Our Market Update for April comes again courtesy of our investment partners at Quilter Cheviot. They publish a range of insightful content on a highly regular basis. Follow them online here.
We were fortunate to spend time at their offices last week to participate in a forum focused on supporting cross-border clients, their investment approach and how to navigate the current climate.
The views below come firstly from Chief Investment Officer John McElroy and then a weekly viewpoint from Caroline Simmons.
……………………………………………………………………….
Q1 2025 saw significant regional rotation in financial markets, largely driven by political developments on both sides of the Atlantic. European stocks strongly outperformed their US counterparts during the quarter, although a larger weighting to the latter in global indices meant that the MSCI All Country World index declined by 5.5% (all returns Q1 and in euro, unless otherwise stated). European government bonds also declined, albeit more modestly at -1.2%, and under-performed their US and UK counterparts — primarily due to major fiscal spending plans by Germany.
CONTINENTAL EUROPE / EUROZONE: RAMPED-UP SPENDING PLANS VS BELT TIGHTENING:
The MSCI Europe ex UK posted strong first quarter returns (+6.4%) whereas the MSCI North America declined by 8.4%. There was a notable negative currency impact for euro investors as the US dollar fell by c. 4.5% against the euro. The regional rotation has been caused by continental Europe gearing up for largescale government spending increases while the Trump administration is pushing US policies — such as trade tariffs and unorthodox spending cuts (DOGE) — which are seen as likely to reduce economic growth. The ongoing war in Ukraine also played a part, as the US walking back its security guarantee has led to European governments deciding to ramp up defence spending plans.
CAUTIOUS FISCAL APPROACH ENDS
Germany’s election signalled a step change in the country’s approach to public spending, as incoming chancellor Friedrich Merz used the outgoing parliament to let off the so-called “debt brake”, a constitutional measure capping deficit spending at 0.35% of GDP per year. Alongside an open-ended commitment to increase defence spending, parliament approved a €500bn package (approximately 1% of GDP per year) to improve infrastructure over the next 12 years.
US – SLOWER GROWTH, HIGHER INFLATION
The substantial US tariff increases announced in early April have led to lower growth and higher inflation forecasts for the world’s largest economy. The measures are significantly higher than were expected by investors but despite the claims of further clarity, uncertainty has increased. The tariff rates announced could be the high-water mark for tariffs with duties negotiated down from here, or there could well be an escalatory “tit-for-tat”. This only adds to uncertainty and such uncertainty is likely to weigh on economic activity.
US EARNINGS IN THE SPOTLIGHT
Forthcoming US first quarter corporate results are expected to show downgrades in growth and reductions in Q2 and 2025 earnings forecasts. The MSCI North America 12-month forward Price/Earnings ratio (“P/E”) has dropped to c. 20.6x from 22.2x at the end of 2024. US tariffs will ultimately hit consumers and, consequently, result in lower earnings. It is likely that all companies producing goods outside of the United States are going to be adversely impacted by tariffs.
UK STOCKS MIDDLE OF THE ROAD
The MSCI UK posted a strong quarterly return (+5.0%), comfortably outperforming the US although slightly lagging continental Europe. The Bank of England (BoE) is forecasting inflation to rise in the coming months to 3.7% and has halved its 2025 growth forecast to 0.75%. Stagflation — the unwanted combination of low growth and high inflation — is becoming an increasing concern but there are some reasons for optimism, such as the recent pick-up in retail sales figures. UK small- and midcap stocks have underperformed large-caps, primarily due to rising bond yields and a greater exposure to the slowing UK economy.
ECB CUT, FED ON HOLD
The European Central Bank (ECB) lowered rates once more last month, delivering the sixth cut in under a year to take the deposit rate to 2.50%. The ECB has been more proactive than peers, such as the Federal Reserve and Bank of England in easing monetary policy due to a firmer belief that high inflation has been curbed. Further rate cuts are expected, particularly given the potential economic impact of recent tariff announcements.
SUMMARY
Uncertainty surrounding the impact on trade and geopolitics from the implementation of tariffs has undoubtedly increased in recent months and we are monitoring developments closely. The adversarial US tariff approach is a cause for concern, both in the US and globally, but we recognise this is a fluid situation and could quickly change. The risk of a US recession has increased significantly in recent months and we will be monitoring incoming economic data carefully. After a couple of very good years global equities have above average valuations due to the US market impact. Strong earnings growth and interest rate cuts had supported this at the start of the year, but we remain vigilant for signs that this may no longer be the case. We see bonds as attractive at current levels, offering historically high yields and potential diversification benefits should economic data deteriorate.
