MARKET INSIGHT – May 2025

MARKET INSIGHT

Prime Partners’ monthly analysis of global economic and financial market news.

The day after…

Wednesday, April 2, 2025, may have marked a turning point for the US economy. Proclaimed as “Liberation Day” by President Trump, this date will go down in history as marking the end of a certain idea of global trade. The image of the US president brandishing a large chart detailing the often-exorbitant tariffs applicable to the vast majority of the United States’ trading “partners” will remain etched in our memories.

The stock market reacted immediately to these announcements, as investors gradually realized the knock-on effects of these new tariffs, both for companies’ future results and for the global economy. During April, market participants were repeatedly shaken by the Trump administration’s often contradictory statements regarding the actual entry into force of customs duties and potential future trade deals. Added to this was a grotesque escalation of import duties between China and the US, with both global economic giants determined to show that they would not back down. In short, a new and very uncertain world.

If we had to find a catchy acronym to describe what is currently influencing global stock markets, it would be fitting to talk about the three Ts: Trump, tariffs, and trust. These three Ts should not be confused with the American pop group 3T, formed by three of Michael Jackson’s nephews, which enjoyed its heyday in the late 1990s.

Joking aside, it is fair to say that over the past month, it is the first two Ts that have made and broken the stock markets. President Trump’s repetitive and often contradictory statements have only served to make investors cautious about the future prospects of listed companies. However, the third T mentioned above is also very important: trust, meaning the confidence of market participants in the financial system.

The trade war declared by the US on April 2, dubbed “Liberation Day,” quickly eroded international investors’ trust in America. The dollar has depreciated sharply in recent weeks, alongside a significant rise in long-term US interest rates. In other words, international confidence in US government bonds, which are to some extent the collateral of the international financial system, has wavered somewhat. This reminds us that the level of US public debt means that it cannot tolerate any crisis of confidence when it comes to refinancing itself. If this were to happen, the financial markets would find themselves in an virtually unprecedented and dangerous situation.

The trade war declared by the US on April 2, dubbed “Liberation Day,” quickly eroded international investors’ trust in America

Although it is impossible to say for sure, it appears that the bond market tantrum in mid-April was more effective than the fall of the S&P 500 index in recent weeks in prompting the US president to tone down his rhetoric (slightly). Despite adding a further layer of uncertainty by strongly criticizing the US Federal Reserve’s stance and briefly raising the possibility of Jerome Powell’s dismissal, Donald Trump appeared to adopt a less vehement stance on tariffs in the last few days of the month, highlighting the imminent conclusion of ”deals” and a series of exemptions/special treatments for certain goods, including semiconductors.

This new trade environment and the huge uncertainty currently surrounding economic prospects have prompted us to revise our central scenario for 2025. Where we could legitimately have expected “American exceptionalism” to continue to drive growth, we must now factor in a much weaker economy. Both consumers and businesses will have to tighten their belts in the face of the current uncertainties, whether in terms of household spending or investment plans.

Against this backdrop, and with the earnings season now underway, we must adopt a stance of cautious realism. At first glance, and despite the US economic slowdown that was already apparent before the April 2 announcements, Q1 corporate results should be decent. The doubts surrounding the massive investment plans in artificial intelligence should be addressed to some extent in the statements issued by the tech giants, as the Deepseek episode had already put a serious damper on the stock market’s enthusiasm for the sector after two years of very strong growth.

That said, more generally speaking, this earnings season will likely be marked by very cautious, or even non-existent, guidance from companies, as was the case in 2020. Indeed, how could they give investors any kind of forecast without knowing exactly how the US administration’s tariffs will impact the production costs of so many products? Apple comes to mind, for example, with an estimated 90% of its production taking place in China…

On the US consumer side, which we have so often described in this newsletter as the driving force behind the US economy, the situation has also changed radically since April 2. The import duties imposed by President Trump will automatically lead to inflation on many everyday products. It is of course unrealistic to think that the US economy can produce “Made in the USA” substitutes for all the goods manufactured abroad and consumed within its borders. Inflation goes hand in hand with interest rates, which explains the complicated situation facing the Fed, whose plans to resume lowering rates are being thwarted by a likely inflationary rebound if tariffs such as those announced in early April impact prices in the US.

All these elements lead us to believe that the US economy will experience a transitory period of significant slowdown, reducing growth to between 0% and 1%, far from the figures of the last two years. It seems obvious that President Trump will soon announce, in his inimitable style, a few trade deals for which he will certainly not fail to congratulate himself. However, it is relations with China and progress towards reasonable tariff agreements on both sides that will determine whether or not the global economy can return to its pre-Liberation Day trajectory. As things stand, the custom duties promised by the US and Chinese administrations are bringing trade between the two countries to a virtual standstill.

As things stand, the custom duties promised by the US and Chinese administrations are bringing trade between the two countries to a virtual standstill

This significant change in economic momentum and the downward revision of our US growth expectations have naturally led us to adjust our asset allocations, without however giving in to panic. Specifically, we have divested our passive investment in US mid-cap equities. These stocks will logically be impacted by the likely decline in US consumption. In addition, the interest rate environment we now anticipate should accentuate the financial pressure on these midsize companies.

We have also reduced the risk associated with our exposure to the S&P 500 index by opting for a capital-protected instrument to replace part of our position. Finally, and this is an important feature of our response to the current situation, we have been very flexible within our internally-managed equity products, not hesitating to increase their cash allocation. These moves have had a significant impact on the actual equity exposure of our portfolios.

At this stage, and in an environment that we consider to be still very uncertain, we note that our allocations have performed resiliently in April. Once again, our portfolio construction has enabled us to avoid finding ourselves in challenging situations where it would be easy to make poor investment decisions. Our exposure to gold, which has continued to rise, and the robustness of the fixed-income and alternative pockets of our portfolios have helped mitigate the headwinds from the equity markets and the sharp decline in the dollar.

President Trump has already made 2025 a special year for the financial markets. It is too early to say that it will be a bad year, but it is already clear that it will require more agile management and, above all, a realistic view of the outlook for companies and consumers. We shall not be naively optimistic nor unduly pessimistic, but will instead seek to adjust our allocations according to developments in global trade.