Equities on a roll

Equities on a roll

The first half of this year has been good for equities. Global equity markets have risen by 9.5% following gains of 15% in 2024 and almost 21% in 2023. This year’s upward progression has been far from smooth.

• Equities hit the buffers in April with most major indices falling sharply on the announcement of US tariffs on 2 April. The US market fell 18% from its February peak, the sharpest decline since the pandemic. Technology, financial, oil and gas stocks saw the biggest declines on concerns that tariffs would hit US growth. Other equity markets also sold off sharply, though the US suffered one of the largest declines.

• Since then, equities have bounced back on the US decision to leave time for negotiation and postpone the introduction of many tariffs until 1 August. Renewed enthusiasm for equities comes despite the fact that, on current announcements, the average US tariff on imports of goods is eight times higher than at the start of the year and at the highest level since the early 1900s.

• In recent weeks President Donald Trump has proposed a 50% tariff on imports of copper and a 200% tariff on pharmaceutical products. Markets appear to have shrugged off the news, with the S&P 500 index trading near record highs and up 25% from April’s low. Investors seem to be betting that tariffs may not reach the levels threatened by Washington or that they will not have a major impact.

• In the US, the ‘magnificent seven’ major technology stocks, now account for 27% of the US equity market, up from just 5% in 2013. The performance of these behemoths, from Apple to Tesla, has an outsize impact on the performance of the US market. The magnificent seven sold off in early April but have since risen 39%. Since the start of the year, they have risen by 5%.

• The fortunes of these tech firms have diverged. Nvidia, Microsoft and Meta have risen 20% to 30% on a tide of optimism about AI. Amazon and Alphabet are broadly flat since the start of year while shares in Apple and Tesla are down by nearly 20%. The latter have both said that tariffs will significantly raise their costs.

• In May Apple CEO Tim Cook said that then prevailing tariffs would cost the business $900m. Tesla’s share price has suffered from the impact of tariffs and CEO Elon Musk’s feud with President Trump.

• Retail, and in particular consumer discretionary stocks, have been among the poorest performing US sectors.  Exercise bike maker Peloton has fallen in value by a quarter, while premium fitness retailer Lululemon is down 39%. US firms face a weaker consumption outlook as confidence has softened since the start of the year. Lululemon manufactures most of its products in Vietnam, Cambodia, Sri Lanka and Indonesia, countries that are threatened with high US tariffs.

• The US has been the star equity market of recent years, with gains far eclipsing those in most of the rest of the world. That pattern has gone into reverse this year as investors have started to question the notion of US exceptionalism. So far this year the US market is up 7%. Euro area stocks have risen 26%, Chinese stocks 25% and the UK 11%.

• Banks have performed strongly across Europe. Expectations for the sector were low at the start of the year but it has delivered strong earnings, share buybacks and high dividends. Euro area bank stock rose by over 50% in the first half of this year, with UK banks up 27%.

• Defence stocks have performed strongly in the wake of rising international tensions and NATO’s commitment to spend 3.5% of GDP on defence. Shares in Germany’s largest defence contractor, Rheinmetall, have almost tripled in value this year.

• Returns on government bonds have been poor this year. Yields on government bonds, especially long-dated bonds, have tracked upwards on investor concerns about inflation and levels of government borrowing. (Rising bond yields mean lower bond prices.) The tax cuts in Mr Trump’s “big, beautiful bill” will add significantly to US debt levels, which are forecast to rise from 100% of GDP to 211% by 2055. In March Germany changed its constitution to allow for a significant increase in borrowing to finance higher spending on defence and infrastructure. As in the US, the long-term path of public borrowing in Germany has shifted up.

• 2025 has not been a good year for the US dollar that has come under pressure as investors weigh the impact of US tariffs, sharply higher public borrowing and White House criticism of the Federal Reserve. Against a trade-weighted basket of foreign currencies the dollar has fallen 11% so far this year.

• The oil price spiked during the conflict between Israel and Iran in June on fears Tehran might disrupt oil production and shipping in the region. That spike was short-lived, and oil is trading well below levels at the start of the year. Following the ceasefire between Israel and Iran the market switched back to the fundamentals of softer global demand and rising supply as OPEC+ raises oil production. 

• Uncertainty has been good for gold, which has seen its price rise 28% this. Investors turn to gold when there are concerns about the economic outlook, or market volatility, particularly when other ‘safe-haven assets’, such as government bonds, are out of favour. Bitcoin, another supposed hedge against risk, has continued the ascent that started in 2023 and has risen 25% this year. 

• Investors seem to be counting on a benign outcome, in which US tariffs and growing geopolitical tensions have little impact on equity valuations. That sits uncomfortably with the IMF’s recent observation that amid recent volatility in equity, bond and currency markets, the risk of financial instability has “increased significantly”. For now, equity markets are shrugging off such risks.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.6% at 8,992.