WEEKLY UPDATE
MARKET OVERVIEW – CAROLINE SIMMONS, CHIEF INVESTMENT OFFICER
Global equities rallied last week as they recouped some recent losses on the news that most countries, but not China, would receive a 90-day pause from the US reciprocal tariffs. The MSCI All Country World index rose 3.5% (in US dollar terms) on the week (-5.5% YTD). While the news was met with relief from investors, strong selling in US Treasuries and the US dollar suggest that concerns remain, and uncertainty appears likely to remain elevated for the foreseeable future.
US STOCKS BOUNCE
The pause announcement saw an extremely strong rally in stocks, with US equities posting their largest daily gain since the global financial crisis and ending the week up 5.7% (-8.5% YTD, all returns in local currency unless otherwise stated). Technology stocks outperformed, with tech-heavy index rising more than 10% on Wednesday, closing out the week up 7.3% (-13.2% YTD). Adverse bond market movements are seen as an important factor behind the decision to pause the tariffs — something Donald Trump himself mentioned. This is welcome in the sense that it reveals that while the US president may not be as sensitive to negative market movements as during his first term, he does still have a watchful eye in this regard and that they represent something of a guardrail against more destructive policies.
SHARP RISE IN YIELDS A POTENTIAL CAUSE FOR CONCERN
In the first few days following the 2 April tariff announcement there was a clear move higher in US bonds as Treasuries benefited from safe haven flows while stock markets experienced sizable declines. However, last week saw a change in this dynamic as US Treasuries experienced a large weekly decline, more than erasing the earlier gain. The US 10-year Treasury yield ended the week at 4.49% from 4.00% (-8 basis points (0.08%) YTD). Yields rise as prices fall. Long-dated yields underwent the sharpest rise, while short-dated bonds held up better.
The moves were linked to concerns around potentially higher inflation, the size of fiscal deficits, particularly if growth is weaker, and were concentrated at the long end of the curve, where they are more sensitive to movements in flows. There were rumours that the moves were exacerbated by the unwinding of popular hedge fund trades, such as the basis trade, that are designed for lower volatility environments. And there were some unsubstantiated reports of selling from foreign investors who hold approximately a third of US treasury debt. As a result of the recent high volatility many investors will be watching closely for indications of a further loss of confidence in what is seen as a key benchmark for global financial markets. Yields stabilised following the tariff pause announcement and it is important to keep the moves in context, with the US 10-year yield now back around the level it started the year. UK gilts tracked their US counterparts higher, with the UK 10-year yield rising from 4.45% to 4.75%. Continental European bonds fared better, with the German 10-year bund ending the week little changed at 2.57%.
US DOLLAR DEPRECIATES
The weakening of the US dollar along with rising US yields is another sign of potential falling confidence in the US. When yields rise, you would normally expect the currency to appreciate, due to widening international yield differentials. However, when confidence is hit the opposite occurs, like we saw with the surge in gilt yields and accompanying fall in sterling during the fallout from Liz Truss’s “mini-budget” in 2022. In addition, in response to a weaker potential growth outlook as a result of tariffs, the market started to price additional cuts to interest rates from the Federal Reserve.
SENTIMENT FALLS FURTHER BUT “HARD” DATA STILL HOLDING UP
The clear divergence between “soft” and “hard” US economic data continued, as the University of Michigan Consumer Sentiment index declined for a fourth consecutive month to 50.8, the lowest level since June 2022. There was also a sharp rise in year-ahead inflation expectations, which surged to 6.7% in April — the highest level since 1981. “Hard” inflation data in the form of the March consumer price index provided some good news, although this related to the period before the dramatic tariff developments. The 2.8% annual increase in core prices was the slowest pace since March 2021, but things have changed significantly over the past month. Labour market indicators remain strong, with weekly initial jobless claims showing another solid reading, but it should be noted that any negative developments in tariffs are unlikely to have an immediate impact on the jobs market.
CENTRAL BANKS TO CUT RATES
The Federal Reserve finds itself in a tricky position, trying to navigate the shifting sands of higher inflation and slower growth due to trade tariffs. Recent communication suggests that policymakers are more concerned about rising prices than a slowing economy for the time being, but this could obviously change quickly. Derivatives markets are pricing three 25 basis point (0.25%) cuts from the Federal Reserve in 2025, the same amount of easing as is expected from the Bank of England.
EUROPE RECOVERS, BUT STILL LOWER ON THE WEEK
European markets recouped some of their losses on the positive tariff news, although most still ended the week lower. UK indices closed -1.0% for the week (-1.3% YTD), Germany -1.3% (2.3% YTD) and France -2.3% (-3.5% YTD). The MSCI Europe ex UK ended the week -1.4% (-2.6% YTD).
