It’s been an eventful year so far, defined by bouts of instability. Despite this, asset classes across the board are largely in good health. A quick glance at the year-to-date regional index performance shows that all major markets are up, barring the S&P 500. MSCI Europe (ex. UK) is up nearly 14%, and the FTSE 100 is up close to 10%.1 The S&P 500 appears to be down 2 to 3%, but it is worth noting that this is largely due to currency effects. When adjusted for dollars, the index is actually trading at record highs.
In the last few months, we’ve seen significant market falls, the US launch direct strikes on nuclear facilities in Iran, and tariffs at a 100 year high, so those numbers may surprise some.
For investors, cutting through the noise and taking the long view has paid off. With volatility likely to continue in the coming months, it’s worth reviewing the past two quarters to get a sense of where we are as we go into the rest of the year.
American dealignment
For the past two years, global growth has been led by US stocks, dominated by the Magnificent Seven mega-caps. For a while, US equity was the only game in town.
This year has been different. The dollar has weakened significantly, putting pressure on US Treasuries and equities. March saw the biggest drop in US equity allocation on record,2 and recent bond auctions have seen diminishing interest from foreign investors.
The increasing divergence of the US from its traditional roles in global trade and security, largely due Donald Trump’s policies, has been a significant factor. When Trump was elected, tariffs were expected, but few anticipated the scale and implementation style of Liberation Day. The announcement prompted a sell off that pushed markets close to bear territory.
The markets recovered after numerous delays and have come to expect that Trump will eventually pivot on the more detrimental “reciprocal” tariffs to allow for deals. Or, as some have joked, Trump Always Chickens Out (TACO).
Despite this, tariffs remain at their highest levels in recent history. So far, the impact has only been seen in soft data like sentiment and confidence but, coupled with continued uncertainty, it’s making corporate strategy difficult.
There’s also an expectation that the tariffs will soon affect harder data, eventually pushing up inflation. If we remember COVID, it similarly took some time before the full effects were felt.
David vs Goliath
One of the current challenges in the US market is the unprecedented concentration risk. The top ten stocks make up nearly 40% of the S&P 500,3 they’re expensive and look unlikely to replicate their recent strong performances.
However, small- and mid-caps could be set to outperform. Historical data shows that in the five years after similar periods of high concentration, portfolios with equal weight exposure tend to perform well.4
Although the new Chinese DeepSeek AI model caused some market stress when it seemed to match the capabilities of US large language models at the fraction of the price, we see this as a positive. It means AI innovation and related stock growth are no longer purely the domain of the mega caps. This wider access should also benefit stocks related to energy and datacentres.
Opportunities outside US
Given the unpredictable picture in the US, many investors are turning their attention elsewhere. Europe stands out as an attractive option due to its competitive valuations, the European Central Bank’s active monetary easing and shareholder friendly policies like share buybacks and strong dividends, which are all driving investor interest. Stimulus in areas like green policy, digitisation, AI, and defence has helped reinvigorate the bloc.
The tariff deal now agreed between the European Union and the US, which reduces the expected baseline tariff from 30% to 15%, was initially received positively by markets However, there have been fluctuations since as EU leaders have expressed reservations. While tariffs under the new framework remain higher than pre-Liberation Day levels, the deal should ease economic tensions and pave the way for future negotiations and potentially more favourable arrangements.
Despite recent National Insurance hikes for businesses and persistent inflation, business confidence in the UK has been climbing.5 The UK’s more services-based economy provides some shelter from tariffs, and its cheap valuations and discounts have not escaped investor attention. Interest rates are expected to fall, which generally benefits the market and will also help smaller companies that are more rate sensitive. The smart money has been buying the UK, as evidenced by increased foreign investment and private equity activity.
China is in a stronger position to withstand tariffs than some might expect, as exports to the US account for only a small portion of its GDP.6 China has also caught up on tech and possesses significant tariff leverage when it comes to rare earth minerals which are vital to US manufacturing. The dollar weakness appears to be part of a longer-term trend. Historically, emerging markets have performed well during periods of when the dollar is weakener, suggesting potential opportunities in Asian markets. However, as these markets are manufacturing heavy, they could still be vulnerable to tariffs.
Taking the long view
So far, this year has been marked by instability. Our risk barometer which combines several data points including equity prices, bond yields, interest rates and the gold price to estimate expected risk and return, remains in the red, signalling a cautious outlook. Building a strategy around ongoing instability is challenging, but taking the long view, while making sure you are diversified across regions and asset classes, can provide protection and growth during periods uncertain times.
By Peter Wasko, Senior Portfolio Manager, Copia Capital
Sources
| 1 | FE returns stated in GBP. Period December 31- June 30 2025 |
| 2 | BoA Global Fund Manager Survey |
| 3 | Clearbridge – Index concentration Vs. Subsequent 5-year performance of Equal vs Cap-weighted S&P 500 |
| 4 | Ibid |
| 5 | Lloyds Business UK survey of expectations – Amati Investors |
| 6 | CLSA, IMF DOTS, Oxford Economics, April 2024 |
