Trump’s “Liberation Day” unleashed a storm of tariffs—from 10% globally to over 50% for China. Markets didn’t celebrate. Explore the full picture in our latest market report.
Download PDF VersionIn retrospect, 2024 may prove to have been the highpoint for the outperformance of the US economy and stock markets over the rest of the world.
Since President Trump took office in January, investors who optimistically believed in the "Trump put" - the idea that stock market falls would lead him to water down his tariff policies - have been disappointed. Of course, Trump believes that tariffs will ultimately benefit the US economy by strengthening domestic industry, reshoring jobs and, in time, raising enough revenue to allow tax cuts. That doesn't mean though that he isn't also prepared to use them as a negotiating tactic and cut deals on a case-by-case basis. Less art of the deal and more art of the tariff.
After Liberation Day at the beginning of April, we now have an across-the-board tariff of 10% on all US trading partners. Higher tariffs have been applied to those countries with the largest trade imbalances with the US including the EU (20%), Canada and Mexico (25% for non-USMCA goods), Japan (24%), South Korea (26%), Vietnam (46%) and China (54%). Additionally, sectoral tariffs were announced on cars, steel and aluminium, and exemptions for now for pharmaceuticals. The impact on the global economy depends on how other countries respond. If the retaliation is moderate (at most matching the US tariffs), and does not ratchet up into an all-out trade war, the tariffs are by themselves probably not enough to plunge the global economy into recession, though there will clearly be pockets of pain (not least in the US itself).
There are two chinks of light. Firstly, President Trump is open to cutting deals with other countries and reducing tariffs in return for concessions that help to reduce trade deficits. Secondly, Trump's actions could, perhaps inadvertently, help to rebalance the global economy by forcing partners with large trade surpluses, like the EU, China and Japan, which have for too long relied on exports as their main engine of growth, to boost domestic demand. This is something authorities, like the International Monetary Fund (IMF), have been trying to achieve for years without success.
US stock markets were hit by tariff fears in the first quarter, suffering their first down quarter since 2022, with the S&P 500 losing 5% and the Nasdaq 10%. Recent US economic data has been weaker and the AI narrative has also taken a knock. Confidence was also sapped by the general unpredictability of US economic policy. The dollar weakened, with the dollar index falling 4%, compounding the negative returns for non-US-based investors. Underlining the US-specific weakness, many European and emerging equity markets were higher over the quarter.
The biggest beneficiary of this puncturing of the US equity bubble, however, has been gold. It smashed through the $3,000 barrier and is up around 50% over the past year, making it the best performing major asset by far. As a classic safe haven asset, its rise encapsulates like no other a potent mix of uncertainties about the world in 2025. Some of the main reasons for the rally include demand from central banks as countries seek to reduce their reliance on the dollar, fears of inflation, concerns about a possible bubble in US technology stocks, and geopolitical shifts.
So, is American exceptionalism over? Perhaps the term was always a little exaggerated. Two things made the US exceptional: it was the only major developed economy to continue growing at a healthy (but not spectacular) rate after the inflation and interest rate surge of 2022-23. Secondly, it is home to the largest technology companies in the world and is the centre - or was believed to be - of advances in AI, which are seen as the great growth hope for the future.
But the US lead has been whittled down in both areas. Therefore, the version of American exceptionalism that was touted in late 2024 may well be over. Which is not to say that American dynamism and innovation are over, but it may be a while before they hold the same sway as in the last two years.
Economically the $64,000 question is whether President Trump’s tariffs will escalate into a full-blown trade war. Alternatively, will the reciprocal tariffs unveiled on 2 April set the stage for negotiations and deal-making between the US and its trade partners? If so, damage to the world economy could be limited.
A possible peace deal between Russia and Ukraine could also have a significant economic impact. The most immediate effect would be in Europe, where lower prices for energy and other commodities would provide a significant economic boost. But lower commodity prices would also be a boon for other economies around the globe, particularly emerging economies.
The next few months will also be pivotal for the debate about whether US inflation will continue to fall, or whether stagflation - weak growth with stubborn inflation - will set in. This will have implications for the path of interest rates, which could therefore fall more sharply, or more slowly, than currently expected.
In many ways, we are not that much further on from the radical uncertainty that prevailed three months ago. Surprises in any direction are still possible.