CONCLUSION
We believe that recent developments have reduced the relative attraction of US equities for a number of reasons. After a strong run in recent years US equities trade at a premium to peers and even after recent declines valuations are still relatively higher. Many earnings estimates are yet to fully price in the impact of strongly escalatory trade tariffs, but we believe the US equities remain on around a 20x 12-month forward P/E (price/earnings ratio). This was approximately 22x at the start of the year and while we recognise the decline, The premium valuation is still a risk given the high levels of uncertainty over the growth outlook in the near term.
The average net tariff rate has moved significantly in recent weeks, but we believe it to now be in the region of around 18% versus forecasts for around 15% pre the 2 April announcement from Donald Trump (before the pause and technology exemptions it was in the region of 23%). This may weigh on US earnings going forward, with eps (earnings per share) growth potentially limited to around 6% for 2025 — half what it was pre-tariff announcements.
It is not just this higher tariff level that is providing a headwind for US equities, there is also increased uncertainty in the near term. This will negatively impact investment and economic activity as corporate leaders have hazy visibility at best of what the business environment will be like in the coming months. During short periods of uncertainty paused activity can be recouped, but the longer uncertainty remains, the more growth leakage occurs.
Whilst additional trade deals may be struck and a more positive news flow emerge in coming weeks, there is also the risk for a further loss of confidence in US assets, which could contribute to a further depreciation in the US dollar and reduce returns for international investors. We believe there are many world-leading companies in the US that we like but at present the relatively higher valuations, imposition of trade tariffs and increased uncertainty lead us to view other areas more attractively on a relative basis.
One of these areas is Europe (ex UK) where we see increased fiscal stimulus from Germany and a collective increase in defence spending as potentially landmark moments for the Eurozone. The interest rate path for the European Central Bank (ECB) also appears more predictable than that of the Federal Reserve (Fed), with the latter now being pulled in opposing directions by increased risks of a slowing economy but with rising prices. This is supportive of the single currency and the EUR/USD has appreciated around 10% YTD. There is also the potential for Europe to continue to benefit from investment flows out of the US, as investors pare back general US exposure.
Find original articles here
April 2025 Market Update – “Stocks stabilise as Trump announces tariff pause”
Table of Contents
Our Market Update for April comes again courtesy of our investment partners at Quilter Cheviot. They publish a range of insightful content on a highly regular basis. Follow them online here.
We were fortunate to spend time at their offices last week to participate in a forum focused on supporting cross-border clients, their investment approach and how to navigate the current climate.
The views below come firstly from Chief Investment Officer John McElroy and then a weekly viewpoint from Caroline Simmons.
……………………………………………………………………….
Q1 2025 saw significant regional rotation in financial markets, largely driven by political developments on both sides of the Atlantic. European stocks strongly outperformed their US counterparts during the quarter, although a larger weighting to the latter in global indices meant that the MSCI All Country World index declined by 5.5% (all returns Q1 and in euro, unless otherwise stated). European government bonds also declined, albeit more modestly at -1.2%, and under-performed their US and UK counterparts — primarily due to major fiscal spending plans by Germany.
CONTINENTAL EUROPE / EUROZONE: RAMPED-UP SPENDING PLANS VS BELT TIGHTENING:
The MSCI Europe ex UK posted strong first quarter returns (+6.4%) whereas the MSCI North America declined by 8.4%. There was a notable negative currency impact for euro investors as the US dollar fell by c. 4.5% against the euro. The regional rotation has been caused by continental Europe gearing up for largescale government spending increases while the Trump administration is pushing US policies — such as trade tariffs and unorthodox spending cuts (DOGE) — which are seen as likely to reduce economic growth. The ongoing war in Ukraine also played a part, as the US walking back its security guarantee has led to European governments deciding to ramp up defence spending plans.
CAUTIOUS FISCAL APPROACH ENDS
Germany’s election signalled a step change in the country’s approach to public spending, as incoming chancellor Friedrich Merz used the outgoing parliament to let off the so-called “debt brake”, a constitutional measure capping deficit spending at 0.35% of GDP per year. Alongside an open-ended commitment to increase defence spending, parliament approved a €500bn package (approximately 1% of GDP per year) to improve infrastructure over the next 12 years.
US – SLOWER GROWTH, HIGHER INFLATION
The substantial US tariff increases announced in early April have led to lower growth and higher inflation forecasts for the world’s largest economy. The measures are significantly higher than were expected by investors but despite the claims of further clarity, uncertainty has increased. The tariff rates announced could be the high-water mark for tariffs with duties negotiated down from here, or there could well be an escalatory “tit-for-tat”. This only adds to uncertainty and such uncertainty is likely to weigh on economic activity.
