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The first quarter of 2025 saw Global stock markets reverse all the gains that they’d made in the 4th quarter of 2024; leading to losses of 4.5%.[1]The bulk of the downdraft came from American stocks. American companies constitute just over 70% of the entire global stock market and the world’s biggest economy sets the tone for stock market direction.
Despite the negative market returns, American companies posted very strong results in the first quarter. Heightened uncertainty around US trade policy (notably tariffs) rocked investor sentiment, which in turn fed through to stock prices.
President Trump’s second term is likely to be marked by a combination of “stick” and “carrot”, with the “stick” (in the form of tariffs) coming first.
The “carrot” of tax-cuts and de-regulation likely comes later [2] and this should breathe life into stock markets. Although heightened uncertainty (around tariffs) can cause short-term pain, we’d note that Central Banks are in a strong position to cut interest rates, which would be welcome news for Consumers, Corporates and Governments alike.
UK & Europe bounce back
On a positive note, the first quarter of 2025 saw some excellent returns for UK and European equities. UK equities posted their best quarterly returns since the back end of 2022, whilst European stocks posted their best quarterly return in well over a year. This highlights the benefits of owning a diversified portfolio and in being exposed to the more attractively priced areas of stock markets.
Within Europe, we saw a break from the political malaise which had served as a handbrake on their stock markets in the back half of last year. Specifically, in Germany, the Parliament approved and agreed to a 500 billion Euro infrastructure fund and allowed for the removal of debt restrictions for defence related spending. This, combined with continued stimulus from the Chinese authorities helps fire up the engines of growth from the World’s second (China) and third (Germany) largest economies and made for a positive and meaningful flow through to asset prices.
Strong performance in the UK (with the FTSE All Share up by 4.5% in the first quarter) came on the back of some better-than-expected corporate results and served to highlight the benefits of owning cheaper, more diversified markets alongside faster growing ones (such as the US). We saw some continued strong results from the Banking sector with Banks noting strong asset quality (i.e. consumers are rarely defaulting on their loans!) and increased profitability.
The UK banking sector is growing its earnings at 30% year-over-year [3]which is a similar rate to the “Magnificent 7” companies in the US, yet UK banks continue to trade at a discount to their book value and are using excess cash to buy-back their stock (and increase dividends) in an effort to demonstrate their health and return cash to shareholders.
Strong performance of the UK market helped highlight that the stock market does not equal the economy! The first quarter finished with something of a whimper for UK economic growth (with the OBR downgrading their forecast for 2025’s growth to just 1%), but big international earners (such as the oil majors which make up over 10% of the FTSE 100) have low exposure to this dynamic. Furthermore, good companies continued to demonstrate their ability to make good profits. Next Plc would be a fine example here, as they raised both their sales and profits guidance over the course of the first quarter.
Bond markets were modestly positive in the first quarter, with government bond yields decreasing to reflect a faster than previously anticipated pace of interest rate cuts. UK Government bonds finished the quarter up by about 0.6%, with UK corporate bonds up by around 0.5%.
Central Banks to the fore?
Central Banks, with room to cut interest rates, is one of the themes which we think will help prop markets up whilst trade policy uncertainty reigns. To that end, we saw further interest rate cuts from both the Bank of England and the European Central Bank in the first quarter. Furthermore, we’d note that the bond futures market has moved to pricing in a further 1% of interest rate cuts in the US and Europea over the course of the next year, with 0.75% of cuts being priced in for the Bank of England.
Inflation, whilst lower than a year ago, remains above target. Our view is that Central Banks will be prepared to look past this in favour of supporting economic growth and job stability. In turn, this will support asset prices. The diverging fortunes of “hard” (realised) data and “soft” (survey) data has been one of the key conundrums for policy makers in recent weeks. As is so often the case, it is likely that survey data has lurched too far towards pessimism.
However, it is likely that US Government departmental job cuts will start to show up soon in US jobs data, with a similar situation occurring in the UK with the removal of certain disability benefits. This would give the US Federal Reserve an ability to shift their focus away from the inflation (“price stability”) part of their “dual mandate” in favour of maximum employment (“jobs”) and allow them to cut interest rates.
Lower interest rates would be welcome news not just to investors but also to Governments! The US has c$36 trillion of debt to service whilst the UK has c£2.9 trillion. As we’ve seen from recent moves from the Labour government here in the UK, raising money through tax hikes or spending cuts is not a popular measure. It’s likely that we see ratcheting pressure from President Trump in the US (who’s already taken to Truth Social to urge Fed Chair Jerome Powell to “do the right thing” and start “cutting rates”. Despite his protestations[4], President Trump (and the US Federal Reserve) cannot ignore the fate of the US stock market. The US economy relies on consumer spending [5]and roughly 50[6]% of consumer spending comes from the top 10% of US households. These top 10% of households account for nearly 90% of all equities [7]owned by US households: at some point these folk feel the pinch that stops them spending…
After 2 years of seemingly unchecked gains in equity markets, the market correction experienced in the last quarter is not uncommon. In fact, in the last 21 years, global equities have seen such selloffs about once every 2 years. Typically, these opportunities have often created excellent entry points for markets and have penalised investors for jumping out and missing out on some of the best returns.
Uncertainty created by the US administrations trade policy may linger but the fundamentals that have driven the market higher remain. Corporate profits continue to rise, consumers remain employed and are continuing to spend and central banks have begun their path of easing. Lower interest rates, combined with the Trump “carrot” of tax cuts and de-regulation should support asset prices. Furthermore, such interest rate cuts would also tease out some of the c$7.2trillion that is sitting in US money market funds.
Much of the recent sell-off has been concentrated in richly valued US technology and consumer stocks. These stocks constitute a high weight within broad passive indices. We have some exposure to these names within our clients’ portfolios but at a relatively low weighting and have diversified our clients’ equity exposure via relatively high exposure to the UK market (which we increased towards the back end of last year), defensive assets such as infrastructure and defensive equity sectors such as consumer staples.
History tells us that being overly reactive in these environments can cause damage to long-run returns. We intend to use market volatility as a friend and to keep diversified and to keep invested. Thank you for your support.
[1] Source Bloomberg
[2] As such measures require legislative approval as opposed to tariffs which can be implemented via executive order
[3] For the Calendar Year 2024
[4] President Trump claimed “I’m not even looking at the market” in response to a question on the falling stock market on 6th March 2025
[5] 68% of US GDP comes from Consumer Spending as per the St. Louis Fed.
[6] As per Moody’s analytics
[7] The top 10% of Americans account for 87% of all Corporate equities and Mutual Funds owned by US households as per St. Louis Fed data.
The source for all data is Bloomberg (unless stated otherwise)
The value of investments and the income from them can go down as well as up and you could get back less than you invested. Past performance is not a reliable indicator of future performance.
The content of this article is not intended to be or does not constitute investment research as defined by the Financial Conduct Authority. The content should also not be relied upon when making investment decisions, and at no point should the information be treated as specific advice. The article has no regard for the specific investment objectives, financial situation or needs of any specific client, person, or entity.
