Uncertainty Resolved? Distinguishing signal from noise

If we’d shown you today’s stock market prices at the beginning of the year, you could have been deceived into believing that the first half of 2025 had been unremarkable. In reality, this couldn’t be further from the truth. 

The modest overall movements year-to-date disguise the extreme noise and volatility that have characterised the year so far. A chief driver of this volatility has been the administration change in the US. 

Scepticism surrounding The White House’s policies and extensive tariff plans overcame the preceding optimism of Artificial Intelligence (AI). Market movements for much of the first 10 weeks of the year were dictated by AI, including the emergence of Chinese firm DeepSeek. However, stock prices fell throughout March and April as investors fled US assets in favour of other markets. 

A weakening dollar compounded negative returns for international investors. By the end of June, the dollar was down -10.7% compared to major trading partners, its worst first half to a year since 1973. Europe was a key beneficiary, with local equity prospects already burnished by a series of interest rate cuts and fiscal reforms. 

Bond markets weren’t immune from volatility either; European yields jumped on news of the same fiscal reforms, while US treasury yields priced in fears of widening deficits and ballooning national debt. 

Similar to recent editions, our review of the past six months is unfortunately overshadowed by geopolitical strife. Conflicts in the Middle East and between Ukraine and Russia have continued unabated. In this environment, safe haven assets such as gold have flourished, while the price of oil has swung with each escalation and reprieve.

American exceptionalism

The arrival of ‘DeepSeek’, China’s low-cost answer to ChatGPT, in late January led investors to scrutinise the spending of US tech firms, temporarily throwing cold water on the enduring AI rally. Amid growing doubts of continuing ‘American exceptionalism’, the new US administration looked to address what they saw as exceptionally contentious: America’s trade deficit. 

With optimism waning, markets reacted poorly to the mooted details of the tariff impositions. Worries culminated on ‘Liberation Day’ on 2nd April, which led to precipitous falls and one of the most volatile weeks in US stock market history. However, subsequent tariff pauses, and mooted trade agreements spurred a recovery that was just as quick as the downturn. 

As the bellwethers of the AI surge, the ‘Magnificent Seven’ underperformed the broader market in the initial downdraught and while they have recovered strongly, they are still modestly behind the broader US markets year to date. 

European economic performance

European equities fared better, having been supported by both monetary and fiscal expansion. Germany – Europe’s largest economy – reformed their debt brake in early March, in addition to announcing €500 billion in infrastructure investment. Germany plans to spearhead increased defence spending across the EU, which has driven both beneficiary stocks and bond yields higher, the latter driven by concerns around the fiscal impact on bond supply. 

With US tariffs raising more growth than inflation concerns in the eurozone, and with reported inflation dipping back below the 2% target, the European Central Bank (ECB) was able to deliver four consecutive 0.25% rate reductions. This is a luxury that has not yet been afforded to Fed Chair Jerome Powell, with US investors now pricing in just two 0.25% rate cuts this year.

Outlook summary

We are still maintaining perspective for the second half of 2025, as we attempt to distinguish between material policy and market signals and shorter-term trading noise. Investors hope that policy uncertainty dissipates in the months to come, and markets are priced for broadly economy-friendly outcomes without long-lasting negative inflation outcomes. That may be the case even if the path to it is erratic. 

The long-term implications of the quite profound developments across the globe in the first half of the year have yet to be fully digested and it’s possible that some of these – positive and negative – may have market-moving potential even in the short run. 

At present, we hold a slightly underweight stance towards equities – which we sold after the sharp rise in May - and are overweight in shorter-dated fixed income, reflecting a more cautious stance towards longer-dated bonds for now. 

We think that some of the existing market thematics have further to play out – and these are reflected in our various equity portfolios - but in the short term we’re adopting a slightly cautious stance on equities from an asset allocation perspective as we think that markets are overbought and, at minimum, due a pause. As we have done in the face of the market and policy volatility so far this year, we’ll continue to be controlled and measured regarding overall risk taking. 

From a global economic perspective, recession fears have dissipated since the 90-day tariff pauses came into effect. Inflation has continued to broadly trend lower, but not without some ‘stickiness’. Central banks have been able to hold or even lower rates despite the head-spinning tariff policies of the US administration. Long-term expectations remain anchored as they have broadly done for some time now – and this is a key necessary condition for us to remain medium positive on risk assets. 

We will continue to keep a close eye on US and European labour markets and capital expenditures to see how tariffs and fiscal policies impact on the real economies in the shorter term. Also on the radar will be the impact of possible deregulation efforts in the US and any signs – in whatever economic region – that higher technology spending on artificial intelligence is having noticeable impacts on economy-wide productivity or price developments. 

As we have said many times over the years, the structural decline in inflation was driven by globalisation, central bank independence and technological improvements. Some of those factors have frayed somewhat in recent times but there is an optimistic view that new technologies – which have already had material direct impacts on the makers of the new ‘plumbing’ – will have profoundly positive overall-economy impacts through higher growth & productivity and lower inflation. 

It remains to be seen how quickly some of these positive impacts will be felt but we will monitor closely. In the interim we have somewhat higher risks to bond yields from higher government deficits and debt – not just in the US, even if that has been the most recent centre of attention. 

High debts have not been a material issue to date because private sector debt expansion has been modest enough to not clash with higher government borrowing. But there are limits to this nonetheless and materially higher real bond yields – if they were to emerge – would likely undermine risk assets. This is not our central scenario for now, but we judge the risks to have risen since the start of the year. 

Geopolitical issues have been a depressing feature of the landscape again in 2025 albeit with modest market impacts. Oil price volatility has only had short-lived impacts and perhaps the market impact here will dissipate structurally over time as energy sources in aggregate become more diffuse. 

We are holding a high Gold weighting for now – where permitted- as we expect the positive structural factors underpinning its rise to date to play our further. Included amongst those is the desire of China to pivot away, as much as possible, from a US-centric global trading, payments and financial system.

The extent of the market recovery is certainly reassuring from an investor perspective, even if a substantially stronger euro has completely distorted a euro-based investor’s view of global equities so far this year and has highlighted that even if the US remains at the centre of innovation that its attractiveness as a locus of capital have been tempered somewhat by the new political and policy dynamics at play in the US.

Changing dynamics

In conclusion, we are maintaining a flexible outlook in the face of policy uncertainty that is not fully resolved yet. Medium term inflation expectations, which remain anchored for now, and reasonable growth dynamics are positives for risk assets. Structural factors – both negative or positive for bonds and risk assets – will battle out in the periods ahead and will present opportunities.

You can read more in the Investment Outlook, July 2025.