Preparing for market uncertainty

Published in Business Eye in June 2025. 

European equities have surged in 2025, marking their strongest gains against US counterparts in over two decades. Longer term, America still holds the advantage - £10,000 invested in the US on 1 January 2000 would now be worth £77,000, compared to £46,000 in Europe. This has led to US stocks comprising two-thirds of global markets, making it harder for investors to spread their risk without active management.   

Reliance on the US market was exposed in the wake President Trump’s ‘liberation day’ tariffs. A 90-day pause and intervention by the US trade court has provided breathing room, but expectations are now for slower growth and higher inflation, particularly in the US.

That scenario will face policymakers with some difficult choices. We have been used to central banks responding to economic weakness with lower interest rates which encourage borrowing and boost spending. However, if lower growth is combined with higher inflation, then central bankers in the US might be reluctant to provide this backstop.

The story is a little different in Europe. Although growth is slower, it is expected to be less affected by tariffs. The US might be two-thirds of the global stock market, but it’s only a quarter of global trade. Europe and the UK still have the other three-quarters to trade with. Inflation also started lower, and is unlikely to rise by as much, allowing central banks this side of the Atlantic flexibility to support growth if the economy weakens. 

Despite uncertainty, the U.S. stock market has recovered most of its liberation day losses. In part, that is down to the quality of its listed companies. 

To generate a return for shareholders, companies can either grow their earnings, or investors can pay more for their share of those earnings. Earnings growth is healthy and more sustainable, but if prices rise faster than earnings that just means the market is getting more expensive.

In the five years to the end of 2024, the S&P 500 delivered an annual return of 16% in sterling, compared with 7% in Europe and less in the UK. Stronger earnings growth fuelled over half of the US gains, but investors paid an increasingly high price for those earnings. In contrast, European and UK earnings grew, but at a slower pace. Their stock markets got cheaper, not because anything was fundamentally wrong, but because investors were unwilling to pay any premium for lower growth companies.

An overlooked benefit to investing in the US, particularly for sterling-based investors, has been the US dollar’s role as a safe haven.  During downturns, when asset prices fall the dollar often strengthens, softening the losses when you converted back to pounds. However, the Trump administration has been vocal about its desire for a weaker dollar to fix U.S. trade imbalances.  This time when the stock market fell, the dollar fell too.

Many wonder if the era of exceptional returns on US assets is coming to an end. While a repeat of the past looks less likely, recent events have reinforced the essentiality of global diversification. The US, which has deeper capital markets, more retail participation in investing, and the world's largest tech companies will continue to be the most important stock market in the world. Even if US corporate earnings growth slows, and investors decide to pay less of a premium to own American companies, other regional stock markets still have a long way to go to challenge US dominance.

With uncertainty ahead, the right investment decisions could mean the difference between meeting your objectives or falling short. The key to making the right investment decisions is by planning for the future, not predicting it. Planning for the future, particularly in a more uncertain world, means owning assets that will do well in a range of environments. True diversification and active management may be more expensive but failing to prepare for uncertainty carries an even greater cost.