Q2 2025

The second quarter of 2025 delivered one of the most dramatic reversals in equity market history. The quarter began dramatically: global equities had sold off towards the end of Q1 and the sell-off gathered pace sharply in April following the Trump administration’s announcement of sweeping global trade tariffs. The S&P 500 ultimately fell 20% in less than 2 months from its February peak, including a dramatic 12% fall in a week from the April 2nd “Liberation Day” tariff announcements: a so-called “Trump Dump” as investors worried about the consequences for trade, for global growth, for corporate profits and for inflation. As we published our Q1 review in the midst of that sell-off, we reminded investors of the importance of sticking to a long-term strategy, of accepting risk as part of the investment journey, and we queried whether we might be close to the moment of maximum market panic over tariffs. It seems that may have been the case.

A 90-day pause in some tariffs announced by Trump early April triggered a near-record recovery: the S&P surged 28% off its April lows to finish the quarter at new all-time highs, one of the fastest rebounds ever from a meaningful market correction.

Yet the exuberance was uneven. European and UK stocks rebounded, gaining around 4% in the quarter, and Japanese stocks gained 7% (all in local currency terms: this matters significantly in 2025). Asian and Emerging market stocks fared far better, gaining around 12% (albeit in US Dollar terms) as the framework of US-China trade arrangements appeared to take shape.

On the face of it, the US equity market’s gain of over 10% in Q2 was spectacular, but currency moves - the notable continued weakness of the US Dollar - detracted significantly from this, wiping out the majority of the gain. US large-cap growth stocks recovered in the second quarter, with strong earnings growth helping several of the “Magnificent Seven” major technology stocks to deliver a rebound in performance. The leading contribution from this handful of stocks conceals a more pedestrian performance from the broader US market in Q2: US Value stocks advanced only 4% in Q2 (in USD terms - so they lost money for global investors); energy and healthcare stocks experienced declines.

For the first half of 2025, stocks in Asia (+15%) and Europe (+10%) are the clear outperformers; the UK is just a little behind, and the US market’s Q2 recovery has failed to close the gap after a very weak first quarter. The performance differential is even wider when the impact of the very weak Dollar is taken into account: investors who held substantial Dollar assets faced a significant headwind to performance. After many years of US exceptionalism and outperformance, such that the US accounts for over 70% of the global equity market index weight, the shifting currency tides of 2025 will have hurt many investors. To outperform, managers needed to allocate outside the US and especially away from the Dollar; this shift in investor thinking appears to be underway.

The US Dollar had already weakened around 3% in Q1, but fell a further 7% in Q2 to record its weakest trade-weighted levels in 3 years, reflecting market concerns over the impact of tariffs on growth and inflation, and increasing worries over expanding fiscal deficits. For Sterling and Euro-based investors, the weakness in the Dollar has exacerbated performance differentials this year: US equities have lagged over six months, but currency losses from unhedged Dollar assets have made the difference even more marked.

Sterling rallied around 6% against the Dollar, supported by the Bank of England’s relatively slow pace of interest rate cuts; at over $1.37, the Pound stands at its highest level vs the Dollar for almost four years. The Euro has gained significantly amid global dollar softness, from $1.03 at the start of 2025 to over $1.18 now, a rise of 14% year-to-date. A wide range of emerging market and commodity-related currencies also gained, in the face of Dollar weakness, helping local currency emerging market debt to rank as one of the better-performing asset classes over the period, gaining 8% in Q2 and 12% year-to-date, in US Dollar terms. Of course, for Sterling-denominated investors, much of this gain has again been wiped out by Dollar weakness against the Pound.

The bond market saw mixed signals. Long-dated US Treasuries came under pressure as concerns mounted about a deteriorating US fiscal picture, with policy choices pointing towards tax cuts, bigger deficits, increasing debt issuance and persistent inflation. Auction demand was patchy and term premia rose, i.e. investors sought more compensation for lending to the government at longer maturities. Shorter-dated U.S. bonds held up better, anchored by expectations of eventual rate cuts arriving towards the end of 2025. Gilts made modest gains in Q2, with yields edging lower again as earlier alarm over the government’s spending plans eased - but volatility in early July confirms that market sensitivity over fiscal sustainability - over government spending commitments that are not matched by spending cuts elsewhere or by tax rises - remains acute. Credit markets fared better: spreads in investment grade and high yield had briefly spiked during the Trump-tariff panic, but compressed again back towards cycle lows. US high yield bonds returned a further 3% in Q2 - returns have almost kept pace with US equities year-to-date, with significantly lower volatility. Emerging market debt attracted inflows on currency strength and supportive rate trends.

