How political pressure shapes the markets

Stock markets delivered a swift verdict on US President Trump’s dramatic tariff announcement. In the run up to April 2nd, investors were trying to factor in the potential impact but an effective duty of over 20% was double what was expected. It fit worst case scenarios – a tail risk that seemed unlikely to occur.

By the close on the 8th, with Trump’s ‘reciprocal’ tariffs due to come into effect at midnight, global equities had declined almost 12% in euro terms over just four trading days. On two occasions, the S&P 500 entered bear market territory – declining more than 20% from the February peak.

Intraday swings were extremely wide. Volatility, as measured by the VIX index, spiked north of 50. The long-term average for the index is about 20. To put that move in perspective, the VIX hit 80 in March 2020 in the early days of the COVID-19 pandemic and in 2008 during the financial crisis. The difference today is that Trump’s tariff turmoil was entirely self-inflicted.

The US President says that tariffs will be great for his country, after some ‘pain’. Stock markets are forward-looking and should in theory see through short-term difficulties. If investors believed that extreme protectionism would be good for the US in the long term, the S&P should have rallied on the news. The market’s judgment was clear.

As share prices fell, US treasury yields rose. Declining bond prices and a dip in opinion polls, combined with pressure from respected business leaders and members of his own party, led Trump to capitulate on the 9th. He rowed back from his extreme position but a baseline tariff rate of 10% remains high, while duty on imports from China is prohibitive. The focus now turns to the administration’s negotiations with trading partners. In the interim, uncertainty will restrain investment and spending.

Having risen in the first quarter, the broad European equity index is now in negative territory. Major Asian markets are also lower in Euro terms since the turn of the year.

Globally, all the major industrial sectors have declined year-to-date. The more defensive consumer staples and utilities have been relatively more resilient. The technology sector – last year’s winner – is this year’s laggard.

Figure 1: Major regional indices total return year to date in euro

Source: Bloomberg as at 11th April 2025

Government intervention

We began the year with ‘peak’ US optimism, peak European pessimism, and with views on China somewhere in between. Trump’s protectionism, China’s technological advances, and Germany’s new spending plans have certainly dulled the allure of American exceptionalism.

US government action influenced the three big themes shaping markets this year: tariffs, technology disruption, and European rearmament. The Trump administration’s departmental efficiency drives and protectionism have rattled stock markets and increased the risks to economic growth.

It was the US imposed restrictions on the export of advanced semiconductor chips that led to a breakthrough in Artificial Intelligence (AI) by a Chinese startup. Necessity being the mother of invention. Deep Seek’s development of a high performance and lower cost AI model, shook the belief that America was destined to win the race to create a ‘Digital God’. Following strong performance last year, the Magnificent 7 cohort of mega-cap US tech stocks have lost ground.

US policy drove a lonely Europe to acknowledge the need to spend more on defence – a historic turning point, or ‘Zeitenwende’. A political price The US stock market had outperformed the rest of the developed world by 22% in 2024. By the close of markets on the 11th of April that gap had narrowed to 7%.

A political price

The US stock market had outperformed the rest of the developed world by 22% in 2024. By the close of markets on the 11th of April that gap had narrowed to 7%.

Figure 2: S&P 500 versus the EAFE Index (Developed World excluding US) total return in euro

Source: Bloomberg as at 11th April 2025

The S&P 500 entered 2025 trading at a premium to its long-term average, and by the middle of February, it had reached 22 times forward earnings. Outside the US, equity indices were valued pretty much in line with their historical multiples. Over the last few weeks, the S&P has derated and is now trading on about 19 times forward earnings which is still a bit above the long-term average. The price to earnings (P/E) multiple has dipped because share prices have fallen. Published earnings estimates haven’t moved very much.

The first quarter earnings season began with the US banks reporting results on the 11th. As companies release numbers, the market will focus on managements’ guidance, and given the uncertainty around trade policy, executives will be conservative. Analysts will update their models and revise earnings estimates.

Figure 3: S&P 500 12-month forward price to earning

Source: Bloomberg as at 14th April 2025. P/E dark blue line right hand scale. EPS light blue line, left hand scale. EPS: earnings per share

‘Zeitenwende’ – Europe‘s turning point

The Euro Stoxx 50 index is composed of blue chip Eurozone companies, considered leaders in their respective sectors. In February, the index finally breached its March 2000 high – and it ‘only’ took a quarter of a century. Drawn to an improving economic narrative, investors favoured domestic plays. In the first quarter, six of the top ten performers in the Euro Stoxx 50 were banks. With Trump threatening a 20% tariff on European imports, the Euro Stoxx 50 has dropped below the year 2000 level again.

Looking at the broader Euro Stoxx index of 300 names, the top performer is German defence company Rheinmetall. Year-to-date, the stock has doubled. It’s viewed as a key beneficiary of Europe’s decision to increase its ability to defend itself in a world of higher geopolitical risk.

‘When America sneezes, the world catches cold’ and tariffs help spread the infection. European stock indices have fared better than the US so far this year, but can that continue? According to Bank of America research, for every €100 of outflows from Europe since the start of the Ukraine war, only €7 has returned. It will take time for fiscal plans to feed through to economic growth, and more immediately, US protectionism impacts Europe’s exporters. On the other hand, peace and reconstruction in Ukraine would be a positive.

Too close to power

After enjoying a Trump bump on the US Presidential Election result, US mega-cap Tesla has gone into reverse. Lack of product innovation combined with the controversial political profile of its CEO have dented sales. Meanwhile, Tesla’s Chinese rival, BYD Auto, hit a record high in March, on reports it can charge an electric vehicle as quickly as it takes to fill a car with petrol. China is set to install 460,000 new public electric vehicle chargers this year, accounting for about two-thirds globally (FT March 2025).

Figure 4. BYD versus Tesla, total return in euro year to date

Source: Bloomberg as at 11th April 2025

Short term volatility - long term focus President Trump prides himself on being unpredictable. Markets like certainty. What’s an equity investor to do? Recent market action reminds us why we need to be diversified, beyond one stock, one sector, or one country.

Ever the showman, Trump built up tension on tariff announcements to the April 2nd deadline. By the 8th his ‘audience’ was threatening to leave. The volatility that equity investors have experienced demonstrates why we need to take a long-term view and focus on our investment goals, even though it’s so difficult amid market turmoil.

When indices pull back sharply, it’s the ‘bear’ arguments that get the most airplay, but markets recover over time, as they always have done. Well capitalised businesses have the flexibility to adapt to change, and the capacity to take advantage of new opportunities.