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This week, two hall of fame charts (for asset allocators like me at least). But first a quick review of where we are. The economic data continues to turn out better than many people feared back in April. The Atlanta Fed US GDP estimate for Q2 is running at almost 4%. And on Wednesday US inflation came in comfortably below market expectations. Higher growth and lower inflation is pretty much the opposite of the stagflation many had (very sensibly) feared when the tariff shock hit. Unfortunately for the UK, the story is more mixed. UK inflation surprised on the upside a few weeks ago and the labour market continues to weaken. But it is US data that moves markets and, helped by this friendly news flow, equities have continued to recover from their April lows.
To illustrate this, here are UK, European and US equity returns since end of April last year:
If I look at this chart it is pretty clear to me that the market was looking at only the good parts of a Trump presidency (less regulation, lower taxes) in the second half of last year and then woke up to the bad parts (the tariffs, its Donald Trump) in 2025. Net, net though your returns through this period are (i) positive and (ii) more or less the same.
If you do my job, though, it does not quite work like that. Investment professionals have what is known as the calendar year effect. 2024 (when the US outperformed) is done and in the books. The past is the past. For 2025, GBP based investors are staring at this
The pressure in this business is always to sell the thing that is underperforming and buy the market that is doing well and often this is the right thing to do! The US outperformed for more or less 15 years straight up to 2024. But the tariff shock, relative valuations and a sense that no trend lasts forever has pushed European investors back to favouring their local markets. Less exposure to a (weakening) US dollar is the icing on the cake.
We are, of course, also looking at this at IPS but we have not pulled the trigger yet. This brings me to two of my favourite charts. The first is corporate earnings since 2009 split between technology and non-technology businesses:
To see meaningful outperformance from the rest of the world you will need a meaningful pickup in non-technology earnings growth (the flat-lining light blue line above). Or to put it differently, the UK and Europe are trading at a lower valuation because they haven’t generated much earnings growth over the last few years. To see them meaningfully outperform, this story needs to change. It’s possible the German infrastructure stimulus will help here. But remember AI now looks to be the next major technological platform revolution (after PCs, the internet and mobile phones) and it may turn out to be the most consequential. Nearly all the major AI players are located in the US (and China). If you are going to be overweight UK and Europe I’d make sure you are not underweight the US technology sector at the same time.
But before I get too gloomy on my local region it is also worth remembering that cheap unloved markets always create opportunities. I wrote in November 2023 (The UK Does Look Very Cheap) about the opportunity in UK banks. It is worth noting that European banks (here including the UK) have actually outperformed the US technology giants since 2022:
Our (passive) US exposure has let us profit from the US technology theme. And, I am happy to say that our active UK and European managers have had a meaningful exposure to European banks. Of course, if you do this job you always have your fair share of mis-steps and regrets. But this mixture of passive equity exposure in the US and (good) active managers over here is not one of them. And I’d be surprised if our strategy deviated much from this general approach for the rest of 2025.
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.
