Market Update – May 2025

Markets have largely recovered from the initial panic over the “Trump tariffs” in April, with many indices now rallying to all-time highs. However, investors remain worried about whether trade disruption will return over the summer (as the 90-day “pause” on Liberation Day tariffs starts to expire). The UK’s economy is showing some positive signs of momentum, but global uncertainty and inflation at home still hang over the outlook.

UK policy

In early May, the UK announced its latest local election results, with devastating news for the incumbent Labour administration. Reform UK made huge gains – taking control of 10 councils and winning a constituency by-election. In total, the party won 31% of the vote in England.

This may largely explain Labour’s policy shift following the results. On 12 May, the government announced “radical” reforms to reduce immigration and strengthen the border – apparently in an attempt to win back lost Labour voters.

Measures include ending overseas recruitment for social care visas, increasing minimum salary thresholds, and raising minimum English Language requirements.

The proposals are in the “white paper” stage, and so could take a different final form. Those in favour of such measures argue that the UK will benefit from lower pressure on public services, less wage competition, and more affordable housing.

However, shifting policy significantly could have unintended consequences. For instance, the OBR (Office for Budget Responsibility) argues that higher net migration leads to lower deficits and debt. As such, there could be detrimental economic effects, e.g. higher UK borrowing costs.

The UK economy

The economy has recently shown more positive signs of momentum. There are at least three reasons to be more optimistic about the outlook.

Firstly, retail sales increased by 1.2% in April compared to the previous month (better than expected), showing some signs of returning consumer confidence.

Secondly, the pound (GBP) rose 0.6% against the U.S. dollar, hitting $1.35 for the first time since 2022. This helps to lower our import costs, reduce inflationary pressure from abroad, and strengthen the financial sector.

Thirdly, GDP growth figures surpassed expectations – rising 0.7% in January to March 2025. This is far better than the 0.1% achieved in Q4 2024, and it represents the fastest growth right now amongst other G7 nations.

Concerns still remain over inflation, which rose by 3.5% in the 12 months to April 2025. This is higher than the 2% target set by the Bank of England (BoE), and is higher than the 2.6% in the 12 months leading up to March, casting doubts over the prospect of further interest rate cuts.

The UK market

UK stock markets have made a positive start to 2025. The FTSE 100 (our leading index) is up approximately 7.3% since the start of the year, outperforming major indices in the US. The FTSE 250 (a more domestically-focused index) has also shown a strong rebound since the April dip.

This is partly explained by the BoE’s recent decision to cut rates by 0.25%, taking the base rate to 4.25%. Historically, this lowers borrowing costs for UK businesses (aiding their growth plans) and makes equities more attractive compared to newly-issued government debt.

Investor sentiment has also been raised by the UK’s recently achieved trade deals with India, the US and the European Union. The former alone could raise bilateral trade by £25.5bn, also potentially adding £4.8bn to UK GDP and £2.2bn to wages each year.

Looking ahead, momentum could soften in the second quarter (Q2) as demand is dampened by rising UK energy prices – as well as by higher employer national insurance contributions (raised in April 2025).

Trade uncertainty could also return over the summer as the 90-day “pause” on the Trump tariffs starts to expire. Higher US tariffs, and weaker global demand, could potentially knock investor confidence in the months ahead.

The Global Outlook

Looking to the continent, European stocks have also had a strong year-to-date. The STOXX Europe 600 is up approximately 9% since 1 January, despite the recent trade uncertainty with the US.

Annual inflation in the eurozone was around 2.2% in April 2025, falling from 2.3% in February and raising the prospect of a further rate cut by the European Central Bank (ECB). Analysts widely predict that the ECB’s 2% inflation target could be hit by the summer.

This assumes that energy prices continue falling, deflationary tailwinds from diverted Chinese imports, and no further tariff escalation with the US. The latter is experiencing a slight downturn, following a fall in real GDP in Q1 2025.

The fall is largely attributed to a significant rise in US imports, partly offset by increases in investment, consumer spending and exports. Inflation is still hovering around 2.3%, with the Fed (Federal Reserve) reluctant to cut interest rates as quickly as President Trump would like, currently holding them steady at 4.25 – 4.5%.

Further afield, China has recently announced a further stimulus package (based on monetary easing) to boost growth. The response from investors has been muted so far, with investors still concerned about the potential impact of US tariffs.

In Japan, the central bank continues to be cautious, with tariff challenges still weighing heavily on exporters. Interest rate hikes are not expected until the situation stabilises with global trade.