The first quarter of 2025 has shown that a great deal can happen in just 90 days. A sense of uncertainty across the markets has brought volatility and revised forecasts for the year ahead.
Rachel Reeves delivered her Spring Statement against a backdrop of disappointing growth forecasts and the news that the UK economy had unexpectedly shrunk by 0.1% in January.
The OECD revised its forecast for UK GDP growth in 2025 down to 1.4% while the Office for Budget Responsibility’s (OBR) report claimed the chancellor’s fiscal headroom had almost disappeared due to increased defence spending and rising borrowing costs. This led the OBR to halve its growth forecasts for the UK to 1%.
Reeves moved to rein in public spending with multi-billion-pound cuts to welfare spending and broader reductions in Whitehall expenditure.
However, the end of March brought some signs of reprieve, with Bloomberg reporting that the S&P Global Purchasing Managers’ Index had jumped to a six-month high, an early sign that the stagnation which has plagued the Labour government since taking office might finally be easing.
The short-term outlook suggests some turbulence ahead, but we can hope for brighter days and long-term growth on the horizon.
Inflation – From VR Headsets to Chickens for Rent
Inflation is once again centre stage, both in the UK and abroad. The Office for National Statistics (ONS) recently unveiled its updated basket of goods for measuring UK inflation.
Designed to reflect everyday life in Britain, the basket is reviewed annually to provide an accurate snapshot of spending patterns. VR headsets and yoga mats are now part of official calculations, replacing more outdated items such as DVD rentals.
The Bank of England (BoE) remains cautious about inflation over the coming months. The 12-month figure for January 2025 rose to 3%, up from 2.5% at the end of December. With energy and water bills expected to increase from April onwards, the BoE predicts inflation could hit 3.7% in the first half of 2025.
Figures for February offered a welcome surprise for consumers, as inflation levels dropped to 2.8%.
Source: BOE
The US is also grappling with inflation. According to the Guardian, egg prices have surged by 310% since 2005, due to bird flu outbreaks and generally higher grocery costs. Some Americans have turned to the unusual solution of renting chickens to offset high grocery prices.
Egg prices have been a key topic since the election and a battleground for Trump’s policies. While the rising price of eggs is beyond the President’s control, recent tariffs have left the Federal Reserve concerned that the average American will start to feel the strain of higher prices.
In March, the Fed revised its inflation forecast for the year, predicting that inflation could reach as high as 2.7% by the end of 2025. Continued tariffs seem to be keeping price pressures elevated, prompting the Federal Reserve to keep interest rates unchanged in the near future.
Tit-for-Tat Trade Wars
On 20th January, Trump was sworn in again, and markets held their breath. A flurry of executive orders was merely the calm before the storm.
On 1st February, Trump announced plans to impose tariffs on the US’s closest neighbours, Canada and Mexico. Since then, to describe Trump’s approach to tariffs as ‘fluid’ would be a drastic understatement and predicting Trump’s next move has become increasingly difficult.
As we know, markets dislike uncertainty, and the S&P 500 has struggled throughout the first quarter as a result.
The US trade deficit is the primary driver behind these tariffs, with Trump arguing that the US is being taken advantage of by some of its closest international allies. He prides himself as an astute businessman (despite numerous bankruptcies), and many business leaders view running at a deficit as inherently negative. However, governing a country is fundamentally different to running a business. In January, the US trade deficit widened by a record margin to $131.4 billion.
Some economists have suggested that the reason behind the swell was a pre-emptive move by companies to stockpile goods in anticipation of the impending tariffs.
Data from the US Census Bureau
It should be noted that trade deficits are not inherently positive or negative; like most things, the reality is more circumstantial.
A trade deficit allows a country to consume more goods than it produces, which can boost economic growth and improve living standards. The US has run a trade deficit since the 1970s and some economists argue that this is a sign of a strong economy.
So, the question remains: what do the tariffs mean for investors?
There are some fears that Trump’s full-throttle approach might be leading the US into a recession. The Independent quotes the US Commerce Secretary, Howard Lutnick, as stating that a recession would be “worth it” if it led to the implementation of the right policies. But is the long-term gain guaranteed after all the short-term pain?
Recessions are costly; businesses suffer falling profits, stock prices drop, and economic hardship increases. Pair this with rising unemployment and growing government deficits, and the effects on the average citizen can be long-lasting.
