Market Review 6th May 2025

Everything you need to know, Simplified!

Summary

• Equities have rebounded sharply, erasing steep losses since the start of April as strong earnings - particularly from financials, tech and utilities - helped lift sentiment despite trade tensions and macro uncertainty

• US forward earnings (projected profit) are up 1.1% year-to-date, with sectoral divergence emerging: defensives are leading, while cyclicals and areas exposed to tariffs, like consumer discretionary and energy, have seen downgrades

• First-quarter US GDP contracted by 0.3%, but the decline was driven entirely by distorted trade flows ahead of tariff deadlines; underlying domestic demand remains solid

• Inflation surprised on the upside, with core personal consumption expenditures (PCE) jumping to 3.5% in Q1, raising stagflation concerns as consumer sentiment dips and recessionary signals flash

• Hopes of renewed US-China trade talks buoyed markets, with Beijing reportedly considering Washington’s outreach - but concrete progress remains elusive

• This week, the US Federal Reserve (Fed) is expected to hold rates steady, with Chair Jerome Powell likely sounding cautious but firm; the Bank of England (BoE), meanwhile, is anticipated to cut, though Governor Andrew Bailey will likely stress a gradual path forward.

  
  

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Market Review

It was the best of times, it was the worst of times

April has been a roller coaster ride, but now - measured in US dollar terms - both global and US equity markets are back in positive territory (from the start of April). Quite the turnaround, considering both were down over 10% mid-month.

Investors typically view markets through either a macro or micro lens. And while macro has rightly dominated the headlines, it’s worth remembering we’re in the thick of earnings season too. Last week was the busiest so far, and with around half of companies having reported, a broadly constructive picture is emerging. Last week in particular, strong earnings helped drive equities higher.

Despite the swirl of trade tensions and policy uncertainty, forward earnings in the US continue to edge higher. According to Ed Yardeni, President of Yardeni Research, they’re up 1.1% year-to-date - less than the historical norm, but positive nonetheless. That resilience is being led by financials, tech, communication services and utilities, with earnings expectations up more than 2% across all four sectors.

The picture is more challenged for cyclical sectors, especially those most exposed to tariffs. Forward earnings estimates have fallen year-to-date by over 2% for consumer discretionary, real estate, materials and energy. Still, the fact that aggregate forward earnings are rising, even modestly, is reassuring.

In practice, of course, macro and micro aren’t separable - corporate results are inevitably shaped by the environment in which businesses operate. That’s been clear this earnings season, with many companies noting uncertainty around trade policy, yet still reporting solid results. Markets seem to be taking that in stride, which bodes well for the months ahead. If nothing else, this earnings season is a reminder that fundamentals heading into this volatile stretch were solid.

This takes us neatly to the macro. The first-quarter GDP print landed with a thud, showing a -0.3% contraction for the first quarter, the first decline since the pandemic. But dig beneath the headline, and the story is more nuanced. The weakness was driven entirely by net exports, with firms racing to import goods ahead of tariff deadlines. Strip out that distortion, and growth still looks sturdy. Put simply, this wasn’t a growth scare in the traditional sense but a policy-induced wobble.

Still, the risks are clear. Core PCE inflation for Q1 came in at a scorching 3.5% up from 2.6 in Q4 last year and notably hotter than expected. Economic contraction and inflation is a toxic mix known as stagflation.

Sentiment has soured too with consumer expectations slipping to levels historically consistent with recessions. And yet, there’s an eerie sense of calm from the Federal Open Market Committee (FOMC), whom with inflation risks rising remain hesitant to cut rates.

Chinese Whispers

China also played its part in supporting markets last week. Hopes for a thaw in US-China relations flickered to life after ‘whispers’ that Beijing is evaluating Washington’s overtures to restart trade negotiations.

The backdrop is one of growing economic strain in China that may be softening Beijing’s resolve. Trump continues to tout a “very good” trade deal within weeks and while some of those claims have been denied by Chinese officials, the prospect of renewed talks appears to be gaining solid traction.

With tariffs now sky-high and both economies under pressure, a diplomatic off-ramp may be mutually appealing. Whether it materialises is uncertain but even the hint of dialogue was enough to buoy sentiment.

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The week ahead

Wednesday: FOMC rate decision

Our thoughts: With risks on both sides of the mandate, the Fed is likely to stick to its ‘wait and see’ approach. We expect rates to be held steady at 4.25–4.50%. Markets are pricing just a 1.9% chance of a cut. The press conference could skew more hawkish, especially in the wake of the so-called ‘Liberation Day’ tariffs. Jerome Powell will likely underscore the need for patience amid renewed policy uncertainty.

Thursday: BoE rate decision

Our thoughts: A rate cut to 4.25% is widely expected, with the macro backdrop having shifted meaningfully since the March meeting. Rising uncertainty has strengthened the case for action, and a move lower is now the base case. That said, short-term inflation risks remain, so expect Governor Bailey to frame the cut as part of a cautious, gradual easing cycle.

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