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This has been a quieter week for markets. Last week I wrote a more detailed review of the first half of the year and gave our outlook for the second half. As ever, if you’d like a copy of that overview, please do get in touch. This week I thought I’d take a more thematic, bigger picture review and highlight some of the charts that help tell the story of the year so far. They also tie in with our current portfolio positioning and outlook and so should also help give you a better understanding of that.
The first theme of 2025 for me has been economic resilience in the face of the Trump tariff shock. As an example, here is the latest Atlanta Fed estimate for Q2 US GDP.
It is the latest direction of travel that is most interesting to me. After a poor run, the latest data releases have started to pick up again. I am, of course, very reluctant to sound the all clear here but if you want to know how/why equity markets are as strong as they are today, then the resilience of the global economy to all that the politicians have thrown at it is a good place to start.
For a long time over the last 10 or more years, the US felt like the only investment destination that made you any real money. Plenty of non-US markets (including the UK of course) felt like they were treading water in comparison. In 2025 all that has changed. Europe, the UK and China were all over 10% ahead of the US for the first half of the year. In that sense it feels like some diversification has returned to equity markets. To illustrate this, a classic cheaper value play (European Banks) has actually outperformed the US technology giants (as measured by the US Magnificent 7 stocks) since 2022.
So if you worry (as plenty do) about Trump or US equity valuations (of which more below) then 2025 has been a reminder that there are plenty of other opportunities out there.
The other area where I feel like we have seen resilience is in government bond yields. There are plenty of (very understandable) concerns about (i) running large deficits when unemployment is low and (ii) government debt levels that are forecast to keep rising and rising for the foreseeable future. As an example, the UK’s Office of Budget Responsibility estimated last week our debt-to-GDP ratio will reach 270% by the 2070s. At 5% government bond yields, this would mean 13.5% of all the money we earn would be taken up by interest payments on that debt. My only consolation is that if I live that long, at least I’ll be retired.
And yet, in spite of all this, bond markets have remained remarkably steady in 2025. As an example, the UK 10 year gilt has traded pretty tightly around a 4.6% level all year:
This has helped create some stability in our portfolios. This obviously proved valuable when equity markets fell over 10% after the Trump tariff shock. And a stable bond market, with yields comfortably above today’s inflation rate, makes for a healthy alternative to equities.
Which is just as well, because my final theme for the year is that with the recovery from April behind us and many major equity markets at or near all-time highs equities look very dear relative to their recent history. I showed this chart in my latest quarterly client overview and I still find it remarkable viewing today.
But before you all start running for the exit, one thing I have learned is that p/e ratios (which are what the chart above shows) are neither an investment strategy nor a catalyst for change. US stocks trade at a premium because US technology companies have been generating nearly all the earnings growth for the last 15 years. A bet against the US is a bet on this trend reversing. Given the AI revolution currently underway, this is not a bet we feel comfortable making today.
For this reason, we have maintained our core US exposure. The one comfort I can give you is that inflation beating bond yields, the (long awaited) return of UK and European equity markets and even the the recent strength of gold mean that there are, for the first time in what seems like a long time, some attractive alternatives out there.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