While it’s difficult to predict where this will lead in the long run, it’s important to consider longer-term investment goals. Some of the best days in the market follow the deepest market dips, so at times like these, patience and a level head are worth an investor’s weight in gold.
Rare Earth Metals – What’s the Fuss About?
Against the backdrop of the ongoing conflict in Ukraine, rare earth metals are playing a crucial role in global geopolitics.
Ironically, rare earth metals are not particularly rare. They are a group of 17 earth elements used in a wide range of products, with a vital role in the production of consumer electronics and the transition to green energy. While these elements are relatively abundant, they are often found in concentrations too low to make mining them economically viable. This, combined with the fact that they are complex and expensive to extract and refine, makes them a highly valuable commodity.
The chart below illustrates the top countries where rare earth metals had been identified prior to 2023.
Source: Statista (2025)
China dominates the market, according to Reuters, accounting for 60% of global mine production and 90% of refining. This has left Western countries heavily reliant on Chinese supplies and refining capabilities, not only for the transition to greener energy but also for the production of crucial military components, which are essential for national security.
So, where does Trump come into this? The US is seeking to negotiate a deal to support Ukraine’s war effort in exchange for access to its vast, untapped deposits of these metals. Estimates suggest that Ukraine holds around 10% of the world’s total reserves. This leads to the issue that a deal is yet to be brokered, and Trump is playing hardball, withholding any promised involvement.
The absence of US backing in the war effort has left Europe facing a defence funding gap. While governments are scrambling to address this, the issue remains a pressing concern for European governments. As a result, some European asset managers are feeling the pressure to reconsider their policies on investing in defensive company stocks within ESG strategies. This includes large household names such as UBS Asset Management, which recently told Reuters that it is reviewing its defence sector exclusions. This shift is not yet widespread across the industry, but momentum towards defence investment is steadily building.
Asset Class Commentary
Equities – Markets Tell Diverging Stories
In the first quarter, the longstanding trend of the US market outperforming its European peers was temporarily reversed. Dubbed the Magnificent Seven stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla – hold a disproportionate influence over the value of US stock indexes. Needless to say, this influence works both ways. While the stellar performance of the seven stocks drove large market gains in 2024, their returns in the first three months of 2025 have been lacklustre.
Magnificent Seven Stock Performance
Source: Morningstar (2025)
With no exception, all seven stocks saw prices decline in the first quarter. Tesla, in particular, lost almost 30% of its value. As a result, market-cap weighted Nasdaq composite and the S&P 500 indexes were down 10.3% and 4.4% since the start of the year, as of 31 March.
Predicting how long the ongoing softening of the US market will last is inherently difficult. However, despite this uncertainty, two things remain clear.
Firstly, US market valuations remain elevated compared to the rest of the world, even after the recent downturn. The current trailing price-to-earnings (P/E) ratio of the S&P 500 index is around 28 and well above its historical average of 16. In comparison, the estimated P/E ratio of FTSE 100 is around 12.
Secondly, despite the recent correction, a long-term perspective reveals that American stocks are still performing exceptionally well. The S&P 500, when viewed over a five-year period, remains up by more than 125% at the end of the first quarter. In reality, the recent drawdown appears as little more than a minor blip in comparison to the index’s long-term performance.
Across the Atlantic, investor attitudes have been more optimistic, as reflected in the significant market gains across major European economies. In the first quarter, the FTSE 100 was up more than 4%, and the French CAC index was up more than 5%, while the German DAX index was up around 12%. This rally can be attributed to increased government spending, according to Investco, as well as favourable monetary policies, and relatively low valuations. Compared to American stocks, European shares are not only more affordable but also more sheltered from the political and policy uncertainties that are driving volatility in the US on an almost daily basis.
Chinese stocks, which have struggled for years, have also experienced an upward surge in the first quarter. The SSE Composite index rose 2.5% and the Hang Seng index was up more than 17%, supported by government stimulus, heavy buying from mainland investors, and growing optimism in the Chinese tech sector. A notable example is the Chinese AI model Deepseek, whose advanced reasoning capabilities recently sent shockwaves through the American tech industry. On 27 January, news of Deepseek triggered a 3.01% drop in the tech-heavy Nasdaq index, while Nvidia (one of its largest components) tumbled by 17%. This serves as a reminder that innovation can not only drive market gains but also introduce volatility when competition threatens the dominance of established tech giants.
