Market Outlook May 2025
The shift from “America First” to “America Last” has been starkly reflected in the US stock market’s performance. US equities have underperformed global markets by the largest margin in over thirty years, driven by investor concerns over erratic policymaking.
April was a tumultuous month for the financial markets, marked by significant volatility and uncertainty. Investors faced considerable stress, especially following the chaotic “Liberation Day” announcement, which introduced the most extensive tariff hike since the Smoot-Hawley Tariff Act. The S&P 500 dropped by approximately 13% in the first week, and the bond and currency markets experienced alarming fluctuations. Long-term Treasuries were sold off as hedge funds unwound leveraged positions, and the US-Dollar depreciated sharply against all G7 currencies, undermining its status as a safe haven. This situation mirrored Japan’s experience in the 1990s, raising concerns about a potential “Sell America” trend. The flight from American assets is particularly troubling because the global financial system relies on the safety of the US-Dollar and Treasury bonds.
When these safe assets are hit, the implications are severe. Despite initial turmoil, the US market made an unexpected recovery by the end of April, returning to its starting point. The rally followed a familiar post-pandemic pattern, with tech stocks leading, followed by cyclicals like financials and industrials, while defensives such as healthcare and staples lagged. Investors found some reassurance in the president’s attention to market performance and anticipated Federal Reserve intervention during declines. In contrast, European markets appear to be faring better. The Euro is at its strongest in three years, German bonds have outperformed Treasuries, and European shares showed resilience despite the trade war.
BENDURA Investment Policy
*inkl. UK und CH
The terms attractive / unattractive describe the return potential of the various asset classes. An asset class is considered attractive if its expected return is above the local cash rate. It is considered unattractive if the expected return is negative. Very attractive / very unattractive denote the highest conviction views of the BENDURA Investment Committee. The time horizon for these views is 3-6 months.
Global Economy
USA
The broader economic outlook for the US remains bleak, with recession fears dampening the benefits of low interest rates. Earnings estimates for the year remain optimistic, but US stocks are still expensive. The future hinges on whether the White House can provide consistent and predictable policies, allowing markets to stabilize at higher levels, or if continued volatility will drive markets to lower levels.
The initial data from Trump’s second term paints a grim picture. US stocks have plummeted over 7% in the first 100 days, marking the worst start for a new administration since Gerald Ford’s presidency. The S&P 500 has specifically dropped by 7.2% since Trump’s inauguration and the first quarter growth GDP was negative and lower than expected at -0.3% compared to the previous quarter. The GDP decline is linked to a surge in goods imports prior to the tariff announcements. The second quarter GDP will offer a more precise evaluation of the tariffs’ impact.
Trump has aggressively utilized tariff powers to push for American self-sufficiency, resulting in the highest effective tariff rates seen in a century. Despite his promises to curb rising prices, inflation has continued to decrease, a trend that began under Biden. However, consumer sentiment has also declined due to fears of a global recession sparked by trade tensions. Another notable point is the sharp drop in Trump’s approval ratings, which is unusually steep compared to typical presidential trends during their initial months in office.
Europe
Macroeconomic indicators suggest a slowdown in activity. Notably, forward-looking PMIs indicated that European economies were already slowing before tariffs took effect. The Eurozone’s composite PMI for April fell to a four-month low of 50.1. Despite this, Eurozone Q1 GDP unexpectedly grew by 0.4%, a figure likely boosted by pre-tariff stockpiling by businesses and households. The slowdown in activity has kept the disinflation process on track, with softer readings across euro area countries ahead of Friday’s Eurozone update. There were signs of stabilization in Germany, as the Ifo business climate index improved for the fourth consecutive month. Conversely, the UK’s PMI dropped sharply to a 29-month low to 48.2, with the services sector entering contraction and manufacturing activity weakening at its fastest rate in 32 months.
However, the current trade war implications with US distort the short-to-medium term picture. With US imposing 20% tariffs on European goods, Stoxx 600 index tumbled with the heaviest losses since the start of pandemic. The market is taking into consideration concerns that the trade war will have negative implications on economic growth and curb consumer demand.
