After a strong start to 2025, market sentiment took a sharp downturn in February due to growing concerns over the US administration’s policy agenda. Uncertainty around US tariffs and retaliatory measures from other countries, combined with domestic spending cuts and government layoffs, have weighed heavily on both corporate and consumer confidence.
Geopolitical tensions escalated mid-February when US Vice President JD Vance criticised European countries at the Munich Security Conference, followed the next day by US Secretary of State Marco Rubio, highlighting a deepening divide over values between the US and Europe. Tensions peaked when President Zelensky’s Oval Office meeting with President Trump ended abruptly, signalling further strain in transatlantic relations. These developments are influencing the investment environment.
In the US, investor focus has mainly been on tariffs and the downward revisions for economic growth and corporate earnings, with higher inflation. Consequently, US stock markets weakened in February with relative shelter to be found in undervalued segments of the market. Meanwhile Europe’s response has been swift to the threat of retreating US security support, with increased defence and infrastructure spending commitments.
This shift has boosted European industrial stocks, which outperformed as markets adjusted to the new spending outlook. Meanwhile, buoyed by momentum from last month’s DeepSeek rally, Chinese tech stocks helped to lift emerging markets.
The earnings gap between the Magnificent-7 and the broader market has started to close as investors rotate toward more diversified opportunities – a healthy correction that could provide a stronger foundation for future gains.
US interest rates declined in February on concerns about a weaker growth outlook and reinforced by government commitment to spending cuts. This cushioned some of the equity market losses. European and UK interest rates have moved higher in March, driven by expectations of higher government spending in Europe and persistent inflation in the UK. With the UK’s Spring Budget approaching, rate pressures are likely to persist into at least the summer, in our opinion.
Our optimistic outlook from earlier this year is being challenged. On the positive side, a broader set of performance drivers could support portfolio gains. However, policy uncertainty and a potential US growth slowdown are new and significant risks with the potential to stall corporate and consumer activity. US economic data has been resilient so far, with only a few cautionary signals from consumer-facing companies.
We’re closely watching the evolving landscape and will adjust portfolios as opportunities appear.
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Please remember, this content is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, to determine the risks associated with the investment and its suitability.
