Q2 2025 Market Commentary

22/07/2025

Global Markets

Note: All quoted equity performance figures are in GBP terms.

Q2 2025 began with sharp market declines in early April after the US administration announced “Liberation Day” tariffs. Sentiment improved when tariffs were paused with a 9th July deadline for most countries, allowing trade talks to progress. Despite a volatile start, global equity markets rebounded, with the MSCI World Index rising 5% to close the quarter, driven by suspended tariffs and resilient corporate earnings.

US equities contributed to the global rally, with the S&P 500 returning 4.5% over the quarter. Gains were concentrated in information technology and communication services, with the “Magnificent Seven” bolstering returns. However, the US dollar weakened significantly due to decreased confidence in US fiscal debt sustainability. The US Dollar (DXY) Index fell 7.1%, boosting returns of international indices for dollar investors.

In the UK, the FTSE All-Share Index posted modest gains, supported by strength in industrials, telecommunications, real estate, and utilities. Detractors included energy and healthcare sectors. While tariff uncertainty initially dampened UK investor sentiment, easing trade tensions later helped recovery.

Eurozone equities advanced, led by industrials and real estate. Defence stocks performed well following NATO’s agreement to raise military spending. The European Central Bank cut interest rates twice, signalling the near end of its easing cycle.

Emerging markets (EM) delivered robust performance in Q2, with the MSCI EM Index returning 5.5%. EM investors navigated a challenging but favourable backdrop of shifting trade and geopolitical developments, aided by a weaker US dollar and structural tailwinds in select markets. Asian equities ended the quarter as the highest returning region with Korea and Taiwan standout performers.

Commodity markets showed mixed results. Rising Middle East tensions briefly pushed oil prices higher amid shipping disruption concerns; however, ample supply and OPEC+ production announcements kept prices broadly stable. Gold rose roughly 7% over the quarter, ending at US$3,303 per Troy ounce.

Equity Styles

Growth stocks outperformed significantly in Q2, with global growth indices returning 10.8%. This was driven by the resurgence of mega-cap tech and AI-related names. The rally remained narrow, with gains concentrated in a small number of large-cap names. Value and Quality styles lagged, as investors rotated back into high-growth sectors amid improving sentiment and falling bond yields.

Inflation

Inflation trends were mixed across major economies. In the US, inflation remained stable, with the Federal Reserve maintaining its policy rate amid ongoing trade uncertainty and resilient labour market data. The eurozone saw inflation ease to 1.9% in May, down from 2.2% in April, supporting the ECB’s rate cuts. In the UK, the Bank of England (BoE) cut interest rates by 25bps to 4.25% in May while inflation remains above the 2% target, reading 3.4% for May.

Fixed Income

Note: All quoted fixed income performance figures are in GBP-hedged terms.

Bond markets were volatile. The US tariff shock triggered an April sell-off, pushing 10-year Treasury yields up 50bps. Markets stabilised as trade fears eased, but the curve steepened amid concerns over the “One Big Beautiful Bill Act,” expected to add $3-5 trillion to US debt over 10 years. Debt worries lifted 30-year yields by 20bps.

UK gilt yields followed a similar pattern. Early rate cut hopes supported short-dated gilts, but yields rose in May on fiscal concerns and the US sell-off. A 25bps BoE cut in May was followed by cautious messaging. Soft labour data in June revived cut expectations, lowering yields across the curve.

High yield outperformed investment grade, supported by stronger risk sentiment and equity gains.