Looking back on Q2
Looking back on Q2
Few would have predicted after the volatility in the Middle East wrought by President Trump’s “liberation day” tariffs, that the US market would recover to hit all-time highs but that is exactly what happened. The so-called “TACO trade” (Trump always chickens out) where markets rallied in response to the President backing down on his tariff agenda, saw strong equity performance across the board. Markets even shrugged off an increase in violence in the Middle East, as Israel, followed by the US, bombed nuclear facilities in Iran. There was a brief spike in the oil price, but this quickly passed and stock market reaction was muted.
To misquote Mark Twain, rumours of the death of American exceptionalism may have been greatly exaggerated as the S&P 500 roared back to all-time highs. The Magnificent 7 (ex-Apple 1), and technology, particularly AI plays, were once again to the fore making it feel like a rerun of previous years. One notable casualty though has been the US dollar, which has fallen over 10% even as other assets have recovered.
1 Apple stock has struggled this year (-25% to the end of June in GBP terms). It almost exclusively produces iPhones in China and so has been hit hard by increased tariffs and is perceived to be losing the AI war.
US assets have fully recovered from the “liberation day” falls except for the
US dollar
Source: Artorius, Bloomberg
This dollar weakness has a significant impact on investor returns in different currencies. From a UK perspective, returns in Sterling for US assets have been more than halved over the quarter, with a 10.9% return for the S&P 500 in USD terms translating to only 4.4% in GBP terms. US dollar exposure has been a major tailwind for UK investors over recent years, but this year has been a strong headwind.
Nevertheless, equity returns were strong across the board, with only China performing poorly amongst the major regions, although, after a strong first quarter, China is still outperforming global equities year-to-date. Earnings expectations seem to be improving, and interest rates are falling, which should provide better economic conditions ahead and be supportive for equities. Similarly, credit spreads have tightened on greater optimism, leading to the outperformance of corporate bonds (both investment grade and high yield bonds) over gilts.
Equity markets were consistently strong in Q2 and Europe continues to lead for a Sterling investor. Chart shows percentage returns over the specified periods
Source: Artorius, Bloomberg
Indices used are: Global – MSCI All-Country World, UK – MSCI UK, US – S&P 500, Magnificent 7 – Bloomberg Magnificent 7, Europe ex UK – MSCI Europe ex UK, Japan – MSCI Japan, Emerging Markets – MSCI Emerging Markets, China – MSCI China
Fixed Income markets were positive in Q2 as (despite volatility) as bond yields fell. With investors pricing in interest rate cuts, cash has lagged bonds. Chart shows percentage returns over the specified periods
Source: Artorius, Bloomberg
Indices used are: GBP Cash – Barclays Benchmark Overnight GBP Cash Index, UK Gilts – Bloomberg UK Government All Bonds, GBP Corporates – IBOXX Sterling Non-Gilts, Global Bonds – Bloomberg Global Aggregate Hedged GBP, Global High Yield – Bloomberg Global High Yield Hedged GBP, Emerging Markets Debt – Bloomberg EM Hard Currency Aggregate Hedged GBP
Dollar weakness is the major story in currency markets as investors reallocate to other currencies and Gold. Oil weakness shows how quickly markets moved on from escalation in the Middle East. Chart shows percentage returns over the specified periods
Source: Artorius, Bloomberg
The Dollar Index compares the US Dollar to a basket of currencies.
British Pound, Euro Yen, Gold and Oil are shown as performance versus the US Dollar.
A spot rate is the current price at which an asset, like a currency or commodity, can be bought or sold for immediate delivery.
Looking forward
After a tumultuous first half of the year, can we expect the second half to be any calmer?
Markets feel risk-on at the moment, but a number of headwinds remain. Valuations remain elevated, particularly in the US. We are still concerned about the US economy, where the data remains mixed and the inflationary impact of tariffs is still unclear within the data.
While markets seem to have shrugged off tariff concerns for now, risks remain. The 90-day pause on the so-called “reciprocal” tariffs ends next week (9th July). So far only the UK and Vietnam have come to agreement (although there is significant devil in the detail), and it is unclear what tariff rates will come into force for other countries. There has been suggestion that this could be kicked down the road again with another pause but, as is his want, President Trump raised concerns with a series of posts suggesting that tariffs could be even higher than previously announced, up to “…maybe 60 or 70%”. The TACO trade may be tested in the coming weeks, but we will watch to see if the actions match the rhetoric.
One ongoing theme is the question of fiscal sustainability, as many governments struggle with the challenge of high debt levels in a world where interest rates have normalised, and some simply ignore any concerns, like the US.
The One Big Beautiful Bill Act lost its name2, but narrowly passed through Congress and will now be signed into law by the President. As a reminder, this bill extends tax cuts from Trump’s first term amongst other measures, whilst cutting back on Medicaid and other social security payments, and will significantly increase the US fiscal deficit and federal debt. This will likely put pressure on US treasuries, where we have reduced exposure in recent months, as to fund this deficit, treasury issuance will have to increase, which may well drive bond yields higher in order to make this attractive to reluctant investors.
Meanwhile in the UK, Prime Minister Starmer might wish he had President Trump’s ability to get his party to support him in order to pass legislation, as he was forced into a humiliating U-turn on welfare legislation by his MPs. They say that a week is a long time in politics, but can it only be a year since Labour won a resounding majority? It’s much easier to raise spending than to cut it and with this latest retreat, Chancellor Rachel Reeve’s ironclad fiscal rules may be under threat, and could lead to volatility in the gilt markets. The sight of the Chancellor in tears in the House of Commons and concerns that she might be fired led to a spike in gilt yields, as investors fretted that any replacement might be less focused on fiscal discipline. Markets have calmed but it shows that markets are highly sensitive and that the government has limited fiscal freedom in the current environment.
2 Senate minority leader Chuck Schumer invoked budget rules to delete the title of the bill before it’s vote in the Senate and I quote “nothing about this bill is beautiful—it’s a betrayal to American families, and it’s undeserving of such a stupid name.”
Gareth Thomas
Head of Investment Management
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All expressions of opinion reflect the judgment of Artorius at 4th July 2025 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions.
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