US growth shifts and trade policies: what’s moving markets?

Our Chief Investment Officer, Richard Flax, reviews recent market volatility, driven by shifting US growth expectations and trade policy developments.

There are a few trends to highlight. The first is rising concern about US economic growth. As we’ve said before, the US has been the engine of growth over the past eighteen months or so, far outstripping the UK and the Eurozone. But some of the latest macro data has pointed to a slowdown. Retail sales and the latest manufacturing survey have delivered weaker-than-expected results. We think that’s been exacerbated by political uncertainty in the US, which we think is beginning to impact consumer confidence. We’ve seen that reflected not just in weaker equity markets, but also in lower US government bond yields.

As part of that, trade policy is back in the headlines. For the last couple of months, investors seem to have been in two minds on tariffs. There’s a widely held view that higher tariffs would be negative for growth. But investors seem divided about whether the US government would really implement higher tariffs, which could weigh on equity markets, or whether it was just a negotiating tactic – just noise. For now, the US looks set to raise tariffs on Mexico, Canada and China, suggesting that they’re not just part of an extended negotiation. That has caused financial markets some concerns.

Another notable trend is the outperformance of European equities compared to the US so far in 2025. We think there are a few things driving this. First, there was some relief that the US did not immediately impose tariffs on European goods. Second, there’s some hope that the US administration will push for some sort of ceasefire between Russia and Ukraine. That could translate into an easing of sanctions and maybe lower energy costs for European companies. Third, the prospect of lower policy rates could also help improve the growth outlook for Europe. Finally, as we’ve noted before, starting valuations in Europe are generally low compared to history, and compared to the US equity market. 

The geopolitical winds have also been shifting. The US looks set to reduce its commitment to Europe and it seems clear that defence spending in Europe is going to rise. It’s timely that the new German government – when it emerges – will look to increase its investment spending, taking advantage of its low debt levels. Other European countries might find it a bit tougher. But, overall we should see more government spending in Europe going forward, and that should help drive growth.

So, where does this leave us? On the one hand, we’ve seen a few tough days in markets, but that’s part and parcel of investing and it’s something we should expect. At the same time, the macro outlook in the US has deteriorated a bit. We’ll monitor closely how that can impact corporate earnings growth at a time when valuations for US equities are already high versus history. The outlook for European growth, however, looks a bit better, as European governments see the need to increase their spending.