While some have interpreted this recent trend of other markets outperforming America as a sign of a “sharp sentimental shift” and “fade of US exceptionalism according to Euronews, caution is still recommended. The technological dominance that has underpinned much of North America’s equity market growth is not something that can disappear overnight. It is too early to tell when or whether the US will ever lose its status as a powerhouse of world-changing innovation. However, trade wars and geopolitical tensions are likely to continue generating volatility in the near term.
Fixed Income
On the fixed-income side, asset prices have been less volatile compared to equities this quarter. Overall, global bonds are up 1.39% in the first quarter.
In recent months, the Federal Reserve has repeatedly signalled that it is in no rush to cut interest rates. The Fed has been reducing rates at a cautious pace, which is certainly slower than Trump would prefer. With inflation remaining above target, the Fed is holding rates steady following its March meeting. Given the current economic uncertainty in the US, there is a possibility that further rate cuts could follow later in the year, impacting bond markets.
The European Central Bank (ECB) most recently cut its key interest rate on 12 March, lowering it by 25 basis points to 2.5% in response to forecasts of weak economic growth in the Eurozone and concerns over potential US tariffs. However, since early March, Germany’s announcement of a bold fiscal plan to significantly increase government spending has driven yields higher and pushed bond prices down across the Eurozone. In particular, long-term European bond yields rose sharply following the announcement.
Emerging market bonds did relatively well this quarter compared to recent history for the asset class. This bullish trend was driven by several factors, including high carry from elevated yields; a fall in US yields in the latter half of the quarter which helped make the region’s debt markets more attractive; and the resilience of emerging market currencies such as the Colombian peso and Brazilian real, which defied expectations despite tariff threats from the US.
Glittering (Fool’s) Gold
Gold has been performing exceptionally well recently, with prices reaching all-time highs. On 31 March, gold hit £2400 per ounce. This represents a significant increase of 16% since the beginning of the year and 64% over 3 years. The surge is driven by several key factors, according to JP Morgan and The Armchair Trader, including rising geopolitical uncertainty, the anticipation of future interest rate cuts, persistent inflationary pressures, and strong demand from central banks. When the future becomes more unpredictable, many investors turn to gold as a “safe haven” asset, as it is perceived to retain, or even appreciate, its value when other assets are declining.
However, investors should be mindful that gold has historically demonstrated significant price volatility over various timeframes, often reacting sharply to major economic and political events. Expert opinions generally suggest that gold prices are likely to remain elevated throughout the remainder of 2025, with some forecasting further gains. While the outlook remains positive, investors should not forget the inherent volatility of the asset.
According to a Morningstar study published in 2023, which analysed half a century of assets’ historical returns, gold has been significantly more volatile than both stocks and bonds. Timeline’s in-house analysis finds that gold has a return profile similar to bonds but with volatility akin to emerging market equities, as illustrated in our chart below:
As unpredictable as the equity market already is, predicting gold prices is even more challenging due to the commodity’s lack of cash flow and its reliance on complex, often unpredictable macroeconomic and geopolitical factors. Unlike equities, which can be analysed using fundamental metrics to determine intrinsic value, gold’s price is largely driven by unexpected events and human psychology – often leading to speculative trading.
With this in mind, we remind investors that gold may be better placed in jewellery rather than in a portfolio.
Final Words
What a whirlwind 2025 has been so far, and this is only the opening gambit. Global politics and international tensions are tumultuous, to say the least, allowing uncertainty to creep into the markets. It’s difficult to predict what might happen in both the economic landscape and the wider global climate over the rest of 2025. As we move forward into what is likely to be a year of higher volatility and inflation, we remind advisers to stay focused on the long-term investment horizon.
In times like these, it can be hard to see the wood for the trees when investing, but it’s essential to stick to your investment objectives. Forecasts are rarely accurate, and making rash decisions based on what people may believe the market will do is a dangerous game to play. Sticking to an evidence-based investment philosophy, built on research and market data, is key to maintaining long-term results.
So, we leave you with the wise words of Warren Buffett: “The rearview mirror is clearer than the windshield”.
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