US EARNINGS IN THE SPOTLIGHT
Forthcoming US first quarter corporate results are expected to show downgrades in growth and reductions in Q2 and 2025 earnings forecasts. The MSCI North America 12-month forward Price/Earnings ratio (“P/E”) has dropped to c. 20.6x from 22.2x at the end of 2024. US tariffs will ultimately hit consumers and, consequently, result in lower earnings. It is likely that all companies producing goods outside of the United States are going to be adversely impacted by tariffs.
UK STOCKS MIDDLE OF THE ROAD
The MSCI UK posted a strong quarterly return (+5.0%), comfortably outperforming the US although slightly lagging continental Europe. The Bank of England (BoE) is forecasting inflation to rise in the coming months to 3.7% and has halved its 2025 growth forecast to 0.75%. Stagflation — the unwanted combination of low growth and high inflation — is becoming an increasing concern but there are some reasons for optimism, such as the recent pick-up in retail sales figures. UK small- and midcap stocks have underperformed large-caps, primarily due to rising bond yields and a greater exposure to the slowing UK economy.
ECB CUT, FED ON HOLD
The European Central Bank (ECB) lowered rates once more last month, delivering the sixth cut in under a year to take the deposit rate to 2.50%. The ECB has been more proactive than peers, such as the Federal Reserve and Bank of England in easing monetary policy due to a firmer belief that high inflation has been curbed. Further rate cuts are expected, particularly given the potential economic impact of recent tariff announcements.
SUMMARY
Uncertainty surrounding the impact on trade and geopolitics from the implementation of tariffs has undoubtedly increased in recent months and we are monitoring developments closely. The adversarial US tariff approach is a cause for concern, both in the US and globally, but we recognise this is a fluid situation and could quickly change. The risk of a US recession has increased significantly in recent months and we will be monitoring incoming economic data carefully. After a couple of very good years global equities have above average valuations due to the US market impact. Strong earnings growth and interest rate cuts had supported this at the start of the year, but we remain vigilant for signs that this may no longer be the case. We see bonds as attractive at current levels, offering historically high yields and potential diversification benefits should economic data deteriorate.
WEEKLY UPDATE
MARKET OVERVIEW – CAROLINE SIMMONS, CHIEF INVESTMENT OFFICER
Global equities rallied last week as they recouped some recent losses on the news that most countries, but not China, would receive a 90-day pause from the US reciprocal tariffs. The MSCI All Country World index rose 3.5% (in US dollar terms) on the week (-5.5% YTD). While the news was met with relief from investors, strong selling in US Treasuries and the US dollar suggest that concerns remain, and uncertainty appears likely to remain elevated for the foreseeable future.
US STOCKS BOUNCE
The pause announcement saw an extremely strong rally in stocks, with US equities posting their largest daily gain since the global financial crisis and ending the week up 5.7% (-8.5% YTD, all returns in local currency unless otherwise stated). Technology stocks outperformed, with tech-heavy index rising more than 10% on Wednesday, closing out the week up 7.3% (-13.2% YTD). Adverse bond market movements are seen as an important factor behind the decision to pause the tariffs — something Donald Trump himself mentioned. This is welcome in the sense that it reveals that while the US president may not be as sensitive to negative market movements as during his first term, he does still have a watchful eye in this regard and that they represent something of a guardrail against more destructive policies.
SHARP RISE IN YIELDS A POTENTIAL CAUSE FOR CONCERN
In the first few days following the 2 April tariff announcement there was a clear move higher in US bonds as Treasuries benefited from safe haven flows while stock markets experienced sizable declines. However, last week saw a change in this dynamic as US Treasuries experienced a large weekly decline, more than erasing the earlier gain. The US 10-year Treasury yield ended the week at 4.49% from 4.00% (-8 basis points (0.08%) YTD). Yields rise as prices fall. Long-dated yields underwent the sharpest rise, while short-dated bonds held up better.
The moves were linked to concerns around potentially higher inflation, the size of fiscal deficits, particularly if growth is weaker, and were concentrated at the long end of the curve, where they are more sensitive to movements in flows. There were rumours that the moves were exacerbated by the unwinding of popular hedge fund trades, such as the basis trade, that are designed for lower volatility environments. And there were some unsubstantiated reports of selling from foreign investors who hold approximately a third of US treasury debt. As a result of the recent high volatility many investors will be watching closely for indications of a further loss of confidence in what is seen as a key benchmark for global financial markets. Yields stabilised following the tariff pause announcement and it is important to keep the moves in context, with the US 10-year yield now back around the level it started the year. UK gilts tracked their US counterparts higher, with the UK 10-year yield rising from 4.45% to 4.75%. Continental European bonds fared better, with the German 10-year bund ending the week little changed at 2.57%.
