The first half of 2025 is already behind us. Optimism soared in the first few months, driven by Trump 2.0 and the White House’s pro-growth policies. There was widespread belief that inflation would continue to fall, and that the Federal Reserve Bank would cut interest rates.
Then came the drama. At the end of January, global investors started dumping US tech stocks over concerns that China’s DeepSeek, a new low-cost artificial intelligence model, might threaten the dominance of Nvidia and other AI leaders. Nvidia’s market value plummeted, suffering the biggest one-day loss ever seen on Wall Street. But the drama was short-lived: Nvidia and the rest of the stock market quickly roared back to health.
Then came April’s “Liberation Day”. Trump’s tariff announcements impacted global markets yet again, and the S&P 500 Index plummeted 12% in six days as investors vented, selling off risk assets.
In just a few days, the markets transitioned from order to chaos. The Cboe Volatility Index (VIX) – Wall Street’s “fear gauge” – spiked to levels not seen since the early days of the pandemic. But as is so often the case with Trump’s manoeuvres, there was a twist: he announced increased tariffs on China, but subsequently paused them on every other country for 90 days. This pushed the S&P 500 Index up by 9%, ending a month of significant volatility for investors - a noteworthy decline followed by a powerful rebound - a V-shaped recovery over just 20+ trading days.
The second quarter of 2025 brought with it further volatility as conflict in the Middle East escalated. Relations between Iran and Israel reached critical levels as the US carried out a series of coordinated drone strikes on Iran’s nuclear facilities, inflicting substantial material damage. Iran then retaliated, striking a US airbase in Qatar.
Although a return to the negotiating table is always possible, the Israeli and US-led airstrikes have made a deal less likely. Indeed, Iran may even believe that acquiring a nuclear weapon is the best way to preserve its administration.
Oil and liquefied natural gas prices immediately rose on the back of the US attacks on Iran, as did concerns that Iran would try to close the Strait of Hormuz. Fortunately, this did not happen (it would have cut off 20% of the world’s supply). Instead, energy prices stabilised as a ceasefire was agreed between Israel and Iran.
The politics surrounding military action usually govern how other countries react. Fundamentally, even though the operation was militarily successful, the manner in which it was conducted raises concerns about Trump’s decision-making, democracy, and civilian-military relations. These may ultimately harm US influence and its standing in the world.
Over Q2 2025, many central banks began to ease following the aggressive hikes seen in 2022 and 2023. Some cut interest rates, while others held steady. The underlying objective: support economic growth while keeping an eye on sticky inflation amid periods of uncertainty (e.g., trade tensions, varying inflation dynamics).
The US dollar weakened significantly against other major currencies over H1 2025. Sentiment around trade policy and moderating US economic growth has led professional and retail investors to shift from US-cited assets to ones quoted on international markets.
The reverse has happened in the UK: sterling has gained almost 9% against the US dollar since the beginning of 2025, supported by strong economic data (e.g., retail sales) and progress on a UK-US trade deal.
This diversification is evidenced by the performances of the:
Some of the best-performing developed markets this year have been in Europe, reflecting changing investor sentiment.
In emerging markets, South America has performed well due to a combination of:
A strong corporate earnings season and renewed investor confidence helped mega-cap tech stocks rebound in Q2 after underperforming in Q1.
The Magnificent 7 delivered 18.6% price returns in Q2 2025, outperforming the remainder of the S&P 500 by 14%. In short, the tech sector has enjoyed a strong recovery.
Despite the volatility, markets ended June at a number of all-time highs. A subsequent easing of trade tensions has left the effective tariff rate at ~15%. There is potential for further reductions, depending on the outcome of ongoing negotiations.
Trump has extended the 9 July tariff deadline to 1 August, allowing more time for diplomacy. Encouragingly, the US has already reached agreements with the UK and Vietnam.
Although inflation appears to be contained, we expect volatility to resurface in H2 2025 as tariffs begin to drive prices upward. Companies may draw down inventories and pass costs to consumers, eroding household purchasing power and corporate margins - which could weigh on growth.
Still, economic data remains resilient, and easing trade tensions plus potential policy support offer reasons for cautious optimism.
While maintaining a tilt towards US equities, we also see growing opportunities in:
In bond markets, we continue to prefer short-duration government and investment-grade paper, but are beginning to see value in 7- to 10-year maturities.
Commodities are also of interest: a weaker US dollar will support pricing, and a pickup in global growth would drive demand higher.
As always, investors should do their best to tune out the foreground noise and focus on their long-term financial goals, maintaining regular contact with their financial adviser.
