Market Update July 2025

With classic British understatement, you could say the second quarter of 2025 has not been without incident. But market performance over the period fails to capture the full drama. The FTSE Private Investor Balanced Index, a reasonable proxy for the majority of our industry’s clients, returned around 2.5%, which could be considered slightly better than par on an annualised basis. That looked like a tall order at the end of the first week of April when it was down more than 5%.

Ahead of President Trump’s announcement of ‘reciprocal’ tariffs on 2 April that it might be a trigger the next twist in markets, but the scale of tariffs led to the sharp fall in equities. Counterintuitively, bonds and the dollar, which would normally be expected to be bid up in times of equity market stress, also fell.

Towards the end of the quarter, escalation in the Middle East provided another threat to investors, but this was shaken off with
remarkable alacrity. At the time of writing, the MSCI World Index (which is quoted in dollars) sits at an all-time high, although for non-dollar investors it hasn’t fully recouped its losses yet. But, US tariffs remain a significant cloud with recent further comments from President Trump.

TARIFF TIDES
Given the constant assault of news in the Information Age, events that occurred as recently as three months ago can feel a bit like ancient history. Even so, it’s important to reflect on ‘Liberation Day’, which turned out to be anything but. Even the US Treasury Secretary, Scott Bessent, generally considered to be the grown-up when he is in the room, appeared nonplussed when they were
unveiled.

With the starting point for most economists’ expectations having been an average tariff of 10%, it was no wonder that markets reacted so badly when first estimates suggested an average as high as 27%. With major indices hitting bear market territory (down 20% from the most recent peak), President Trump was forced within days to announce a ‘pause’, allowing time for negotiations. A pause that expires, in theory, on 8 July (and 11 August for China). This triggered an immediate and aggressive rally in equity markets, one that continued through what turned out to be a relatively positive corporate earnings report season and then extended through May and June.
However, companies have become more adept at mitigating costs and rejigging supply chains, having learned from their experiences of the covid pandemic and subsequent burst of inflation, which reached its apotheosis following Russia’s full-scale invasion of Ukraine.

THE SPOILS OF WAR
June gave as another ‘blink and you missed it’ potential crisis in the form of escalating hostilities in the Middle East. First came Israel’s surprise attack on Iranian military leaders and various strategic and military assets. That was followed by an even more surprising bombing raid carried out by the US on Iran’s key nuclear facilities. Leaks from Washington suggest that the latter attack was deliberately carried out over a weekend so as not to upset financial markets, which could quite easily have been sent into panic.
Instead, investors were faced with a fait accompli when markets opened on Monday, 23 June, although still waiting to see the extent of Iran’s response. This turned out to be very tame, coming in the form of a telegraphed missile attack on a US military base in Qatar which was (by design) easily intercepted. A ceasefire between Israel and Iran was announced and everyone stood down.

Sharp rises in the oil price have in the past been a catalyst for recessions, especially when the price spikes have been triggered by a curtailment of supply. Iran always holds the threat of closing the strategically important Strait of Hormuz, a channel along its border through which around 20% of global oil-related products pass on a daily basis. But it was only ever going to be the ultimate (and effectively self-defeating) ‘scorched earth’ option. As we write, it remains open, and we believe that there are enough vested interests involved to keep it that way, not least those of China, which aligns diplomatically with Iran and is a big net importer of oil via Hormuz. Given the already shaky nature of its economy, China cannot afford an energy shock.

THAT SINKING (DOLLAR) FEELING
As briefly mentioned earlier the fact that non-dollar equity investors are facing something of a headwind. The fact that US equities accounted for 64% of the market capitalisation of the MSCI All-Country World Index at the end of May means that they have an outsized influence on global investors’ returns. For the past few years, this influence has been positive, as investors have ridden the twin waves of a rising US stock market and a stronger dollar. However, the tariff shock (combined with concerns about America’s fiscal stability) turned everything on its head. While the dollar has often been a safe haven in times of trouble, the fact that the triggers of the market sell-off evolved in the US meant that the dollar was suddenly vulnerable. Looking at the numbers, the widely quoted DXY dollar index (which is heavily weighted to the euro) has now fallen by 11.5% from its most recent peak in January and by almost 15% from what appears, with hindsight, to have been the latest cyclical peak in September 2022. For UK investors, the pound has risen from a low of $1.22 earlier this year to $1.37, though this is largely a ‘weak dollar’ phenomenon. The wider dollar index is currently sitting very close to its 10-year average of 98.4, at 97.2, so this sharp move down in the dollar could be seen as reverting from overvalued levels back toward its mean.

Even so, questions are being asked about whether we are on the cusp of some sort of major sell-off or crisis, and the dollar’s global reserve currency status is being questioned too. Most of the discussion in the media fails to make the distinction between the dollar’s level and its status as a reserve currency. In terms of its level, there are four broad influences that we can look at to assess these risks. The main, but in many ways, least reliable one, is valuation, a factor that tends to be dreadful for market timing but which does in the end hold sway. Remember the wise words of Warren Buffet, the retiring leader of Berkshire Hathaway and a man generally recognised as the greatest investor (as opposed to trader) of all time: “Price is what you pay, value is what you get”.  Interest rate differentials are another strong influence on currency pairs, and the Federal Reserve’s (Fed’s) reluctance to cut interest rates more quickly had also been attracting deposits to the dollar. More recently, signs of weaker employment trends, a moribund housing market and a run of lower-than-expected inflation have boosted expectations for rate cuts. Comments from more Fed governors have encouraged this view, although not (yet) from the chair, Jerome Powell – much to the displeasure of the President! Thus, another support is being gently removed.

THE SECOND HALF
One well-connected Washington policy analyst recently suggested a one-year blanket 10% tariff on all goods to allow all parties to get used to them and, crucially, to see what works and what doesn’t. Sustainable peace in the Middle East and Ukraine would be a bonus, but perhaps sits too close to ‘wishful thinking’ on the spectrum of optimism. The passage of the OBBBA in the US promises more government stimulus in the form of tax cuts, which could support economic activity (despite longer-term fiscal deficit fears). And we continue to note the US political cycle, with November 2026’s mid-term Congressional elections beginning to be factored into the government’s thinking. Expect to see more friendly policies being rolled out the closer we get.