Q2 Market Review 2025

Our latest market commentary covers the drivers of market conditions across Q2, along with factor, asset class, and portfolio returns.

Key Events

April 2nd

‘President Trump’s ‘Liberation Day’ signifies a large shift in the US’s tariff regime, and the global trade landscape.

May 7th

The Bank of England (BoE) votes to cut interest rates by 0.25% to 4.25%, while striking a cautious tone about the pace of future rate cuts.

May 8th

A UK-US trade agreement, the ‘Economic Prosperity Deal’, is the first post-tariff trade deal to be signed following US ‘Liberation Day’.

June 2nd

The UK Government’s Strategic Defence Review is published, with the government setting a target of raising defence spending to 3% in the next Parliament.

June 18th

The US Federal Reserve (Fed) holds interest rates steady at 4.25-4.5%, while signalling it is likely nearing the end of its rate-cutting cycle..

June 21st

Following ongoing conflict between Israel and Iran, the US launches airstrikes on Iranian nuclear facilities, before a ceasefire takes hold.

Overall Market Backdrop

US President’s Trade Wars Cause Widespread Market Disruption

Financial markets started the quarter in a volatile state, as a direct consequence of President Trump’s America First geoeconomic agenda, before regaining a relative sense of calm in the following months. On his self-styled ‘Liberation Day’, the president stood outside the White House with a board of ‘reciprocal’ tariffs (even though the proposed levies had limited relation to existing equivalent foreign tariffs) to be imposed on US trading partners, with the broad aims of reshoring America’s diminished manufacturing sector and raising federal funding to decrease the accelerating rate of growth of US debt. Most notably, exceptionally high tariffs were imposed on the world’s most successful manufacturer, China, prompting a trade-based arms race between two global economic superpowers, forcing the President to relent to lower tariffs (this inspired the provocative acronym ‘TACO’ on Wall Street – “Trump Always Chickens Out”), with China also backing down from its proposed punitive equivalent tariff regime. A period of intense market volatility followed the President’s announcement, as countries attempted to respond in real-time to the shift in global trade dynamics (with, for example, companies attempting to hoard stock prior to the tariffs coming into effect). A somewhat chaotic political back and forth ensued following this, with a small number of deals being struck, including the Anglo-American deal announced on 8th May (the ‘Economic Prosperity Deal’), which reduced or removed tariffs on a range of exports between the US and UK, including cars, steel, and aluminium. However, Trump implemented a 90-day grace period effective April 10th for around 60 countries, markets began to stabilise. As the quarter drew to a close, the global equity market returns over the quarter stood at 5.1%; a strong positive return, but masking the volatile journey experienced along the way.

Middle East Conflict Impacts Oil Prices

Global oil prices surged in early June amid intensifying tensions between Israel and Iran. On 13th June Israel conducted Operation Rising Lion; coordinated airstrikes targeted over 100 military and nuclear sites across Iran. Following a range of Iranian counterattacks, on 22nd June the US intervened directly, carrying out Operation Midnight Hammer, in which so-called ‘bunker buster’ bombs were dropped on three Iranian nuclear sites. The initial spike in prices was driven by fears that Iran might retaliate by disrupting the Strait of Hormuz, a critical shipping route through which a large portion of the world’s oil supply is transported.

However, the announcement of a ceasefire between Israel and Iran on 24th June helped calm those concerns, and oil prices quickly fell as the perceived risk to global supply chains diminished. While Israel did confirm a strike on Iranian territory after the ceasefire, the United States moved swiftly in an attempt to de-escalate the situation, with the US noting that the terms of the ceasefire agreement would also allow China to resume oil imports from Iran, further reducing fears of supply disruptions and adding to the downward pressure on global crude prices.

Oil prices have been volatile over recent months

Source: LSEG via markets.ft.com.

Source: Morningstar (Morningstar Global Markets; Bloomberg Global Agg). Data as of 30/06/2025 in GBP terms.

Source: Morningstar. Data from 01/07/2022 to 30/06/2025 in GBP terms.

Equity Markets

Source: Morningstar. Data shown in GBP terms (annualised for time periods over 1 year). As of 30/06/2025.

U.S. 4.6%

Impact of Tariffs on the S&P 500

Immediately following the announcement of tariffs on 2nd April, the S&P 500 index of US stocks declined sharply as investors anticipated a sharp increase in operating expenses for American large and mega-cap companies, most of which rely heavily on complex supply chains that involve East-Asian manufacturing. Between April 4th and April 8th, the S&P lost $5.8 trillion in market capitalisation, its steepest four days of losses since the index was created in the 1950s. Because of the large weighting to the US within global market capitalisation weighted indices, this had a significant impact on globally diversified investors. Since the downturn at the beginning of April, the S&P has recovered well, reaching record highs towards the end of June (in dollar terms). The Nasdaq’s recovery has been even more impressive, returning over 30% in dollar terms since the market trough in April, in part thanks to the quick response of technology giants like Apple, which rapidly made plans to move significant manufacturing operations from China to India and Vietnam.

