded to replace the US Federal Reserve’s Chairman, Jerome Powell, this attack on the US central bank’s independence caused a slide in US government bond prices and a sharp correction in the US dollar, prompting Trump to announce a 90-day pause on the reciprocal tariffs to buy more time to begin negotiating trade deals with the US’s major trading partners. Whether these negotiations will bear fruit is an open question, with the elephant in the room being whether China will join the US in trade discussions.
German equities have been the standout performer this year, rallying strongly on an unprecedented German commitment to boost defence and infrastructure spending.
With the US economy now expected to slow markedly in the months ahead, European and UK equities have generally fared better than their US counterparts. In addition, the defence sector has been a significant beneficiary of the Trump administration putting pressure on NATO members to increase their spending in this area.
German equities have been the standout performer this year, rallying strongly on an unprecedented German commitment to boost defence and infrastructure spending by more than EUR1trn in the years ahead, as European leaders faced the prospect of a future with a reduced US military umbrella. In addition, the EU Commission proposed that member states could significantly increase defence spending without breaching the EU’s deficit rules.
Despite delivering strong earnings growth, the major US technology companies are still suffering from a combination of reduced investor enthusiasm for the hitherto dominant theme of ‘US exceptionalism’ and fallout from the news earlier in the year that Chinese group DeepSeek had developed an artificial intelligence (AI) application arguably as good as those made in the West, but at a fraction of the cost. This latter point has raised concerns that Amazon, Alphabet, Meta and Microsoft were overspending on AI capital expenditure.
The UK economy continues to be very much in ‘muddle through’ territory as the effects of last Autumn’s employer National Insurance (NI) hike takes effect. The upcoming rise in inflation due to higher utility bills and the passthrough of higher NI costs are well anticipated by the market, and allowed the Bank of England to reduce its base rate by 0.25% at its February and May meetings whilst guiding the market to anticipate further reductions in the quarters ahead.
As we look ahead to the rest of 2025, the prospects of a damaging tit for tat trade conflict and fiscal consolidation driven by The Department of Government Efficiency suggest that the Trump administration is 'throwing the kitchen sink' at the US economy by delivering radical supply side reform well ahead of the 2026 midterm elections.
In this scenario, a period of weak growth would draw the US Federal Reserve into a rate cutting cycle and lower the cost of government borrowing, paving the way for tax cuts later in the year. Both of these measures should ultimately provide a boost to equity markets and improve Trump’s chances of maintaining control of Congress.
With the US economy likely to be an underperformer this year and investors keen to rebalance their equity weightings away from the US, we expect returns to continue to broaden out by region and sector and this should provide a good environment for our investment managers’ approach to active stock selection.
