Q2 2025 Market Commentary

Volatility remained a defining feature in Q2, as markets digested the economic and political fallout from President Trump’s aggressive tariff announcements on “Liberation Day” in early April. Markets had braced for either a reciprocal or blanket tariff regime but in true Trumpian fashion, he delivered both. A 10% blanket tariff across all trading partners was imposed, alongside sector and country targeted tariffs. Unsurprisingly, this triggered an all-out trade war between the world’s two largest economies with peak tariffs on Chinese goods of 145% and the Chinese imposing reciprocal tariffs of 125% on US goods and banning exports of critical rare earth minerals.

The US equity market fell sharply with the S&P500 down around 13% in the week following the announcement led by the “Magnificent Seven” tech giants, as investors anticipated severe earnings hit and questioned the durability of US equity leadership. This sparked a rotation into other markets such as the UK and Europe, the latter helped by significant stimulus packages launched in response to tariff and defence pressures.

We also saw a sharp increase in geopolitical tensions in the Middle East and a spike (albeit rapidly reversed) in the oil price. Typically, the US Dollar strengthens in times of rising geopolitical risk. Not this time. The Dollar has continued its decline since Trump’s inauguration, not helped by Trump’s repeated broadsides at the US Federal Reserve. In fact, Q2 has been one of the worst quarters on record for the Dollar.

Markets recovered their footing when Trump, faced with the market’s backlash, paused the implementation of reciprocal tariffs above the 10% blanket level for 90 days. In a now familiar pattern of initial aggression followed by retreat, the S&P500 rebounded almost as fast as it had fallen. The trading acronym of the moment - “TACO” (Trump Always Chickens Out) sums it up.

Tariffs weren’t the only big economic news this quarter. Trump succeeded in passing his “Big, Beautiful Bill” tax package, despite a record Federal deficit, fiscal concerns and clear evidence that the Department of Government Efficiency (DOGE) is falling way short of its promised savings. This has added to the pressure on the Dollar and Treasuries (US Government bonds).

It remains too early to fully quantify the impact of tariffs on global growth and more importantly corporate profits. However, this has not phased retail investors and by the end of the quarter US equity markets were within a whisker of their all-time highs.

However, what is really important to note is that the US is no longer the only game in town. For investors who measure their returns outside of the USD, as our clients do, the US equity market is now lagging all regions year to date in sterling terms.

You will not be surprised to read that our portfolios remain defensively positioned as we are underweight equities (particularly US) and overweight short-dated investment grade bonds.

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