The dollar falls and the Fed sticks to its guns

While US equities performed strongly during the second quarter, the US dollar trod the opposite path, depreciating against a range of other leading currencies. For example, the dollar depreciated by approximately 5% vs pound sterling over the quarter. For non-dollar-denominated investors, this served to reduce the return seen from US equity markets. For example, while the S&P 500 returned approximately 11% in dollar terms over the quarter, given the dollar’s 5% fall vs sterling over the time period, the S&P returned approximately 6% in pound sterling terms over this time period. Dollar weakness has been compounded by President Trump’s verbal musings regarding ‘firing’ the Chairman of the Fed Jerome Powell (although the legal path to this is unclear, and whose position is designed to be independent of government policy). Any replacement of Powell with an acolyte who supports the President’s political agenda could lead to a drop in interest rates, and further potential hit to the dollar’s value. Despite repeated criticism from the White House, the view of the Fed is to stick to it’s conservative ‘wait and see’ strategy, holding the federal funds rate at 4.25-4.5%; however, a number of market participants believe a cut in July may be on the table.

President Trump’s ‘Big Beautiful Bill’ signed into law

Just after quarter-end, it was confirmed that Trump’s flagship tax and spending bill had passed at the eleventh-hour, with just two Republicans voting “Nay” in the House, and three in the Senate. This led to an upbeat mood in the White House, with an official telling reporters “We think that it is the bridge to the golden age of America”. US markets rallied on the news, which was combined with better-than-expected job figures. The bill will extend 2017 tax cuts from Trump’s first term, while increasing defence spending and reducing social safety net programs including Medicaid (the state-provided healthcare scheme for those on low incomes and the disabled). Its critics highlight that it would raise the deficit by an incredible $3-4 trillion, and risks leading to a US federal debt spiral.

Source: Congressional Budget Office, staff of the Joint Committee on Taxation via the BBC. Downloaded 07/07/2025.

UK 4.0% | Europe (ex-UK) 6.0%

UK government spending uncertainty leads to gilt market volatility

The Labour government in the UK released its Strategic Defence Review on 2nd June, marking a significant shift in national security policy. The review included a commitment to raise defence expenditure to 2.5% of GDP by 2027, with an ambition to reach 3% in the subsequent parliamentary term. More broadly, a spending review released in June demonstrated further commitments to spending on healthcare, decarbonisation, and education. However, this increase in spending was brought into question at the end of June when the government was forced to climb down from its proposed cuts to welfare payments. A subsequent failure from Prime Minister Keir Starmer to back Chancellor Rachel Reeves during a fiery session in the House of Commons resulted in questions over her tenure. As a result, gilts experienced a mini-sell off, with the 10-year yield increasing from 4.5% to almost 4.7%, indicating the fragility of investor confidence in the UK’s fiscal position.

Optimism over the European comeback begins to falter

Following Trump’s erratic actions in the US, a number of market participants had begun to underweight the US relative to global market capitalisation-based indices, while overweighting Europe, under the assumption that the US would struggle as a result of its aggressive new trade and tariff regime. Optimism about Europe was high earlier in the year, especially following Germany’s ambitious €1 trillion plan to invest in defence and infrastructure, alongside broader moves toward looser fiscal policies across the region. While those developments remain in progress, there remains question marks over the region’s ability to deliver sustained growth, with optimism beginning to falter as the quarter drew to a close.

Japan 4.8% | APAC (ex-Japan) 6.7%

Business sentiment in Japan shows broad confidence in the economy, however tariff uncertainty remains

Japan’s solid Q2 returns were supported by a positive result in the Bank of Japan (BoJ)’s June Tankan survey, which showed that large manufacturers’ confidence improved over the prior three months, as firms maintained robust long-term spending pipelines. These results came despite uncertainty created by the potential hit from higher US tariffs, with President Trump threatening 25% tariffs on good imports following the quarter-end, alongside comments that the US goods trade deficit with both countries was a “major threat to our economy and indeed our National Security”.

Strong Q2 returns driven by largest monthly inflows in 15 months

The broader Asia-Pacific region also saw strong returns over the second quarter, with this driven by the largest monthly foreign inflows in May that the region has experienced in over a year. While the geopolitical backdrop remained volatile, investors had gained enough confidence to bring inflows back to the region after four consecutive months of net selling. This was supported by several positive earnings growth forecasts for the region from leading banks such as Goldman Sachs, who raised its estimates by 2% for 2025 and 1% for 2026, with the bank now expecting earnings growth of 9% in both years.

Emerging Markets 5.9%

A positive quarter for Emerging Markets, however a divergent picture at the country level

Emerging market (EM) equities delivered a positive return over the second quarter, but with mixed results at the country level.

Many Emerging Market countries’ returns dipped in April, in response to the ratcheting up of tariffs between the US and other countries, however, have since shown a high degree of resilience as the dust settled between the two powers. This has been led by markets such as Taiwan (+17.2%) and India (+4.2%), with smaller nations including Peru (+14.0%) also delivering notable returns.

