• Calm returns to financial markets after trade war paused
• Leading economic indicators worsen
• Cash position reduced in favour of Eurozone government bonds

April 2025 was marked by sharp volatility across global financial markets, triggered by a sudden escalation in U.S. trade policy. The announcement of sweeping “reciprocal” import tariffs sent shockwaves through risk bearing-assets, leading the S&P 500 to experience one of its steepest two-day declines in decades. Volatility surged to pandemic-era highs, and markets broadly sold off amid growing concerns about the global economic fallout. However, sentiment began to recover later in the month after the U.S. administration paused implementation for 90 days and signaled a more conciliatory approach toward key trading partners, allowing space for negotiation and easing immediate concerns.

Despite the initial turmoil, equity markets demonstrated notable resilience. The MSCI World Index ended the month 0.7% higher in USD terms (-4.1% in EUR), while the S&P 500 closed 0.7% lower and had already recovered its losses by early May. Regional performance was mixed, with emerging markets outperforming developed peers. Brazil and Mexico benefited from limited exposure to the harshest tariff measures, while Chinese equities rebounded on signs of policy support and a solid 5.4% year-over-year GDP print. Modest equity gains in Europe followed the ECB’s rate cut and the EU’s decision to suspend retaliatory tariffs. Despite this technical resilience, underlying fundamentals began to show signs of fatigue.

Corporate earnings in the U.S. exceeded expectations, with first-quarter results showing double-digit profit growth compared to Q1 2024. This strength, however, was not broad-based. Earnings declined significantly in energy and basic materials, while sectors such as healthcare and technology posted notable gains. Among the standouts were mega-cap tech companies, which delivered stronger-than-expected results, supported by sustained investment in AI infrastructure and solid underlying demand. Consumer spending also showed resilience, as reflected in positive transaction data from major payment networks. Despite this robust start to the year, many companies struck a cautious tone in their outlooks. Analysts are revising earnings forecasts downward, particularly in light of anticipated margin pressures as higher-priced, tariff-affected goods weigh on consumption. Nonetheless, markets appear inclined to look through the near-term softness, supported by progress in trade discussions. Looking ahead, earnings growth is expected to slow temporarily before reaccelerating, with a potential return to 10% annual growth projected for 2026.

Macroeconomic data for April confirmed a mixed but weakening outlook. In the U.S., GDP contracted by 0.3% in the first quarter, largely due to a surge in imports ahead of tariffs and a record-high trade deficit. However, domestic components such as consumer spending and capital investment remained positive, suggesting underlying economic activity is more resilient than the headline figures imply. Labor market data remained solid, with stable unemployment, higher hours worked, and a halt to the recent decline in temporary jobs. Wage growth moderated but stayed compatible with the inflation target. However, leading indicators, including consumer confidence, job vacancy rates, and hiring intentions, weakened significantly, pointing to further economic softening.

In the eurozone, Q1 GDP growth was surprisingly robust (+0,4% q-o-q), led by Spain and Italy, though the underlying trend appears unsustainable. Export strength to the U.S. ahead of tariff enforcement played a temporary role, and weak leading indicators (PMI, ZEW-, and ifo-Index) suggest stagnation is returning. Consumer sentiment and corporate investment appetite weakened, and inflation continued its downward trajectory, increasing the likelihood of additional ECB rate cuts later this year.

Chinese growth remained officially strong at 5.4% year-on-year in Q1, though much of this was supported by short-term stimulus and inventory restocking. Structural imbalances persist, particularly in the real estate sector, and elevated tariffs between China and the U.S. (145% and 125% respectively) are now materially impacting trade volumes. Container traffic from Asia to the U.S. has declined sharply, and confidence among Chinese manufacturers and service providers deteriorated further in April.

Bond markets initially sold off in tandem with equities, but subsequently recovered as recession concerns and central bank communication reinforced the case for easing. Credit markets weathered April's volatility reasonably well. However, spreads remain tight by historical standards and appear vulnerable should recession risks increase. In the U.S., the yield curve steepened sharply, as short-term rates fell faster than long-term yields. This move was mirrored in the UK and Germany, though to a lesser extent. Despite expectations for Federal Reserve rate cuts later this year, it appears increasingly likely that the Fed will remain on hold in the short term due to conflicting inflation and growth signals. In contrast, the ECB continued its easing cycle, and with inflation easing and growth cooling, longer-dated eurozone sovereign bonds now offer relatively attractive carry, especially compared to cash.

Commodities delivered a mixed performance. Oil prices fell sharply, reflecting weaker global demand expectations and OPEC’s decision to increase output from June. Industrial metals also declined amid concerns over Chinese growth momentum. Gold, by contrast, surged to record highs above $3,500 per ounce, driven by geopolitical risk, currency uncertainty, and strong central bank demand.

Although markets have recovered from the initial tariff shock, uncertainty remains elevated. Economic data are expected to soften further in the coming months, and with investor positioning no longer as conservative following the latest rally, the near-term upside in equities may be limited. Against this backdrop, a gradual and disciplined approach to portfolio positioning remains warranted. The current environment continues to call for selectivity and discipline. While near-term earnings expectations are being revised lower and forward-looking indicators point to decelerating growth, real economic data remain largely intact. This divergence justifies a balanced allocation. Equity exposure remains neutral given the fragile earnings momentum and uncertainty around trade policy outcomes. However, markets could react sharply to either a resolution or escalation, and maintaining flexibility is key.

Government bonds, particularly in the eurozone, are increasingly attractive given their improved yield profile, ongoing ECB support, and limited downside risk. The recent steepening of yield curves enhances the relative value of longer maturities over cash, prompting a reduction in cash holdings in favor of European sovereign bonds. U.S. Treasuries also play a useful role, both as income generators and as protection against equity downside, even though monetary policy may stay unchanged in the near term.

Please find attached our last Asset Allocation Update for May.