Market Update (Q2 2025): Navigating Uncertainty with Steady Gains
As we reflect on the second quarter of 2025, it's clear that global markets have had to contend with a fair share of challenges; from shifting US trade policies, to geopolitical tensions in the Middle East. Yet, despite a rocky start, markets showed resilience and finished the quarter on a much stronger footing than many had anticipated.
A Tale of Two Halves
April began with volatility, sparked by a surprise announcement of higher-than-expected US tariffs, an event now dubbed “Liberation Day” by financial markets. This led to a sharp sell-off, with US equities falling significantly in local terms. However, as policymakers softened their tone and delayed implementation of the new trade measures, confidence returned. By the end of the quarter, global stock markets had bounced back, with US equities up over 7.5% when measured in Sterling.
The Usual Market Movers
Technology giants, commonly referred to as the "Magnificent Seven" (Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta, and Tesla), played a major role in both the downturn and the recovery. After hitting lows in early April, most of these names rebounded strongly, delivering double-digit gains.
Currency Moves and Global Impacts
One of the standout themes this quarter was the weakness in the US dollar, which fell over 6% against the pound. While this posed challenges for some US-based assets, it provided a boost to overseas investments. Notably, emerging market stocks performed well, benefiting from a combination of dollar weakness and a temporary easing in trade tensions with China.
Surprisingly, the ongoing conflict in the Middle East had only a short-lived impact on oil prices. After spiking briefly following US involvement in late June, oil prices quickly retreated and ended the quarter more than 9% lower.
Regional Market Highlights
- UK and Europe: After a strong first quarter, UK and European stocks took a breather but remain solid performers for the year—up 14% and 9% respectively in Sterling terms.
- US: Despite the Q2 rebound, US equities are still slightly down year-to-date, reflecting the initial market jitters around tariffs.
- Sectors: Market performance was mixed across sectors. UK stocks were weighed down by weaker energy and healthcare shares, while US consumer-focused companies also lagged. Financials, however, stood out with consistent gains across most developed markets.
Bond Markets Stay Steady
Fixed income investments delivered positive results across the board. The weaker dollar helped boost returns on inflation-linked global bonds, and high-yield bonds had another solid quarter. Broadly speaking, bond markets were supported by the view that interest rate cuts may be on the horizon.
The Interest Rate Picture
Interest rates remain a key factor for markets:
- US: The Federal Reserve kept rates steady, despite political pressure to cut. The central bank remains cautious due to potential inflation risks from new tariffs.
- Europe: The European Central Bank cut rates twice, bringing them down to 2% as inflation slowed to 1.8%.
- UK: The Bank of England made a small rate cut in May but held off further action in June amid uncertainty around oil prices.
- Japan: Rates remain near zero, with the Bank of Japan still waiting for inflation to pick up.
Eyes on Fiscal Policy
In the US, a major fiscal package, the “One Big Beautiful Bill Act”, is making its way through Congress. If passed, it could add between $3–5 trillion to the national debt over the next decade. Investors are keeping a close watch on how this may affect long-term economic stability and inflation.
Economic Outlook: Cautiously Optimistic
While the threat of recession increased earlier in the quarter, recent economic data has remained robust. The full impact of new tariffs may take several more months to unfold, so we may see further market swings. However, there’s a growing sense of optimism, particularly as corporate earnings are expected to improve in the coming quarter.
June in Focus: Steady Momentum Builds
June saw a continuation of the market rebound that began in May, with global equities rising another 2.6% in Sterling terms. Every major asset class delivered positive returns, supported by a further dip in the US dollar.
- Emerging markets led the way with gains over 4%.
- Small-cap stocks, typically more sensitive to the economic outlook, performed as well or better than large caps, indicating increased investor confidence.
- Bond markets had a strong showing with all key segments, government, corporate, inflation-linked, high-yield, and emerging market debt, posting gains.
Looking ahead, the market is pricing in a more upbeat earnings season and potential interest rate cuts in the second half of the year. While risks remain, especially on the geopolitical front, the overall tone has turned more positive.
As ever, this article is intended to inform you of market movements and factors effecting the portfolio. We have already factored this in to our long term assumptions in your financial plans, however should you have any questions, please contact your adviser.
About
Aled Phillips
: Aled is a Fellow of the PFS, a Chartered Financial Planner, and a Chartered Fellow of the CISI.
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The contents of this article do not constitute financial advice in any way; if you have any concerns about your finances you should talk to your financial adviser. The value of your investments can go down as well as up.
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