However, China experienced a negative return over the quarter (-3.0%), off the back of slowing growth, and drag from its real estate sector. Real estate investment remains negative, with this dragging on wider market sentiment and household wealth. Uncertainty regarding the US’s new tariff regime, and wider US-China tensions, also affected the degree to which investors sought exposure to China during the second quarter.

Sectors

Source: Morningstar. Data shown in GBP terms (annualised for time periods over 1 year). As of 30/06/2025.

• Technology (+15.1%) and Communication Services (+10.7%) were the best performing sectors in Q2, driven by a resurgence of the Magnificent Seven. This included a standout performance from Nvidia (+37.3%), following continued strong performance off the back of a partnership with Humain, an AI subsidiary of Saudi Arabia’s sovereign wealth fund. Meta also delivered robust returns during Q1 (+20.7%), as it continued to ride the AI wave with its new AI superintelligence group. As a result of this, it has been engaged in an intense battle to poach top artificial intelligence researchers and engineers from rivals such as OpenAI, with extremely high salaries and sign-on bonuses, and includes bringing on board Alexandr Wang who experts suspect might be a game changer for Meta’s AI prospects after the tech giant’s latest models received a muted response from those in the industry.

• The Industrials sector (+8.9%) was also able to provide some support to global equity returns, driven by solid earnings and sustained capital investment from leading global industrial firms. Support was also provided from defence-related spending, which saw commitments to further spending during the quarter, as countries continue to expand defence budgets and spending as a proportion of GDP.

Factors

Source: Morningstar. Data shown in GBP terms (annualised for time periods over 1 year). As of 30/06/2025.

Source: Morningstar. Data from 01/04/2025 to 30/06/2025 in GBP terms.

• The Momentum factor drove factor returns over Q2, with a robust 14.4% performance, as several Magnificent Seven stocks once again delivered robust returns. As noted above, this was led by Nvidia (+37.3%) and its positive news during the quarter of its partnership an AI subsidiary of Saudi Arabia’s sovereign wealth fund, leading to Nvidia rejoining the $3 trillion market capitalisation club, alongside Microsoft and Apple.

• Meanwhile, the Quality factor was the second highest performer, with returns of 5.8% over the quarter; a sharp reversal of its poor performance over Q1 (-7.5%). Magnificent Seven exposure also drove this factor, with Microsoft a standout contributor. While its earnings and demand indicators remain strong, some concern was raised in the market as the quarter drew to a close and the company announced it was laying off c. 9,000 employees (c. 4% of its global workforce).

Bond Markets

Source: Morningstar. Data shown in GBP terms (annualised for time periods over 1 year). As of 30/06/2025.

• The second quarter of 2025 saw a continuation of Q1, with global investment grade bonds (as measured by the Bloomberg Global Aggregate index) returning -1.6% in GBP terms.

• However, this quarter was mostly driven by currency movement, with the index returning 4.5% when measured in USD terms. As noted above, the dollar weakened significantly over the quarter, driven by political and fiscal uncertainty in the US, most specifically the new aggressive trade and tariff regime kicked off by the Trump administration, and concerns over escalating budget deficits in light of the passing of the ‘Big Beautiful Bill’.

• Alongside this, the US interest rate back drop remains relatively tight, driven by the Fed’s reluctance to cut rates in light of the trade and tariff uncertainty.

• Meanwhile in the UK, following an embarrassing climbdown on proposed cuts to welfare payment, Prime Minister Keir Starmer’s failure to back Chancellor Rachel Reeves in the Commons resulted in questions over her tenure, and a mini sell off in the gilt market. The 10-year yield increased from 4.5% to almost 4.7%, indicating the fragility of investor confidence in the UK’s fiscal position.

Source: LSEG via the FT, downloaded 04/07/25

Market Proxies

Factor Indices: Morningstar Developed Markets (Factor Benchmark) | Morningstar Developed Markets Small-Cap | Morningstar Developed Markets Quality | Morningstar Developed Markets Momentum | Morningstar Developed Markets Min-Vol | Morningstar Developed Markets Value

All data is sourced from Morningstar and presented in GBP terms, unless otherwise specified. An appropriate index from the Morningstar database has been selected. For further details about each index, please refer to the corresponding index provider’s official website.

Disclaimer

We do not accept any liability for any loss or damage which is incurred from you acting or not acting as a result of reading any of our publications. You acknowledge that you use the information we provide at your own risk.

Our publications do not offer investment advice and nothing in them should be construed as investment advice. Our publications provide information and education for financial advisers who have the relevant expertise to make investment decisions without advice and is not intended for individual investors.

The information we publish has been obtained from or is based on sources that we believe to be accurate and complete. Where the information consists of pricing or performance data, the data contained therein has been obtained from company reports, financial reporting services, periodicals, and other sources believed reliable. Although reasonable care has been taken, we cannot guarantee the accuracy or completeness of any information we publish. Any opinions that we publish may be wrong and may change at any time. You should always carry out your own independent verification of facts and data before making any investment decisions.

The price of shares and investments and the income derived from them can go down as well as up, and investors may not get back the amount they invested.

Past performance is not necessarily a guide to future performance.

Blog Post by Jonathan Simpson, MSci
Investment Support Analyst at ebi Portfolios

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