In commodity markets, gold made modest gains in Q2, following a very strong Q1, but still seems well-supported, reflecting investors’ concerns that deteriorating fiscal dynamics are a challenge for Treasuries. Gold’s recent gains have taken it to new all-time highs, briefly above $3400 in June. Oil was notably volatile, with prices briefly spiking above $75 mid-quarter as tensions escalated between Iran and Israel. While many geopolitical shocks have little lasting market impact, oil is the exception: Iran’s role as a major regional producer and the vulnerability of traffic through the Straits of Hormuz makes its actions market-sensitive. The US maintains that its military operations achieved their objective in degrading Iran’s nuclear capability, and Iran’s retaliation has so far been measured. But risks remain skewed to the upside, and the potential for renewed disruption continues to hang over energy markets. Brent ended the quarter near $65, reflecting both the de-escalation and ongoing macro uncertainty.

It is impossible to consider macro-economic developments and risks without discussing the moving target of US trade policy. The tariff narrative dominated: US import tariffs have risen substantially compared to a year ago, but remain well below the worst-case destructive levels suggested by Trump’s “Liberation Day” announcements. While a 90-day implementation pause and various bilateral deals have offered markets hope, the path beyond the expiry of this pause remains uncertain. Experience suggests that new deals will be on the table, and markets' buoyant state as we close the second quarter reflects that view; there’s clearly room for volatility if hopes of softer tariff regimes are dashed.

Even more modest tariffs appear to be having some impact already. Some companies accelerated import orders to beat tariff implementation dates, which acts as a drag on GDP; others are already blaming tariffs for higher input costs, which threaten to feed through to consumer price inflation as firms pass on these additional costs. Some US firms have cited tariff concerns as a factor in weaker export orders too. Meanwhile, there does not yet seem to be enough certainty in the long-term framework of US trade and tariff policy to make companies confident enough to meaningfully expand capital investment in the US. Some commentators fear that threatened tariffs are still increasing US recession risks, and are clearly not reflected in market valuations - in equities, bonds or credit. Others take comfort from the observation that household incomes are still growing ahead of inflation, enabling the US consumer to continue its relentless powering of the domestic (and indeed global) economy.

Meanwhile, the so-called One Big Beautiful Bill (OBBB) presents a contradictory package of spending cuts and tax relief. While tax cuts will further boost household incomes on paper, higher consumer prices from tariffs will likely offset much of this. Perhaps more troubling is the longer-term outlook: the bill increases deficits, raises debt-to-GDP, and puts structural pressure on long-term bond markets. Investors are noticing: higher real yields, dollar weakness and a firmer gold price all point to reduced confidence in US fiscal credibility.

Macro data, meanwhile, remains relatively resilient: there may be trouble ahead, but it has not yet landed. US Q1 GDP showed a negative figure, but this likely reflects accelerated imports intended to beat tariff deadlines, and is likely to bounce back in Q2. Key business surveys in June confirm a picture of ongoing, if modest, expansion, helped by ongoing monetary stimulus: 58 rate cuts year-to-date and 130 over 12 months globally. Central banks are still in easing mode, with the exception of Japan, although markets have had to continually reappraise the pace and scale of rate cuts to expect in 2025: tariff-related inflation likely means fewer cuts, later than previously expected, but central banks remain aware of the risks of a slowing economy and are minded to give support.

Perhaps the most important theme emerging from Q2 is more evidence of the apparent pause - perhaps even reversal - in US dominance: we raised the question of an end to dominant US asset performance last quarter and it remains a pressing issue for investors. Valuation gaps are now hard to ignore. For years, investors accepted paying a premium for U.S. equities, justified by the dominance of high-growth, globally significant tech giants. But with U.S. stocks trading on 22x forward earnings versus 12–15x for the UK, Europe, Japan and emerging markets, and with U.S. policy uncertainty arguably higher, that premium looks increasingly difficult to defend. In relative terms, the rest of the world has rarely looked so cheap.

Since the Global Financial Crisis of 2008-09, US stocks and the Dollar have outpaced global peers. But 2025 has so far rewarded the diversified investor. Outperformance came from international non-US equities, value stocks, gold and emerging market debt. Whether this marks a regime change remains to be seen. But in a world facing trade fragmentation, rising fiscal risk and uncertain inflation dynamics, the case for a more balanced global portfolio is stronger than it has been for some time.

N.b. All content is based on data at the time of writing on 11/07/25.