The US economy has shown definite signs of softening in recent months. One of the most striking moves has been in consumer confidence, which has taken a dive and, on some measures, is at levels consistent with a recession.
Talk of higher tariffs has led to fears of higher inflation, and the shock tactics of the Department of Government Efficiency (DOGE) under the leadership of Elon Musk and the general uncertainty resulting from Trump's unpredictable policies may also have hit confidence.
Job growth dipped to around 150,000 in January and February, and the manufacturing purchasing managers' index fell below 50 in March. Furthermore, stockpiling of goods ahead of possible tariffs led the trade deficit to widen, which arithmetically pulls down GDP growth and is one of the reasons why some estimates of first quarter economic growth are negative. However, this effect is temporary and the underlying domestic economy is still growing. But most growth forecasts for 2025 are now below 2%, and a further deterioration certainly cannot be ruled out if the economic weakness begins to spread more widely.
The Fed kept rates on hold in the first quarter. Inflation has remained steady, albeit a touch above the Fed's target: core CPI was 3.1% in February and core PCE 2.8%. However, inflation concerns are focused on the possible effect of tariffs. These are generally thought to be modestly inflationary, at least in the short term, but this is uncertain. If a trade war led to a recession, the resultant downward impact on inflation could offset or outweigh the inflationary impact of tariffs.
So far, we have not seen any of the deregulation and tax cuts that investors had hoped for from the Trump administration, and which prompted the jubilant mood on the US equity markets after the presidential election. However, the president may move on to this agenda later in the year, which would be positive for the markets.
After two years of stellar returns, reality finally caught up with US technology stocks in the first quarter of 2025, with the Nasdaq index falling by 10%.
All of the "Magnificent 7" tech stocks, except Meta, performed worse than this, led by Tesla. AI hype was punctured somewhat by the release of the cut-price DeepSeek model from China, which cast doubt on the primacy of American firm Nvidia’s chips and the likely returns from the tech sector's huge capital spending plans.
The decision of many of the tech CEOs to ally themselves with President Trump (above all Elon Musk) may have hurt their brands, since it reversed the previous perception that they were in the liberal camp. Operational results remained strong in Q4, but with valuations so high, this didn't give tech stocks much of a boost.
The general election in February and the perception that Germany can no longer rely on the US for its defence paved the way for a watershed moment. The previous strict fiscal rules were effectively abolished and Germany is promising an investment bonanza in defence and infrastructure spending in the coming years. Growth forecasts have been revised up accordingly.
European equities were the best-performing developed region in the first quarter, with the Eurostoxx 50 rising by 7% and the DAX index by 11%. European stocks also benefited from the moves towards a ceasefire in Ukraine, which could potentially lower European energy prices.
The European Central Bank (ECB) made two further interest rate cuts of 25 bp in the first quarter of 2025, taking the deposit rate down to 2.5%. The euro area's lower inflation (2.2% in March) has enabled the ECB to run a looser monetary policy than the US and UK and means Europe is not really afflicted by worries about stagflation. This puts the European economy in a sweet spot, since more expansionary fiscal policies should not give rise to inflationary fears.
The UK economy remains sluggish. GDP growth was just 0.9% in 2024 (the same as in the euro area) and contracted by 0.1% in January 2025.
In spite of the slow growth, inflation has been comparatively stubborn and core CPI inflation was still well above target at 3.5% in February 2025. This has made the Bank of England cautious, and it added just one further small rate cut of 25 bp to the two cuts made last year, taking the base rate to 4.5%. It will await further progress on inflation before cutting further.
The Labour government is constrained in what it can do to boost growth by the UK's poor fiscal position, so the government is pulling every non-financial lever it can to strengthen the economy, such as loosening planning restrictions on housebuilding. The fact that the UK has been hit by the lowest rate of US tariffs - 10% - is good news for the UK economy.
Although it has shied away from a giant fiscal package, China has implemented a whole range of smaller support measures to try to bring the downturn on the property market to a halt and boost consumer spending and confidence in the economy more broadly. These have had some success, with the decline in property prices clearly slowing, even if prices have not bottomed out yet. The authorities have also sought to show that the clampdown on the technology sector is over and that tycoons such as Jack Ma of Alibaba have been restored to favour.
