Returns of 5.5% for the global equity market and 1.9% for the UK bond market[1] might suggest that the second quarter of 2025 was plain sailing for investors. The result is undeniably good, but the journey there involved the 5th largest 2 day sell-off for US stocks since World War 2, followed by a 17% rebound (in US stocks) to help close the quarter back in positive territory!
“Trump, Tariffs, TACO, and Tenacity”
Trump & Tariffs
Markets got off to a rough start after President Trump’s April 2nd “Liberation Day” announcement of sweeping tariffs — a move that would have pushed the effective US tariff rate to its highest level in nearly a century. Equities fell sharply, and bond yields rose as international investors demanded greater compensation for holding US government debt.
TACO (Trump Always Chickens Out)
Higher borrowing costs are difficult in any environment — but particularly when you’re servicing $36 trillion of debt[2], with plans to add $3.3 trillion more [3]over the next decade. The reality of refinancing at higher interest rates quickly set in, prompting a familiar U-turn from President Trump. A 90-day pause on new tariffs sparked a sharp equity rebound, as investors leaned into the so-called “TACO” trade — a bet that economic reality would temper the rhetoric.
Tenacity
More encouraging than the short-term political pivots was the resilience shown by companies and consumers alike.
Companies continued to post strong profits and, on the whole, guided towards strong profits growth for the year as a whole.
This was especially notable in the US market (which warrants the most focus due to it comprising a c70% weight in the global equity benchmark). US companies are still expected to generate profits growth of c9% this calendar year. Granted, this represents a c6% reduction to that which was expected (by stock market analysts) at the start of the year, but it is night and day from the 25% reductions to profit forecasts [4]that we’ve witnessed in crises such as Covid or the Global Financial Crisis.
Encouragingly for stock markets, big US technology companies (which comprise c30% of the US equity benchmark) drove gains as commitments for spending on Artificial Intelligence were not only maintained but increased. Further to this, we saw strong earnings from US banks and an ability from companies to grow profits in the face of an increased cost base.
On the consumer side, spending remained resilient, even as confidence surveys remained low. Companies reporting later in the quarter noted stronger end-of-period sales, suggesting the tariff fears had a more limited impact than initially feared.
Profits over Populism
Companies’ willingness to pivot quickly and make unpopular decisions is one of the reasons as investors why we favour an allocation to corporates (via both equity and debt) over governments (via debt), or “profits over populism” to put it another way.
This was evidenced globally, with many companies using the increased cost backdrop (which may or may not materialise) to cut back on staff. The second quarter saw Microsoft (the world’s 2nd largest company) announce cuts to 3% of their entire workforce and smaller companies such as Burberry in the UK announced plans to cut 20% of their workforce. Markets applauded the moves. Unlike governments, which often face backlash for austerity, companies can pivot fast — one reason we favour profits over populism.
Summer Sales started early in the UK
The UK share market rose by about 4.4% in the second quarter. Much of this return came from the smaller companies within the market where bid activity served to drive up prices. Whilst the sale signs might not be up in the shops just yet, they’re certainly up for the UK equity market, with this year already seeing 31 bids for UK companies with a market capitalisation of greater than £100m, with the average premium being 43% to the traded share price pre bid[5]. This, combined with continued strong earnings from UK banks (which are up by 24% for the year to end June) [6]helped propel the UK market higher. Given the diversifying nature of this market (it has low exposure to technology unlike its US counterpart) and the cheap valuation, it is one that we’re delighted to be exposed to on behalf of our Clients.
Interest rates and Inflation – where next.
We expect inflation to remain elevated in the UK for the time being which creates a challenging backdrop for savers. However, chinks in the labour market (layoffs have ramped up since the 30th October budget) should provide the Bank of England with a platform to cut interest rates: welcome news for short-dated UK corporate bonds and UK equity markets.
The Dollar Drag..
One feature of Q2 has been the weakness of the US Dollar, with the Pound up by 6.3% vs the US Dollar in Q2.
In fact, the first 6 months of 2025 have seen the worst start to the year for the Dollar since 1973. Whilst this decline has dragged on our clients’ overseas’ investments, we don’t believe that it is appropriate to give up on the Dollar. The Dollar remains the World’s reserve currency, it remains the most readily traded market, and we still believe it will be the one investors flock to in times of crisis.
Whilst there was a lot to contend with in the second quarter, it was ultimately a profitable one for investors. This speaks to the resilience of Consumers and the ability of Corporates to pivot quickly and keep growing profits. The backdrop of heightened uncertainty may well remain, but we retain our belief in diversification and rebalancing as the best way to navigate these markets.
Please enjoy this video with Rory McPherson, Chief Investment Officer of Magnus, sharing his insights on the Q2 2025 review.
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.
[1] Source: Bloomberg
[2] US Total Debt: Source: Bloomberg
[3] As per estimates from the Congressional Budget Office
[4] Source Factset
[5] As per analysis from Peel Hunt
[6] Source: Bloomberg
