Peter Smith, Senior Investment Director
This week, equity markets have been riding a wave of optimism on the back of positive news flow, with the US stock market, as measured by the S&P 500, remarkably erasing its losses for the year.
Read this article to understand:
- What happened in markets this week
- Why bonds and the dollar were not as exuberant as stock markets
- How we are positioning multi-asset portfolios
Before it even got started, the week began with a surprise agreement over the weekend between the US and China. The two countries decided a 90-day pause on most retaliatory tariffs they had imposed on each other. The US will lower its tariff rate on Chinese imports from 145 per cent to 30 per cent, while China will reduce its tariff rate on US goods from 125 per cent to ten per cent.1
Issuing a joint statement, the US and China emphasised the importance of a sustainable, long-term, mutually beneficial economic and trade relationship. Investment markets reacted very positively to the news, surging at the beginning of the week. The S&P 500 was up 3.3 per cent on Monday, May 12, its third largest daily move in the past five years.
These equity moves meant that, by mid-week, the S&P 500 was up 22.5 per cent from its April lows, marking a truly remarkable rebound and an extraordinary change in investor sentiment. From a global perspective, as of the morning of Friday, May 16, world equities (as represented by the MSCI All-Country World Index) in US dollars were incredibly up 4.8 per cent year to date. For European and UK investors, a continuing weak dollar meant world equities were down three per cent in euro terms and one per cent in GBP terms.
This week wasn’t just all about tariffs though. President Trump travelled to the Middle East and announced trade deals with Saudi Arabia and the UAE. Much of the focus of these deals centred around AI and the provision of US semiconductors to aid its development. As a result, the news buoyed Nvidia and other US tech names, Nvidia shares rising 15 per cent between May 12 and 16, and 24 per cent since the beginning of May.
Better-than-expected US inflation numbers also surprised markets. Annual headline inflation to the end of April came in at 2.3 per cent, with the impact of tariffs hardly evident at this point.
In other positive news, company earnings season in the US was finishing up, and results were stronger than anticipated. Seventy-seven per cent of S&P 500 companies beat estimates this quarter and earnings were up 13.1 per cent, almost double the 6.6 per cent expected.
The bond market, and specifically US treasuries, painted a slightly different picture to the exuberance of the equity markets. Yields in general trended higher as the market priced in fewer rate cuts by year end. Worries were also evident further out the curve due to US fiscal spending in the medium to longer term.
After a brief surge on Monday, May 12, the dollar continued to come under pressure as the week progressed. Gold fell by around three per cent over the week as the risk-on trade continued, while Bitcoin's turbulent year went on, with the cryptocurrency trading at $103,000 by the morning of Friday, May 16.
Outlook
The path from here will depend on what happens next in trade talks, inflation, central bank policy and company earnings. Further volatility in markets is likely as investors weigh up the economic impact of US trade policy.
Although Q1 corporate earnings showed resilience, many companies have chosen to withdraw earnings guidance for the remainder of the year until the picture becomes clearer. It is also likely we have yet to see the impact of tariffs.
Our positioning in multi-asset portfolios
In portfolios where we have active discretion, although we have a slightly overweight allocation to global equities, we reduced it somewhat, taking the opportunity of rising markets to take profit, specifically in US equities. We now hold modest overweight positions in European and emerging market equites.
Within fixed income, we have structured our active positions to be less impacted by rising long-end US bond yields, by having more exposure at the five-year point of the Treasury curve. We also maintain overweight positions in UK gilts and German bunds on the basis of a continued cutting cycle from central banks, and have introduced a preference for the Japanese yen based on our outlook for ongoing weakness from the US dollar.
We continue to monitor the situation to ensure the portfolios remain positioned appropriately. While cautious, we are still looking to add value where we have active discretion.
As longer-term investors, it is important to remain calm in these volatile and uncertain times. We remain confident that financial markets can provide the growth required by investors to meet their long-term goals.
References
1 Source of all data in this article: Bloomberg, as of May 16, 2025.
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