The first half of 2025 seems to have flown by in a whirlwind of relentless newsflow, policy uncertainty, changing tariff levels and geopolitical dramas to add to the mix.
Despite all the news, and noise, the resilience of financial markets has been notable. 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 a particularly uncertain period for financial markets. The principal source of this uncertainty has been the US Administration under President Trump. 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 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.
The geopolitical backdrop has been equally turbulent, with ongoing tensions in the Middle East persisting, culminating in Israel, then the US, attacking Iran, followed by swift de-escalation. Meanwhile, the Russia-Ukraine conflict continues. Trump has also called into question the ‘transatlantic alliance’ with messaging that has undermined faith in the US as a guarantor of western security, prompting a seismic shift in thinking around the defence of Europe, and the need for higher spending to pay for it.
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 Trump Administration back from some of their more extreme tariff policies. The rebound in financial markets, based on the assumption we have seen the worst of the tariff threats and pragmatism will prevail, has been impressive. Financial markets have taken comfort from the weak ‘soft’ data such as business and consumer confidence surveys in the doldrums failing to translate into a significant deterioration in the ‘hard’ economic data. We have also seen no notable downgrading of earnings expectations, based on assumptions that President Trump’s ‘bark’ will remain worse than his ‘bite’ when it comes to the ultimate size, scope and duration of tariffs.
Looking more closely at equity returns, in local currency terms Germany leads the way of the major markets, with the DAX index up 20.1% while the Europe wide EuroStoxx600 was up 9.4%. In the UK the FTSE100 was up 9.5% while the weaker US Dollar helped Emerging Markets to strong gains, with the MSCI EM Index up 15.5%. Despite a drawdown that saw the S&P500 briefly enter a bear market (down over 20% from the highs) the main US index was up 6.2% for the first six months of the year, after a stellar run, up 28% from the intraday lows of 7 April. The last day of June saw the S&P500 index close at a new record high. Despite some significant volatility, bond returns have also been positive, with US Treasuries up 3.8%, UK Gilts up 2.5% and positive returns from both investment grade and high yield credit. While equities and bonds have recovered well, the US dollar has endured a difficult six months, with the Dollar Index down 10.7% for the worst start to a year since 1973.
After a very busy first half of the year, what is in store for the second half? In the very short term, tariffs are likely to be at the top of the agenda, given the 9th July deadline for negotiations to avoid reciprocal tariffs is now a matter of a few days away. While the US tariffs are not expected to impact as heavily as feared during the spring, a sense of uncertainty continues to prevail, and with President Trump using tariffs as his ‘go-to’ policy tool to exert influence or deter perceived unfair treatment, tariffs are likely to remain on the agenda. While the US has been unable to achieve the “90 deals in 90 days” the President claimed would take place 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 will likely rise in prominence, not least as the US passes President Trump’s ‘big beautiful bill’ that cuts welfare spending and extends tax cuts implemented in his first term of office. 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, may see further moves higher in government bond yields.
The outlook 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%, but for certain periods in May it was as high as 26%. 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.
We continue to have a slightly positive bias towards risk in our portfolios, and a preference for equities over bonds. In equities, our preferred regions are the US and emerging markets. Despite all of the chatter around the end of exceptionalism the US is still expected to see faster growth than any other G7 economy this year and in 2026. While US equities continue to trade at higher multiples than their peers, superior earnings growth goes some way to justify this premium. For emerging markets, the weaker US dollar has been a strong tailwind in the first half of the year. While the pace of the dollar decline may ease, further incremental stimulus measures from China, rate cuts elsewhere and attractive valuations drive our view that emerging market equities offer attractive relative returns. In bonds, we see the most attractive assets as investment grade and high yield credit. While we have seen a strong rebound from the widening in credit spreads when risk appetite slumped in April, we see solid fundamentals and an attractive return for the risk taken.
The upside risks from here would see US tariffs landing around the 10% baseline level, with limited further ‘reciprocal tariffs’ being implemented. Limited pass through into inflation would allow the Federal Reserve 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 take hold. 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.
Source: Columbia Threadneedle Investments as at 04 July 2025.
