MARKET COMMENTARY – AUGUST 2025

Investor sentiment improved in July, as political noise subsided and markets gained greater clarity around the direction of U.S. trade and fiscal policy. Key developments included the announcement of multiple trade agreements by the Trump administration, most notably with Vietnam, Japan, and the European Union, as well as the passage of the One Big Beautiful Bill Act (OBBBA), a notably expansionary fiscal package. While the new trade deals left tariffs significantly elevated compared to pre-Trump levels, markets welcomed the reduction in policy uncertainty and the diminished risk of a broad-based trade war. Against this backdrop, global equities advanced to new highs, supported by strong earnings reports, improving growth outlooks, and ongoing optimism around AI-driven productivity gains.

UK equity markets outperformed broader global indices during July, supported by upward earnings revisions in the energy and materials sectors. These gains were underpinned by stabilising commodity prices and an improved global macroeconomic outlook. However, inflationary pressures persisted, with headline CPI unexpectedly rising from 3.4% to 3.6% year-on-year in June, driven by increases in transport, clothing, and recreation costs. Core inflation also edged higher, reinforcing expectations that the Bank of England may maintain a cautious stance. In fixed income, Gilt yields moved higher, with the 10-year yield reaching 4.6% by month-end, as markets adjusted to the stronger inflation data and weakening resilience in domestic demand. While no major shifts in monetary policy occurred during the month, the evolving inflation backdrop remains central to market expectations for future rate decisions.

U.S. equity markets continued their upward trajectory in July, supported by strong corporate earnings and greater clarity on fiscal and trade policy. The passage of the Bill Act, with its expansionary provisions, contributed to a brighter growth outlook, particularly benefiting small-caps in the early part of the month. As the Federal Reserve left interest rates unchanged and mega-cap technology firms delivered robust earnings late in the month, large-cap stocks regained leadership. Overall, the S&P 500 rose further, with nearly 80% of reporting companies beating consensus earnings and revenue estimates, well above historical averages. The Magnificent Seven continued to outperform, with technology firms showing 17% earnings growth versus 4% for the broader index. On the fixed income side, Treasury yields climbed amid stronger growth expectations and mounting fiscal concerns. While core inflation moderated slightly, the effective impact of tariffs on prices remained limited, giving the Federal Reserve room to wait for clearer signals before adjusting policy.

European equities underperformed over the month, with the region’s markets posting modest losses amid concerns over U.S. trade policy and its potential drag on 2026 growth targets for continental firms. Technology stocks were particularly affected, as several large-cap names issued cautious guidance, citing uncertainty related to transatlantic trade. The food and beverage sector also struggled, weighed down by weak demand from China. Despite these headwinds, macroeconomic data showed cautious signs of improvement, supported by gains in both services and manufacturing. In fixed income, eurozone government bond yields drifted higher, caused by fiscal doubt and reduced expectations for further European Central Bank (ECB) easing. The ECB left policy rates unchanged at its July meeting, citing persistent uncertainty in the outlook, even as inflation remained stable at 2.0% year-on-year. Looking ahead, investor focus remains on the potential impact of the recently announced U.S.-EU trade agreement, which includes significant investment commitments but may prove a headwind for European bonds.

Emerging market equities mostly outperformed developed markets in July, buoyed by improving sentiment in Greater China and Korea. Investors responded positively to signs of resilience in the Chinese economy, where GDP growth for the first half of the year came in at 5.3% year-on-year, exceeding the government’s 5% target. Industrial production also surprised to the upside, and liquidity conditions improved on the back of rising credit growth and broader monetary support. Taiwanese equities continued to benefit from the ongoing AI investment cycle, further bolstering regional performance.

Commodities delivered mixed returns in July amid shifting trade dynamics and uneven global demand. Higher prices for key commodities such as iron ore and steel provided a tailwind for resource-rich emerging markets. Industrial metals initially gained on improved Chinese sentiment but lost ground after the U.S. imposed a 50% tariff on copper imports, though refined metals were later exempted. Gold paused its rally as safe-haven demand eased, while iron ore and steel prices continued to support some emerging markets. Overall, commodity performance remains sensitive to geopolitical developments and evolving trade policies.

Looking ahead, markets are expecting steady growth and moderate inflation, but valuations are elevated, leaving little room for setbacks. Risks from rising inflation, higher bond yields, and slower economic growth remain. Maintaining diversified portfolios across different asset classes, sectors, and regions is important to manage risks and take advantage of opportunities in this changing environment.

Total returns in GBP to 31/07/2025

*June 2025

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

This commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.