Market resilience trumps geopolitical uncertainty

Quarter 2 2025 Reflecting on ‘interesting times’! 

Q2 (April - June 2025) was another eventful quarter for investors, marked by shifting trade policies and heightened geopolitical risks in the Middle East. Despite this, markets remained resilient as the worst-case scenarios, failed to materialise.

The announcement of the US-China trade deal on June 11, giving the US access to China’s rare earth minerals, helped ease investor uncertainty. The deal also reduced tariffs on Chinese goods from 146% to 30% and this was subsequently followed by a separate agreement with Vietnam. While the initial tariff on Vietnamese goods stood at 46% on “Liberation Day”, it was later reduced to 20% for direct imports, and 40% for trans-shipped Chinese goods. This marked a significant step in the US’s effort to prevent tariff ‘avoidance’ via Vietnam.

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In the Middle East, tensions escalated between Israel and Iran after Israel launched an airstrike on Iranian nuclear facilities. Oil prices briefly spiked above $80 per barrel, reflecting fears of supply disruption through the Strait of Hormuz, which carries nearly 20% of global oil shipments. The subsequent involvement from the US risked a further fall-out, however, despite Iran launching (a well telegraphed) airstrike on US facilities in Qatar, a truce was ultimately agreed, and the price of oil fell back to below $70 dollar a barrel.

In equity markets, we saw the positive momentum from May continue with most major markets advancing last month (see Figure 1).


Figure 1. Regional market returns (in GBP terms) (Source: FE Analytics, July 2025)

Once again, the S&P 500 had a strong month, delivering a return of 3.2% (in GBP terms). Investors looked beyond the uptick in inflation - its first rise in four months - and the contraction in U.S. GDP, instead focusing on easing geopolitical tensions, an improved trade outlook, and stronger-than-expected corporate earnings.

Gains were broad-based across most sectors with technology stocks once again performing well, climbing more than 7% over the past month.

What a first half! – the key points of 2025 so far

June marked the end of a remarkable first half of the year - not only for U.S. technology companies, which rebounded strongly with a 14% gain in Q2 after falling 15% in Q1- but also for the broader S&P 500. The index staged one of the fastest recoveries in recent history. After declining 20%, it took just 57 days to recover from the falls - making it the quickest rebound since the 1950s. For context, the average recovery time from a similar decline has historically been 511 days (see Figure 2).


Figure 2. S&P 500: Days to recover from a 20% drawdown (Source: Norgate Data, Pacific Asset Management, July 2025) 

Beyond the U.S., Euro Area GDP grew by 0.6% quarter-on-quarter in Q1, following a 0.3% increase in Q4 2024. This marks the fastest pace of expansion since Q2 2022. In response to moderating inflation - now at 2% - the European Central Bank (ECB) delivered another 25-basis point rate cut, lowering its benchmark rate to 2%. This was the ECB’s eighth rate cut over the past 12 months. The combination of accelerating growth, declining inflation, easing monetary policy, and ongoing fiscal support has helped drive European equities to a return of nearly 14% in 2025 year-to-date.

In the UK, the Bank of England voted 6–3 to maintain interest rates at 4.25%. However, with signs of labour market stress and slowing economic momentum - as evidenced by a 0.3% contraction in GDP in April - markets are now pricing in two additional 25 basis point cuts before year-end.

Despite ongoing economic and fiscal challenges, the FTSE 100 reached an all-time high last month. Investors looked beyond domestic headwinds, turning to UK equities as an alternative to U.S. markets. The index was further boosted by strong gains in major oil companies such as BP and Shell, which rallied in the immediate aftermath of the Israel–Iran conflict, as rising geopolitical tensions pushed oil prices higher.

Is US ‘exceptionalism’ back?

The recent rally in U.S. equities has led some to suggest that the much quoted "U.S. exceptionalism" is back. While we agree that the outlook has improved - not only for the U.S., but for the global economy - we believe the bigger story lies in the broader structural shifts underway. In a previous update, we discussed how President Trump’s perspective on the U.S.’s global role could mark a watershed moment. His re-election and subsequent policy direction may serve as a pivotal catalyst for change in global territories beyond U.S. borders.

Consider Europe as an example. At the start of the year, both France and Germany were facing political uncertainty, neither with a stable incumbent government. A previous lack of fiscal investment had contributed to low growth across the Euro area. Fast forward to today, and the landscape has shifted significantly: Germany is now planning to deploy €1 trillion in spending, support for the European Union has surged - driven by a "rally around the flag" effect - and European policymakers are signalling a strong intent to step up and fill the leadership void left by a possibly more isolationist U.S.

Time will tell how this transformation plays out, however, it's already clear that President Trump’s return has acted as a catalyst for much-needed strategic realignment in Europe. 

Looking to the future?

Looking ahead, we do not expect U.S. exceptionalism to persist in the same way it has over the past decade. That said, this is not a call to “sell the U.S.” The United States remains home to some of the most innovative, and resilient companies in the world, underpinned by a deeply entrenched capitalist ethos that is unlikely to fade. However, opportunities outside the U.S. have grown meaningfully - particularly among companies trading at more attractive valuations and better positioned to benefit from a world in which the U.S. becomes more domestically focused.
 
In this environment, diversification remains essential - not only as a tool for managing risk in a rapidly evolving world, but also as a means to take advantage of emerging opportunities across global markets.

As ever, if you have any questions about our commentary or would like to discuss your own portfolio in more detail, get in touch with your Adviser or contact us centrally through our website.

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This information in this article is correct as at 11/07/2025.

This market update is for general information only, does not constitute individual advice and should not be used to inform financial decisions. Investment returns are not guaranteed, and you may get back less than originally invested; past performance is not a guide to future returns.