Asia
Due to their relatively high export share to the USA, Asian countries are the most affected by reciprocal tariffs. On the brighter side, the 90-day tariff delay and the complete exemption of selected electronic goods from tariffs has brought collective relief to the Asian region. The Chinese economy had a solid start to the new year, with momentum particularly improving towards the end of the quarter. The industrial sector saw significant growth due to some preemptive effects related to the trade conflict and stronger domestic demand. Retail sales growth accelerated notably thanks to government subsidies, and investment in fixed assets increased at the fastest rate in nearly a year. The trade dispute with the USA is expected to lead to a slowdown in growth, even though China exports goods worth only about 3% of its GDP to the USA. Beijing will likely try to mitigate any potential decline in growth by advancing or intensifying stimulus measures. A weaker exchange rate against the US-Dollar could also provide support. Additionally, trade diversion through transit countries like Vietnam and the temporary reduction of tariffs on selected electronic goods are expected to cushion the economic slowdown.
Equities
In April, US equity markets appeared relatively stable on the surface, but experienced significant volatility between the start of the month and the end. The S&P 500 declined by 0.76%, having dropped as much as 13% after Liberation Day. Similarly, the Nasdaq ended April with a 0.85% gain, despite experiencing a loss of over 14% at one point. Such a development was called the “Sell America” trade. Not only stocks were impacted, but yields on long-term debt surged and the US-Dollar declined. Even though markets have rebounded significantly since Liberation Day, there remains a concern about a lasting loss of confidence in U.S. assets. It’s troubling when a market, expected to be a reliable refuge during turbulent times, is experiencing its own instability. Although there is currently limited evidence to suggest that the „Sell America” trade is imminent, the potential scale is significant. It is estimated that foreign investors hold $19 trillion in U.S. equities, $7 trillion in Treasuries, and $5 trillion in U.S. corporate bonds, representing 20-30% of the entire market. In March alone, investors withdrew nearly $1 billion from American equity ETFs and invested close to $9 billion in European ETFs, as reported by HANetf.
In Europe, stocks experienced a similar downturn following Liberation Day, with the Dax dropping 13% within two days. However, it managed to recover most of its losses by the end of the month, finishing up 1.50%. Although the movement from US stocks to European counterparts has slowed this month, it is still present. The Stoxx 600 increased in April by 2.5% in US-Dollar terms, while the S&P 500 fell by 1.5% (the decline is more significant in Euro terms). This follows Europe’s record outperformance in the first quarter in US-Dollar terms. Last week, the Stoxx 600 reached its highest ratio against the S&P 500 since early 2024. Most of the indices in Europe were down, with the Swiss market losing the most (-3.82%), and both Italy and France also experiencing declines (-1.18% & -2.53%). Despite this, there is a clear resurgence of optimism for European assets.
Asian equities were no exception, experiencing high volatility and uneven performance in April. By the end of the month, the MSCI Asia Pacific ex Japan index had risen by 1.4%, and the Nikkei 225 had gained 1.2%. Despite declines in Greater China equities, losses were mitigated by ‘national team’ funds purchasing mainland stocks, while the Hang Seng dropped 5.0%. Taiwan’s Taiex saw a sharp decline due to tariff threats affecting semiconductor stocks. South Korea’s Kospi achieved solid gains following the announcement of a presidential election after President Yoon’s impeachment. Australia’s ASX increased by 2.7%, driven by a final-week rally that aligned with other developed markets.
Given the current turmoil, the old adage “Sell in May” might be a reasonable strategy. This well-known market trend is supported by decades of historical data: A fund that started in 1993 and tracks the S&P 500 during the May-October period achieved a cumulative return of 171%, whereas it gained 731% from November to April. Looking at a longer timeframe, the “sell in May” effect is even more pronounced: Over the past 74 years, investing in the S&P 500 from May to October resulted in a cumulative return of just 35%, compared to an 11,657% gain during the other half of the year.