US DOLLAR DEPRECIATES
The weakening of the US dollar along with rising US yields is another sign of potential falling confidence in the US. When yields rise, you would normally expect the currency to appreciate, due to widening international yield differentials. However, when confidence is hit the opposite occurs, like we saw with the surge in gilt yields and accompanying fall in sterling during the fallout from Liz Truss’s “mini-budget” in 2022. In addition, in response to a weaker potential growth outlook as a result of tariffs, the market started to price additional cuts to interest rates from the Federal Reserve.
SENTIMENT FALLS FURTHER BUT “HARD” DATA STILL HOLDING UP
The clear divergence between “soft” and “hard” US economic data continued, as the University of Michigan Consumer Sentiment index declined for a fourth consecutive month to 50.8, the lowest level since June 2022. There was also a sharp rise in year-ahead inflation expectations, which surged to 6.7% in April — the highest level since 1981. “Hard” inflation data in the form of the March consumer price index provided some good news, although this related to the period before the dramatic tariff developments. The 2.8% annual increase in core prices was the slowest pace since March 2021, but things have changed significantly over the past month. Labour market indicators remain strong, with weekly initial jobless claims showing another solid reading, but it should be noted that any negative developments in tariffs are unlikely to have an immediate impact on the jobs market.
CENTRAL BANKS TO CUT RATES
The Federal Reserve finds itself in a tricky position, trying to navigate the shifting sands of higher inflation and slower growth due to trade tariffs. Recent communication suggests that policymakers are more concerned about rising prices than a slowing economy for the time being, but this could obviously change quickly. Derivatives markets are pricing three 25 basis point (0.25%) cuts from the Federal Reserve in 2025, the same amount of easing as is expected from the Bank of England.
EUROPE RECOVERS, BUT STILL LOWER ON THE WEEK
European markets recouped some of their losses on the positive tariff news, although most still ended the week lower. UK indices closed -1.0% for the week (-1.3% YTD), Germany -1.3% (2.3% YTD) and France -2.3% (-3.5% YTD). The MSCI Europe ex UK ended the week -1.4% (-2.6% YTD).
CONCLUSION
We believe that recent developments have reduced the relative attraction of US equities for a number of reasons. After a strong run in recent years US equities trade at a premium to peers and even after recent declines valuations are still relatively higher. Many earnings estimates are yet to fully price in the impact of strongly escalatory trade tariffs, but we believe the US equities remain on around a 20x 12-month forward P/E (price/earnings ratio). This was approximately 22x at the start of the year and while we recognise the decline, The premium valuation is still a risk given the high levels of uncertainty over the growth outlook in the near term.
The average net tariff rate has moved significantly in recent weeks, but we believe it to now be in the region of around 18% versus forecasts for around 15% pre the 2 April announcement from Donald Trump (before the pause and technology exemptions it was in the region of 23%). This may weigh on US earnings going forward, with eps (earnings per share) growth potentially limited to around 6% for 2025 — half what it was pre-tariff announcements.
It is not just this higher tariff level that is providing a headwind for US equities, there is also increased uncertainty in the near term. This will negatively impact investment and economic activity as corporate leaders have hazy visibility at best of what the business environment will be like in the coming months. During short periods of uncertainty paused activity can be recouped, but the longer uncertainty remains, the more growth leakage occurs.
Whilst additional trade deals may be struck and a more positive news flow emerge in coming weeks, there is also the risk for a further loss of confidence in US assets, which could contribute to a further depreciation in the US dollar and reduce returns for international investors. We believe there are many world-leading companies in the US that we like but at present the relatively higher valuations, imposition of trade tariffs and increased uncertainty lead us to view other areas more attractively on a relative basis.
One of these areas is Europe (ex UK) where we see increased fiscal stimulus from Germany and a collective increase in defence spending as potentially landmark moments for the Eurozone. The interest rate path for the European Central Bank (ECB) also appears more predictable than that of the Federal Reserve (Fed), with the latter now being pulled in opposing directions by increased risks of a slowing economy but with rising prices. This is supportive of the single currency and the EUR/USD has appreciated around 10% YTD. There is also the potential for Europe to continue to benefit from investment flows out of the US, as investors pare back general US exposure.
Find original articles here
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