Bunker bluster - Global equity outlook

US President Trump has dominated the headlines since he took office – which is exactly how he likes it. But he’s also had a significant impact on the performance of stock markets. Shocking investors with his 2nd April ‘Liberation Day’ tariff announcements, global equities dropped, with the S&P 500 falling into bear market¹ territory. He capitulated a few days later and markets bounced.

In a tit-for-tat trade dispute with China, tariffs on some goods reached 245%. A truce was then declared thanks to a “very very good” relationship with Beijing. The Hang Seng Index is up more than 20% year-to-date, in local currency.

Trump - the isolationist - intervened in the Iran-Israel war, using bunker-buster bombs to attack uranium enrichment facilities. Although intelligence reports suggest Iran’s nuclear programme was far from “obliterated”, a ceasefire was declared. The oil price spiked, and round tripped, in less than a fortnight.

Following a drumbeat of threats to pull out of NATO, the US President decided it wasn’t a “rip off”, on receipt of extravagant flattery and a commitment from allies to boost defence spending. European defence stocks are some of the strongest performers year-to-date.

Amidst all this bluster, investors headed for the bunkers – favouring stocks and sectors that aren’t in the line of fire.

European leadership

After double digit returns last year, global equities are in negative territory year-to-date, down 3% for euro-based investors. During peak tariff fear, on the 8th of April, equities had declined 16% from the end of December.

Performance varies widely by region. European markets underperformed in 2024 but they’re ahead in 2025. While the S&P500 hit new highs in June, it has delivered negative returns, after accounting for the depreciation of the dollar. In the first half, the European Stoxx 600 index beat the S&P500 by the biggest margin this century. Elsewhere, Asia Pacific is flat and Emerging markets are modestly higher.

Figure 1: Major regional indices total return year-to-date

Source: Bloomberg as of 30th June 2025. Total return shown in Euro.

Since Trump paused the most extreme tariffs, the variation in regional performance has been narrower. From the 8th of April to-date, the US has pulled ahead of its developed market peers, led higher by the tech sector. With trade policy creating economic uncertainty, investors returned to the secular growth theme of Artificial Intelligence (AI).

Market concentration remains high with the seven largest companies in the world representing more than 20% of total capitalisation. Seven mega-cap US stocks have accounted for almost 40% of the global equity rally since the 8th of April: Nvidia, Microsoft, Broadcom, Meta, Amazon, Apple and Tesla.

Figure 2: S&P 500 versus the EAFE Index (Developed World excluding US) since the 8th of April

Source: Bloomberg as of 30th June 2025. Total return shown in Euro.

Looking at valuations, the 12-month forward price-to-earnings (P/E) multiple for the S&P 500 has returned to its pre-tariff level of 22 times. It had dipped to a P/E of 18 in early April. The long-term average is 17 times earnings. The US is trading at quite a premium to its history, although the composition of the index has changed over the decades: asset intensive manufacturing sectors accounted for almost 70% of the S&P in 1980, today they’re less than 20%. European, Asian and Emerging Market indices are trading close to their long-term averages.

Figure 3: Current versus long term average P/E

In the dugout

This year, the top performing sectors are Industrials and Financials, while one of the weakest is Healthcare. Now imagine you were locked away, with no access to news, and you were told the following three things:

1. The top performing sectors in the global stock market are cyclical – namely Industrials and Financials.

2. Europe – a more cyclical index - has outperformed the US.

3. The Euro has appreciated versus the dollar – typically associated with a ‘risk on’ environment.

You would naturally assume that investors were bullish, and you’d be surprised to learn that global equities were in negative territory, or that forecasts for economic growth had been cut since the beginning of the year. But politics is having an influence, driving investors to areas of the market that aren’t directly exposed to tariffs, currency moves, or Trump’s threats. So, domestically focused European stocks have done well this year.

Focusing on the Industrials – European defence stocks are top performers in the world index. Rheinmetall, SAAB and Leonardo are seen as beneficiaries of a pressured Europe’s commitment to increase defence budgets. It will take time for spending to flow through to revenues and, at least initially, its likely to include a high percentage of imports. The European defence sector has had such a run, its now trading at a premium to the US Mega-Cap ‘Magnificent 7’² stocks.

Figure 4: European Defence sector and US Magnificent 7 Price-to earnings, 12-month forward

Source: Bloomberg as of 30th June 2025.

Turning to the Financials sector, European banks are among the top contributors to performance - Banco Santander of Spain, UniCredit of Italy, BNP of France. For those that were investing during the financial crisis in 2008 and 2009, or the Eurozone sovereign debt crisis in 2011, its quite a turn that Eurozone banks are now the safe port in a storm. Relatively low valuations and high cash returns to investors, through dividends and share buybacks, added to the appeal.

Pharma under attack

The Healthcare sector has suffered this year. It has drawn the ire of the US President. In May, he signed an executive order seeking to lower prescription drug prices. His ‘Most Favoured Nation’ policy pushes pharmaceutical companies to match the lowest price they charge in any country where Gross Domestic Product (GDP)³ per capita is at least 60% of US levels. Prices are significantly higher in the United States which lacks a single, centralised, government buyer. The country accounts for almost half of global pharmaceutical revenues.

The Biden administration negotiated lower prices for certain drugs sold through government programmes. The US President has no authority over commercial business which accounts for half of prescription sales. For now, the path forward is unclear. Investors may expect an eventual compromise but how long does that take and what is the headline ‘tweet risk’ in the meantime?

To placate Trump, the pharma companies have been some of the most outspoken about their plans to invest more in American manufacturing. Both Roche and Novartis plan to invest $50bn in the US over the next five years, Johnson & Johnson went one better, with US$55bn over four years. To get ahead of potential tariffs, the companies that manufacture in Ireland shipped so much to the US in the first quarter that Irish GDP was up 22% year-on-year.

The Pharmaceutical sector has lagged the broader world index by over 50% since the end of 2022, this is on a par with the degree of underperformance during the Bill Clinton’s presidency in 1993 and 1994, when Hillary Clinton spearheaded an effort to reform the health care industry.

Figure 5: MSCI World Index and MSCI World Pharma, Biotech & Life Sciences Index

Source: Bloomberg as of 30th June 2025. Total returns shown in Euro.

Capital strength

Corporate earnings season is getting underway. Investors want to know how companies are managing through the on-again, off-again trade war. What’s the impact on supply chains, how much will tariffs impact margins, and can consumer demand sustain the higher prices?

On currency moves, a weaker dollar will benefit the US multinationals while the appreciation of the euro presents a drag for European exporters.

Well managed businesses have the resources to deal with uncertainty. Well-capitalised, cash generative companies have options. In recent months US corporates have announced more than US$500bn of share buybacks – the highest rolling three-month number on record. Trump’s tariff turmoil has impacted investment plans, so companies are buying back their stock, which will reduce share count and boost earnings per share. This year US share buybacks are expected to exceed US$1trn for the first time. Many European companies are purchasing their own stock too.

With share buybacks exceeding share issuance, equity supply is shrinking. In contrast, the supply of government bonds is set to increase, to fund growing deficits. There’s an argument for buying what’s scarce.

¹ A bear market is a drop in the index price of 20% or more.

² The Magnificent 7 refers to the group of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

³ GDP is gross domestic product, the standard measure of economic activity.