The tariffs of 54% imposed on China from April 2025 are in the end not far short of the 60% threatened during President Trump’s election campaign. Moreover, "China +1" strategies have been undermined by the heavy tariffs levied on Vietnam and Mexico. China may try to redirect exports to other regions but may ultimately be forced to take action - such as the fiscal stimulus it has so far avoided - to boost the domestic economy to make up for the loss of export markets.
The Chinese equity market continued its modest recovery, rising 3% in the first quarter, although Hong Kong stocks were up 18%. China continues to flirt with deflation, with consumer prices down 0.7% yoy in February.
The Fed stayed on hold in the first three months of 2025 as it monitored the effects of the Trump administration's policies on growth and inflation. It has admitted that the high level of uncertainty is making projections difficult. Nonetheless, both the Fed and the market anticipate around two more interest rate cuts by the end of 2025.
The ECB remained doveish and reduced its policy rate by a further 50 bp to 2.5%, as it is confident that inflation will return to the 2% target on a sustained basis and remains concerned about the downside risks to growth. After the last cut in March it did indicate, however, that the pace of cuts might be slower from here on.
The Bank of England trimmed interest rates by 25 bp and remains constrained by relatively high inflation and strong wage growth of over 5%. But these constraints are expected to ease eventually and allow the Bank of England to cut rates further in the course of the year and into 2026.
Meanwhile, the Bank of Japan continued its very gradual policy normalisation, raising its key rate from 0.25% to 0.5%. Inflation has been well above target for some time and wage growth is now at its highest rate in over 30 years, raising hopes that Japan has escaped sustainably from deflation. But some policymakers fear that the rise in inflation has mostly been driven by higher commodity prices and the weak yen and that the deflation spectre could return if interest rates are raised too quickly.
Gold was the best-performing asset class in the first quarter, as the price rose 17% and broke through the $3,000 level. The simplest explanation for the rally is: uncertainty about everything else. Gold also left cryptocurrencies in the dust, demonstrating that it is not about to be replaced as the ultimate safe haven asset. How long the rally will continue is impossible to say, but it is underpinned by strong and consistent demand, and other asset classes will have to become more attractive to knock gold off its perch.
Equities continued to outperform fixed income in 2025 so far, although leadership rotated from the US to markets that have been laggards in the last few years: Europe, China and emerging markets. The US stock markets corrected, perhaps inevitably after such a strong run in the last two years, dragged down by a cooler economy and uncertainty about US economic policy.
The continued outperformance of at least some equities reflects the generally fairly benign economic backdrop, with none of the main economies anywhere near recession. The main debate is over the impact of tariffs. While a highly adverse scenario - of an all-out trade war with significant inflationary consequences – cannot be ruled out, a more middle-of-the-road view is that tariffs will probably not fundamentally derail the benign economic backdrop.
While tariffs may have some inflationary impact in the short term, the impact beyond that is far more uncertain. If economic growth slows as a result of the trade war, this could easily outweigh the short-term impact of price rises for certain commodities and still lead inflation to fall overall. Geopolitics, in particular an end to the war in Ukraine, also has the potential to put downward pressure on energy prices and therefore inflation.
Bonds have been the “Cinderella” asset class since 2022, with only sporadic bursts of strong performance, although high yield bonds have performed well, owing to the soft economic landing in the last few years. If the impact of tariffs on inflation is less than feared, bonds could finally emerge from the shadows and put in a longer bout of outperformance. Short-term interest rates are still expected to be cut further, which should also benefit bonds in the medium term. Bonds would also benefit if the US economic slowdown turns into something more serious.
Uncertainty remains high, which makes a strong case for continuing to hold a more diversified portfolio than usual. In terms of equities, diversifying almost inevitably means underweighting US equities relative to their huge weighting in global equity indices of over two-thirds. A solid allocation to safer assets such as fixed income, gold, and even cash also makes sense in the current environment.
The first few months of the Trump presidency have already been something of a rollercoaster ride. In many ways we are in the same position of radical uncertainty as we were three months ago.
The impact of tariffs is impossible to forecast, and an all-out trade war, which would be very bad for risk assets such as equities, is not beyond the bounds of possibility.
But for now, the economic backdrop is still benign, and we are cautiously optimistic that it will remain so on balance. There are therefore still selective opportunities in equities, but leadership may pass from the US to other regions, and the technology/AI story may have peaked.
Overall it is essential to maintain a well-diversified portfolio that is resilient to the uncertainties that lie ahead.
CEO
