Key Takeaways
- H1 2025 was marked by significant market volatility thanks to economic and geopolitical uncertainties, particularly around US tariff policies.
- Despite a volatile environment financial markets have shown resilience largely filtering out political noise and focusing on core economic data.
- Tariffs look set to remain a central issue – with deadlines extended the negotiations are ongoing.
- The US debt ceiling has been raised by $5 trillion – a move increasing concerns about public finances. There is scope for increased government bond yields.
- Economic fundamentals and earnings growth remain robust. In our view, market volatility may present buying opportunities rather than reasons for caution.
The first half of 2025 seems to have flown by in a whirlwind of relentless newsflow, policy uncertainty, tariff levels seemingly changing daily and plenty of geopolitical dramas to add to the mix. Despite all the news the resilience of financial markets has been impressive. We have come a very long way in the past three months from the depths of the tariff related selloff shortly before Easter.
So far, 2025 has been an unsettling but ultimately rewarding period in many financial markets, despite a backdrop of uncertainty in politics, economics and geopolitics. The principal source of this uncertainty has been President Trump’s new Administration. Financial market participants were either hoping for or expecting a re-run of Trump’s first term in office, which despite persistent trade tensions with China, saw market friendly outcomes with both deregulation and sizeable tax cuts boosting sentiment. However, since his inauguration in January, Trump has stirred both economic and political concerns, with heightened uncertainty over tariffs causing significant market volatility across equities, bonds and currencies.
We have seen a near exhausting flow of news from the White House, though financial markets have begun to filter out much of the ‘noise’ based on the tariff relent that was seen in April, when a dramatic sell off in equities and government bonds pushed the Administration back from some of their more extreme tariff policies. Financial markets have taken comfort from resilience in the economic data and the lack of any sizeable deterioration in earnings expectations.
After a very busy first half of the year, what of the second half? In the short term, tariffs are at the top of the agenda, though the 9th July deadline for negotiations to avoid reciprocal tariffs has been pushed back to 1st August, and markets seem happy to ignore some of the tariff numbers that President Trump continues to threaten. While the US tariffs are not expected to impact as heavily as feared, a sense of uncertainty will continue, not least with President Trump using tariffs as his ‘go-to’ policy tool to exert influence or deter perceived unfair treatment. While the US has been unable to achieve the ‘90 deals in 90 days’ the President claimed would take place during the pause in ‘reciprocal tariffs’, there is an expectation that for countries seen to be negotiating in good faith, talks on ‘trade deals’ will continue. Assuming tariffs ultimately fall down the agenda, the size of government deficits may continue to attract attention, not least in the aftermath of the US Congress passing President Trump’s ‘big beautiful bill’ that cuts welfare spending and extends tax cuts implemented in his first term of office, and as a result increases the already substantial national debt even higher. The debt ceiling has been extended by $5trillion, an astronomical amount of money but in reality, only 2½ years of government spending. Bond markets were spooked during the worst of the market turbulence around tariffs in April; any clumsy handling of public finances or the debt trajectory in the US, or elsewhere – such as the UK – may see further moves higher in government bond yields.
The outlook, as ever, is uncertain, and arguably this is heightened by the unpredictable and unusual nature of policymaking under the Trump Administration. This impacts both economics and geopolitics but for financial markets, the resilience shown in the face of such uncertainty is encouraging. Economic fundamentals remain reasonable, and companies and consumers have adjusted well to the ‘new normal’ interest rate environment. Earnings growth appears robust and the path for interest rates in most economies is lower, but not much lower. There is some ‘fog’ in the data however resulting from the tariffs, with the first quarter seeing a surge in activity as a result of companies attempting to ‘front run’ the implementation of tariffs. The second quarter has seen these inventories being drawn down and as we go into the third quarter, there is some ambiguity over underlying levels of demand. Likewise, the economic impact of tariffs tends to come with a significant time lag, with additional uncertainty thrown in to the mix by the fact that while the US effective tariff rate is currently around 13% having started the year at 2.5%, it was as high as 26% for certain periods in May. So, some time will be needed for the data to ‘settle down’ and to be able to gauge the full impact of the tariffs put in place.
The upside risks from here would see US tariffs landing around the 10% baseline with limited further ‘reciprocal tariffs’ being implemented. Limited pass through into inflation would allow the Federal Reserve (Fed) to join other central banks in cutting interest rates further. This backdrop should be supportive for growth, earnings and risk appetite. The more negative scenario would be one of heightened tariffs which would unsettle financial markets where the narrative has been firmly on the side of de-escalation. In addition, higher inflation from tariffs would force the Fed to keep rates on hold, and the ‘stagflation’ narrative may gain traction. On the balance of probabilities, the upside scenario appears more plausible right now, but in an uncertain world it pays to be nimble and taking a mild risk on approach for now appears to be the most appropriate course of action. If the first five months of the Trump Presidency are a guide, there will be more policy surprises along the way, and this may mean further market volatility. However, provided the economic and earnings fundamentals remain supportive, then any market volatility should be seen as more of a buying opportunity than a reason to take risk off the table.