Economics

• The EU proposed lowering import tariffs on US cars if the Trump administration reciprocated as trade negotiations continue. The EU is creating a list of potential tariffs on US services as part of retaliatory measures if trade negotiations break down, the FT reports
• US president Donald Trump said he was “very unhappy” with Russia and threatened to impose 100% tariffs and other sanctions on third parties who trade with Russia if there is no peace deal between Ukraine and Russia “in 50 days”
• The US raised a record $64bn in customs duties over the second quarter this year, an increase of $47bn from the previous year, following Mr Trump’s imposition of import tariffs
• The US dollar fell sharply last week following reports that Mr Trump was considering sacking Federal Reserve chair Jay Powell. Mr Trump later said it was “highly unlikely” that he would sack Mr Powell
• Fund managers have increased investments into technology equities at the fastest rate since 2009, according to a monthly survey by the Bank of America, as US equities continue to rebound 
• US inflation increased by a more than expected 2.7% in the year to June 
• US consumer sentiment improved more than expected in July to reach a five-month high, according to the University of Michigan, however the index remains well below historical averages
• Insurance companies are selling “catastrophe bonds”, which transfer the risk of severe events such as earthquakes and wildfires to bondholders, at a record rate amid growing fears of the impact of climate change
• UK inflation increased to an 18-month high of 3.6% in the year to June, up from 3.4% in May, driven by rising transport costs
• The UK labour market continued to soften, with unemployment rising to 4.7% in the three months to May and the number of vacancies continuing to fall in the second quarter this year. Annual average wage growth slowed to 5% in the three months to May
• German investor sentiment continued to improve in July for the third consecutive month, according to research institute ZEW, driven by government spending announcements and hopes of the US and EU reaching a trade deal 
• Chinese GDP increased 5.2% in the second quarter this year compared with 2024, a stronger than expected increase despite global trade disruptions and weak domestic demand

Business

• The EU has paused an investigation into US social media platform X (formerly Twitter) over breaches of transparency rules as it seeks to reach a trade agreement with the US, the FT reports
• Uber announced plans to invest $300m in US electric vehicle manufacturer Lucid as part of plans to launch a fleet of robotaxis
• Airline Wizz Air abandoned plans for an Abu Dhabi-based operating hub and will instead refocus on its main markets in Europe
• Saudi Arabian utilities company ACWA Power announced an $8.3bn investment into wind and solar farms as part of a consortium, as the country continues to develop its renewable energy capacity
• Applications from US students to UK universities increased to their highest level since records began in 2006, amid threats that US universities will have their funding cut by the US government 
• The UK government published its financial services strategy, aimed to reduce red tape and improve UK growth. Proposals include reforming ringfencing rules for banks and overhauling the Financial Ombudsman Service 
• Troubled utilities company Thames Water said it faces “material uncertainty” amid the possibility of temporary nationalisation. Thames Water chief executive Chris Weston said it would take “at least a decade” to turn the company around
• The UK government announced a £650m scheme to subsidise purchases of electric vehicles in a bid to accelerate sales to meet net-zero targets
• President of the British Academy Dame Julia Black warned of the long-term decline in the UK’s higher education system without significant reform to regulation and government oversight 
• UK digital bank Starling is considering listing in the US as part of its expansion plans, the latest in a trend of UK companies choosing to list in New York instead of London 
• UK bank Barclays was fined £42m by the Financial Conduct Authority for insufficient checks on its clients

Global and political developments

• Israel launched airstrikes on military targets in Syria. The Israeli government said the attacks were to protect members of the Druze religious group 
• Two ultraorthodox parties quit the Israeli government over disagreements on conscription of religious students, leaving the ruling coalition led by prime minister Benjamin Netanyahu with a one-seat parliamentary majority
• It was recently revealed that a UK database containing the details of thousands of Afghan nationals was accidentally leaked by the Ministry of Defence in 2022, raising concerns of reprisals by the Taliban. Thousands of people on the list have since been relocated to the UK under a secret scheme following the leak
• The UK and Germany agreed to work more closely in selling jointly made weapons, including Typhoon jets, as many European nations commit to increasing defence spending
• The UK government suspended four MPs from the Labour Party following recent rebellions in parliament
• The UK government announced that the voting age in England and Northern Ireland will be lowered from 18 to 16
• Sea levels in the UK are rising faster than the global average and more extreme weather “becomes the norm”, according to a report published in the International Journal of Climatology

And finally… the largest Martian meteorite ever found was sold at auction last week. The 25kg rock, found in the Sahara Desert, was sold for over $5m, making it the most valuable meteorite ever sold – ex-orbit-ant