Bonds
Despite extensive discussions about simultaneous movements in bonds and the US-Dollar during early April, the significance of these shifts cannot be overstated. Typically, in times of heightened fear, investors seek safety in the US-Dollar and Treasury debt. However, despite growing recession concerns, this usual flight to safety has not occurred. This anomaly can be attributed to several factors, including inflation risks and a more fundamental issue: the U.S. is perceived as less predictable, more antagonistic, and increasingly isolated, making it less attractive to foreign investors.
Both investment-grade and high-yield spreads have widened significantly since the beginning of the year, however, this spread widening can still be considered moderate. Due to the easing of tensions in recent days, spreads have now fallen below their 10-year median across all segments. This is noteworthy because, given the sharp increase in volatility and the significant stock market correction, one would have expected a greater spread widening. The relatively moderate reaction of credit spreads is due to the fact that the current market stress was triggered by an external influence and not by a systemic risk in the financial markets. In a financial crisis, the credit market would react much more strongly, as a credit crunch would threaten the refinancing of debts. Therefore, the current resilience of corporate bonds is seen as a positive sign for the state of financial markets in these volatile times. It indicates that investors still trust that companies can repay their debts.
Several ECB officials have voiced concern about the euro area’s prospects as the fallout from US President Donald Trump’s tariffs continues to make its way through the global economy. The European Central Bank (ECB) has already lowered its key interest rate for the seventh time in April, citing growing economic risks due to the trade conflict with the US. At the same time, the inflation risk has decreased due to the appreciation of the Euro, the decline in oil prices, and the dimming growth prospects.
Deflation risks in Switzerland have increased with the strong appreciation of the Swiss Franc in April, leading to lower-than-expected inflation in the medium term. We now anticipate a rate cut by the Swiss National Bank (SNB) to 0% in June, followed by another cut later this year.
Commodities & Currencies
The introduction of U.S. import tariffs was the main cause of the decline in commodity prices in April. Global growth concerns also weighed on crude oil prices. Given the ongoing uncertainty, oil prices are expected to remain volatile in the coming months. Signs of de-escalation could temporarily boost prices. However, the self-inflicted demand shocks in the world’s two largest oil-consuming countries negatively impact the already weak growth in oil demand; the extent of this impact depends on whether tariffs are rolled back or intensified. Also, The Organization of the Petroleum Exporting Countries (OPEC) plans to bring its production closer to its capacity limit. This announcement exacerbated the decline in oil prices, initially triggered by the effects of U.S. tariff hikes on “Liberation Day.” The price of Crude oil has recently fallen as low as $55 per barrel. It appears that OPEC is more focused on capturing market share than on higher prices. The group may be considering the growing threat from the U.S. oil industry, which has benefited from OPEC’s production cuts in recent years. Since the U.S. oil industry has significantly higher production costs, its growth is likely to be restrained at lower oil prices. Fewer regulatory requirements for U.S. producers are unlikely to halt this trend. The US-Dollar index recorded its worst performance during the first 100 days of a US presidency since the Nixon era, when the US abandoned the gold standard for a free-floating exchange rate. From January 20, when Donald Trump returned to the White House, to April 25, the US-Dollar is on track for its largest monthly loss since at least 1973. Additionally, major investors are more pessimistic about the Dollar’s prospects than they have been in nearly 20 years, reflecting the impact of Trump’s trade war on US assets. According to Bank of America’s Global Fund Manager Survey, 61% of respondents expect the US-Dollar to depreciate over the next 12 months, the highest percentage since May 2006.
The US-Dollar depreciated the most against the Swiss franc, with the currency pair experiencing its largest two-week movement since the removal of the euro minimum exchange rate. The Swiss Franc’s reputation as the world’s most stable currency, along with its relatively small size compared to major currencies (the “espresso cup effect”), likely contributed to this significant movement. The Swiss Franc also appreciated against the Euro, although the Euro is currently sought as an alternative to the US-Dollar and is among the strongest currencies.
