What’s shaped markets in the first half of 2025?

Dan Coatsworth

Tariffs, downgrades to earnings and economic forecasts and geopolitical conflict were the defining factors for markets in the first half of 2025. They’ve caused considerable uncertainty which has affected asset prices, as well as business and consumer confidence.

It’s led to one of the biggest shifts in investor preferences for years, with certain parts of the market coming to life and previous winners losing their crown. We’re now seeing the great big asset allocation reset and the US is no longer top choice for many investor portfolios.

How have markets performed?

Investors could have made more than four times as much money investing in the UK stock market than in the US so far this year. The FTSE 100 has returned 9.6% including dividends, compared to just 2.1% from the S&P 500.

This will be unsettling for Donald Trump who in his first term as US president implied that stock market gains were a barometer for his success. Second time around for Trump, the US has lagged many other markets globally and many investors are now shunning the dollar and pulling money out of US stocks in favour of other locations including Europe.

Year-to-date total returns for major markets around the world
Country Total return
Hong Kong (Hang Seng) 17.3%
Germany (Dax) 17.3%
Brazil (Bovespa) 14.0%
UK (FTSE 100) 9.6%
France (CAC 40) 5.7%
India (S&P BSE 100) 4.7%
US (S&P 500) 2.1%
China (SSE Composite) 0.2%
Japan (Nikkei 225) -3.7%
Source: AJ Bell, ShareScope. Data 1 January to 20 June 2025.

Why have US shares underperformed?

Investors have grown concerned about a potential pullback in the pace of US economic growth as tariffs push up costs for US consumers and businesses. Trump wants individuals and companies in the US to stop buying from foreign sources and buy domestically, yet his trade policies are making life much more expensive for them.

The consensus earnings forecast for the S&P 500 has been cut by 4.9% so far this year as analysts price in a mixture of higher costs and lower demand. Companies are becoming more cautious in their earnings updates and investors don’t like what they’re hearing.

For example, electricals retailer Best Buy last month cut its profit outlook due to Trump’s tariff policies. Department store owner Target disappointed with its latest earnings update and slashed its forward guidance amid weaker consumer spending. Even companies that provide everyday items such as a bowl of cornflakes are finding life hard. Cereal giant WK Kellogg said in May that it might no longer be able to grow adjusted profits this year.

On top of this, four out of the Magnificent Seven group of mega cap tech stocks have delivered negative returns for investors so far in 2025. These seven companies effectively drove the US market higher in 2023 and 2024, so a reversal this year for Alphabet, Amazon, Apple and Tesla is significant as they’re dragging the market down.

How certain US shares have performed year-to-date
Meta 16.5% Alphabet -12.0%
Microsoft 13.3% Tesla -20.2%
Coca-Cola 10.5% Nike -21.0%
Nvidia 7.1% Apple -19.7%
Amazon -4.4% Salesforce -22.1%
Procter & Gamble -5.2% UnitedHealth -40.3%
Source: AJ Bell, ShareScope. Data 1 January to 20 June 2025 (total return).

The World Bank this month cut 0.9 percentage points off its GDP forecast for the US in 2025, now expecting just 1.4% growth which is half last year’s level.

Other factors have also weighed on investor sentiment, including the US losing its triple-A credit rating following a downgrade in May by credit ratings agency Moody’s, and a ballooning debt position for the country. US equity valuations also remain high with the S&P 500 on approximately 22 times next 12 months’ forecast earnings – not far off the 23.1-times peak seen in 2020.

Put all these negative factors in the mix and it’s easy to see why investor appetite for all things US has waned. People are instead looking elsewhere in the world for opportunities and cheaper valuations in Europe have acted as a magnet for investors.

Why have German shares done well?

Germany has stood out from the crowd because of its decision to ramp up spending on defence and infrastructure. This pledge to spend big provides a tailwind for many companies in the Dax index including defence contractors, construction groups and energy providers.

Germany has offered a bounty of good news in a market environment plagued by uncertainty. German shares have been cheap for a long time and investors finally had a catalyst to fish for opportunities.

The Dax has been a star performer this year, yet it is no longer the bargain it was six months ago. At approximately 15 times next 12 months’ forecast earnings, the German index is now trading at a four-year high valuation. Historically, the market has traded more in the region of 11 to 13-times earnings.

Why have UK shares done well?

The UK’s cheap valuation relative to the US has also worked in its favour as investors begin to reposition portfolios.

The FTSE 100 is full of the type of stocks that appeal to investors when there is uncertainty in the world. Investors seek companies with defensive qualities and the UK market has them in spades. Industries including tobacco and telecoms should have steady earnings regardless of what’s going on in the world, hence why the likes of British American Tobacco and BT have been among the best performing UK shares this year.

Top performing UK shares year-to-date (FTSE 100 stocks)
Fresnillo 126.0% Aviva 32.9%
Babcock 111.0% Next 30.3%
BAE Systems 65.3% Admiral 29.7%
Endeavour Mining 60.4% M&G 29.2%
Rolls-Royce 56.1% Phoenix 28.9%
Airtel Africa 49.8% Smiths 28.3%
Coca-Cola HBC 41.9% ConvaTec 27.9%
Prudential 40.4% St James's Place 27.1%
Lloyds Banking 37.9% British American Tobacco 26.4%
BT 33.6% NatWest 26.0%
Source: AJ Bell, ShareScope. Data 1 January to 20 June 2025 (total return).

The UK stock market has wealth of defence contractors which have attracted investor interest against a backdrop of increased government spending on areas like cybersecurity and military forces. The wide range of banks and insurers have also been on investors’ shopping lists thanks to generous dividends.

Gold hit new record highs in April and investors were hungry for precious metal miners such as Fresnillo which has generated a sparkling 126% return for investors this year.

The UK stock market has re-rated in the same way as the Dax, yet unlike Germany it is still cheap compared to history. It is currently trading on 12.5 times next 12 months’ forecast earnings, much higher than the 8.7-times rating seen in 2022 but well below the 14 to 16-times range it enjoyed between 2015 and 2018.

It means the UK still stands out when investors are looking for value opportunities in the wake of Trump’s tariff chaos. It also helps that the UK has already got a trade agreement in the bag with the US, further enhancing the country’s attraction to domestic and foreign investors.

Disclaimer: These articles are for information purposes only and are not a personal recommendation or advice. Past performance is not a guide to future performance and some investments need to be held for the long term.

Written by:
Dan Coatsworth
Editor-in-Chief and Investment Analyst

Dan Coatsworth is AJ Bell's Editor in Chief. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He has a degree in Corporate Communications from Southampton Solent University.

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