Please see below, an article from Tatton Investment Management analysing the key factors currently affecting global investment markets. Received today – 09/06/2025
Summer starts with less spring
Global stock markets edged close to all-time highs, but the Trump-Musk spat knocked Tesla shares – though thankfully not much else. The bust-up is probably less important than the week’s other political news: the UK Defence Review suggests tax rises, the Germany-US meeting went well, and US-China negotiations trundled along.
Stock prices were helped by lower bond yields – even though these came from weaker growth. The US’ non-farm payrolls (US jobs figures) came in relatively strong, but other US employment data look weak. We said before that companies were neither hiring nor firing – but the latter part is now threatened. The Federal Reserve will be watching the employment data closely, and markets now expect two rate cuts by the year’s end. Soft data didn’t spook equity investors, though, as it was only mild and bond yields have been the bigger concern lately.
German and French bond yields actually spiked this week – despite the ECB cutting rates. This was because ECB president Lagarde said the rate cutting cycle is nearly over, which markets took as hawkish on rates but fairly bullish on European growth. The euro rallied, as did sterling. Part of this is dollar weakness, but we should recognise UK and European strength (the best performing stock markets this year).
Dollar weakness is a concern for US assets. Capital has flowed out of the world’s biggest market this year due to higher risks. For international investors, the dollar is one of those risks. The S&P 500 is still firmly negative year-to-date for British and European investors, for example.
Risk-reward metrics (like Sharpe ratios) have shifted, leading non-US institutional investors to reallocate away from the US – as we said they would. These trends can reinforce themselves: capital outflows weaken the dollar, which increases currency risk, which, at the margin, forces more allocation away from US assets. Currency moves will be crucial to watch from here.
May asset returns review
May was good to global investors, with global stocks up 4.7% in sterling terms and all major regions in the black. Equity investors feasted on the so-called “TACO trade” (Trump Always Chickens Out) and Donald Trump’s promised tax cuts. The US was May’s best performer, up 5.3%, largely thanks to its tech sector gaining 8.6%.
US tax cuts led to debt fears in bond markets, however. This drove US treasury yields up substantially through the month, which caused a stock market wobble mid-month. Thankfully, the government bond sell-off didn’t crank up corporate borrowing costs (thanks to low issuance of corporate bonds), and better-than-expected data helped equities quickly recover.
UK government bonds were particularly hurt by higher US yields, losing 1.2% in May. Downing Street’s fiscal discipline message isn’t affecting its borrowing costs (which remain at the mercy of the US) but is arguably helping sterling strength. UK stocks rallied 3.8% last month and are behind only China over the last 12 months. The euro also strengthened against the dollar, a sign that the US-to-EU capital flow continues. Germany’s fiscal expansion is seen as positive – as it has much more room to issue debt – and Europe is the best performer year-to-date, up 12.8%.
China was the weakest region (+2.1%) in May but is still the strongest over 12 months, despite tariff threats and the government’s inability to properly stimulate its weak economy. Commodities were the worst performers but were still positive overall – up 0.6%. We take this as a sign of market liquidity and risk appetite, evidenced by the pullback in gold prices (which go up when investors are fearful).
The return of liquidity and risk appetite was May’s defining characteristic. Trouble bubbles away under the surface, impacting bonds and capital flow out of the US. But for now, investors seem happy to let them slide.
Earnings analysts are as uncertain as everyone else
American companies’ Q1 earnings were good, but strength was yet again focussed on the Magnificent Seven (Mag7 – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla). The Mag7 posted 30.2% year-on-year growth versus 8% for the other S&P 500 companies, and smaller companies struggled. Even the Mag7 has become more of a Mag6, with Tesla’s profits falling a miserable 40% year-on-year (and that’s before any of the Trump-Musk threats).
The Mag7 delivered some of the best surprises too – with Amazon, Alphabet and Meta beating earnings estimates. The communication services sector (including Alpabet and Meta) is now the only one with projected 2025 earnings higher than at the start of the year.
Corporate earnings expectations have been hit this year, falling 1% from January to April and another 2% after “Liberation Day” tariffs. Normally, positive earnings surprises like those seen for Q1 would push up future earnings projections – since companies are building from a higher base. But while the Mag7’s beat cranked up Q2 expectations, earnings beyond that are largely unchanged. This is, again, about tariffs. Apple has been particularly threatened by the White House, for example, and was one of the Mag7’s weaker earners.
Earnings analysts basing their projections on macroeconomic policy predictions is a little problematic. It’s a top-down approach, when earnings estimates are supposed to be bottom-up. It could certainly be positive for stocks: if companies are more resilient than expected or the TACO narrative prevails, earnings surprises would likely spur a rally. But you would always rather have precise earnings estimates. They are what stock valuations are based on, impacting investment decisions.
In other words, if analysts are influenced by the prevailing market narrative more than company specifics, it increases the chance that stock markets themselves are mispriced. This mispricing might work out for the best, but reliable information is better than unreliable information.
Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.
Marcus Blenkinsop
09/06/2025