Market performance

The chart below shows the performance of regional equity markets to date in 2025. The US has been the weakest major region, down over 6%. March has so far been the weakest month, with the US market falling nearly 8%. It has been technology-related stocks leading the way down. The so-called Magnificent Seven stocks* (the market darlings over the past couple of years) have fallen around 20% from their highs in mid-December 2024 (see second chart below).

*The Magnificent Seven are Google parent company Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.

Strong performance by European equities

Surprisingly, it has been Europe leading the way among the main developed world markets in 2025, with the region buoyed by improving sentiment driven by a number of factors.

1. Trump has strong-armed European states into boosting their defence spending to nearer the NATO target of 2% of GDP. The US has been spending more than 3% on defence to cover the shortfall from European Union states paying between 0.5% and 1.7%. Now, the increase in European defence budgets has boosted investor sentiment towards European defence stocks.

2. Germany announced a mammoth new spending package at the beginning of March. The headline figure is €500bn of spending over ten years to upgrade German’s transport, energy, health and communications infrastructure. The goal is to propel Germany back to economic growth.

3. Trump has announced trade tariffs. This is likely to lead to future inflationary pressures, which we believe will slow US economic growth and could possibly lead to a recession (although we believe this is unlikely). This has encouraged investors to look for opportunities elsewhere.

4. Finally, European equity valuations were looking low relative to the US coming into 2025. European equities were trading at a 40% discount to the US market, the largest discount since the tech bubble.

Trump’s tariffs – why?

Trump has been a man on a mission this year, threatening and implementing tariffs targeting various regions and goods. It is hard to keep up with the various measures, but it is important to step back to try to understand why he is doing this. There are plenty of theories out there, but one we believe makes sense relates to US government debt maturing this year. The Treasury has around $7 trillion of debt to refinance in 2025. If the government does not pay it back, it will have to refinance. A useful indicator of the interest rate on that debt is the yield* on 10-year US government bonds. The 10-year yield was 4.8% in January. One way to bring that yield down would be for Trump to create a lot of uncertainty by, for example, introducing tariffs. Markets hate uncertainty. So far, it has worked. Investors have rotated out of riskier equities and into bonds, which has led to yields falling, because of the increase in demand. That 10-year yield is now 4.3%, compared to 4.8% at the start of the year. It is worth remembering that the US government now spends more on the interest on its debt than it does on defence.

*Yield is the income from an investment, usually stated as a percentage of the value of the investment.

The Marlborough multi-asset team view

Whilst US equities have been lagging other markets this year, tactically we remain neutral on the country. Trump has caused a lot of uncertainty with tariffs, and markets hate uncertainty.

However, our view is that over the course of the coming months, as investors digest the implications of tariffs and other policy changes, uncertainty should diminish. In his first term as president, it was fiscal stimulus at the start followed by tariffs towards the end. If the US can refinance debt maturing this year at reduced interest rates, and with some additional cost savings from Elon Musk’s Department of Government Efficiency (DOGE), perhaps it is possible there will then be scope for fiscal reform.

We believe that after the sell-off a fair amount of the uncertainty Trump has caused is already reflected in US equity valuations. It is also worth noting that historically US companies have been excellent at passing on cost increases to their customers, protecting revenues and earnings(profits). As the chart below shows, US businesses are expected to grow their earnings by double-digit figures this year and in 2026 and these forecasts remain ahead of those for Europe.

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UK equities looking attractive

In a similar vein, we have been careful not to chase the European rally. Europe still has structural issues, including high debt levels, youth unemployment and a significant regulatory burden. We acknowledge the catalysts discussed above and are monitoring the situation closely. However, for now, we remain on the sidelines regarding European equities. We do though continue to find the UK equity market attractive. The UK stock market is known for its defensive characteristics, with strong representation of industries like oil & gas, defence and tobacco. This was demonstrated by market performance in 2022, which was the year when central banks around the world were raising interest rates. Higher rates tend to lead to reduced equity valuations, because increased borrowing costs are expected to reduce future company profits. The US market sold off nearly 20% in 2022, while the more defensive UK market was up 0.91% in local currency terms.

The importance of ‘time in the market’

We believe it is important to remember that historically ‘time in the market’ has proved a far more effective investment strategy than ‘timing the market’, trying to avoid market falls and anticipate market rises. In our view, remaining invested is the single most important factor in long-term wealth creation.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.