A strong start for US equities, building on last year’s momentum.

Continued excitement around the AI story and expectations of tax cuts and deregulation from the incoming Trump administration fuelled the narrative.

Bond markets also delivered positive, though modest, returns—mainly driven by income or “carry” rather than price gains. Expectations of future rate cuts moderated as the pace of decline in inflation rates seemed to have bottomed out.

However, the old adage of “travelling is better than arriving” was never more true as the US equity market peaked within a few weeks of Trump’s inauguration and actually ended the quarter in negative territory. Although other equity markets followed the US down the scale of the move has been much less. The US lagged the Rest of the World in Q1 and the scale of the underperformance is one of the largest quarterly moves on record. The narrative has changed so much that European defence stocks have now outperformed the US tech giants on a trailing 12 month basis!

Although it technically happened at the start of Q2, we must mention the economic impacts of Trump’s sweeping tariff policies, and the volatility that ensued. Trump’s approach to tariffs is emblematic of a broader approach to achieving his objectives by controversial statements and brinkmanship. Whilst the final tariff levels are likely to be different from those originally announced the capricious and volatile, if not chaotic nature of the exercise has been damaging to business and investor confidence even before the we feel the full impact of the actual tariffs. The outlook for growth and corporate profits is too early to quantify but is undoubtedly negative.

Historically US Govt bonds have tended to perform well in periods of equity market volatility as investors seek defensive assets and bond yields (which move inversely to the price) on short dated Treasuries duly decline. However, concerns that tariffs could reignite inflationary pressures through higher import prices led to longer dated US Govt bonds actually declining in price (rising yields). This move also reflects an increased risk premium as the status of US Treasuries has been adversely impacted by the chaos.

The decline in the US Dollar is also particularly noteworthy. Economics textbooks will lead you to believe that tariffs should lead to US Dollar strength (as the trade deficit declines) and the US Dollar also usually strengthens in times of market volatility. However, what we have seen is a decline in the Dollar as investors have sold US assets and withdrawn money from the US. Like the earlier narrative we would not predict the imminent demise of US exceptionalism but there is no doubt that the pendulum is swinging back.

While it’s too early to gauge the full impact on earnings and growth, the return of trade friction has clearly unsettled investor sentiment and injected fresh uncertainty into the macroeconomic backdrop. Our portfolios remain well suited to this current environment as we are underweight equities and, perhaps more importantly, US equities and overweight short dated bonds.