TEAM 2nd Quarter 2025 Investment Review & 3rd Quarter Outlook 2025

Major Asset Class Returns for 2nd Quarter 2025, GBP (£) terms.

Investment Review 2nd Quarter 2025

Gorging on TACO’s

Whiplash

An extraordinary quarter for global financial markets as chaos in the White House triggered price gyrations across asset classes not seen since the depths of the COVID pandemic. Headline moves mask the round-trip journey for major equity and credit markets, which began with a waterfall style sell-off in early April, before one of the strongest V-shaped rebounds in market history powered many major indexes back into the black on a year-to-date basis.

The source of market jitters at the beginning of the quarter was ‘Liberation Day’, the name ascribed to a set of so-called ‘reciprocal tariffs’ targeting America’s key trading partners, announced in dramatic, gameshowstyle fashion by the Donald in the Rose Garden. Its startling impact on the prevailing view of global economic trade policy uncertainty was clear to see:

(Source: Bloomberg, TEAM)

Investors took fright, indiscriminately selling assets during a three-day purge that generated falls of up to -15% across major markets. The damage pushed the Nasdaq index, home to the Magnificent 7, down into ‘bear market’ territory (signifying a peak to trough fall of -20% or greater). Transport and logistics companies that are highly responsive to world trade dynamics were also sold aggressively, and, amidst heightened levels of uncertainty, many multi-national company CEOs began shelving full-year forward guidance.

With the Trump administration seemingly apathetic towards a freefall in asset prices, bond markets wrestled control of the driving seat. A surge higher in longer duration US government bond yields, the pricing instrument for American mortgages and business loans, were potent enough to force Trump to blink first and announce a 90-day pause on the ‘reciprocal’ tariffs to provide a window for trading partners to negotiate trade deals.

TACO Trade

The softened stance was taken as a signal that, not only would the worst-case scenario likely be avoided, but there was also an increasingly high chance that many so-called reciprocal tariffs would be relaxed or not implemented at all. That view was emboldened by further concessions from Trump in his deals with China and the EU, arguably the most sensitive in terms of global impact, giving rise to the ‘TACO’ trade.

Pithily coined by Financial Times columnist Robert Armstrong, the term encapsulates the notion that (President) ‘Trump Always Chickens Out’ on trade policies, particularly in relation to his beloved tariffs, and that risky assets rise in response. With the American economy seemingly humming along, no obvious cracks in the labour market, and a clearer line of sight on earnings from corporate America, equity markets took off and never looked back, recording one of the most ferocious and impressive rallies in history.

The marginal buyer remains a ‘buy the dip’ retail investor who has steadfastly ploughed more than $80 billion into US equities via ETFs and single stocks in April and May alone, alongside fast-moving hedge funds that were caught flat-footed by Trump’s U-turn in April, remained sceptical of the rally since, and are now being forced into equities in an effort to catch-up their underperformance.

Middle East

Having barely recovered from the ‘tariff tantrum’ saga, investor nerves were tested again during June. Geopolitics took centre stage on the back of America’s decision to directly involve itself in an ongoing hot war in the Middle East. Following several public messages from the MAGA (‘Make America Great Again’) team to the contrary, President Trump, Commander in Chief of the Armed Forces, took the executive decision to partner with Israel and strategically bomb three nuclear refining facilities within Iran.

All eyes moved to what the response would be from an angry, traumatised, and strategically weakened Tehran: cautious, considered, and pragmatic, or wild, radical, and unpredictable. Critically for markets, would shipping be able to continue to pass through the Strait of Hormuz? This avenue accounts for 25% of seaborne oil supplies and if blockaded (should Iran be willing and able) could easily have sent oil prices up by a third or more and over $100 per barrel.

Following the US attack, the subsequent two-day returns of +2% for the S&P 500 index, -12% for crude oil, and -15% for the VIX index (Wall Street’s so-called ‘fear gauge’) tell the story. A symbolic (and telegraphed) attack by Iran on a US base in Qatar, with no reported casualties. What immediately followed was a hastily agreed ceasefire from Israel and Iran that was, ultimately, adhered to. Cue the end of the ’12 Day War’. With a crisis seemingly averted, equity markets continued their relentless march higher into quarter-end.

The Unexceptional US dollar

Hyper volatility in bonds and equities was accompanied by a striking development in the foreign exchange markets. The US dollar, the world’s reserve currency and a haven asset during periods of acute market dislocations and stress, also began weakening sharply, falling more than -7% against a trade weighted basket of currencies. Only three months ago, ‘US exceptionalism’ had become the mainstream consensus view, many are now asking whether we are seeing a slow erosion of trust in the ‘greenback’:

(Source: Bloomberg, TEAM)

Equities: Scores on the Doors (all returns in sterling terms)

Developed market equities (represented by the MSCI World Equity Index) delivered a +4.6% total return over the 2nd quarter. The S&P 500 large cap index delivered a +4.4% total return, whilst the technology-laden Nasdaq Index, powered by mega cap growth stocks, returned to winning ways, delivering +11.0%.

Japan’s Nikkei 225 Index returned +11.5% over the quarter. As an export-driven economy acutely sensitive to Trump’s proposed reciprocal tariffs, the American President’s U-turn was very good news for Japanese companies that derive a significant share of overall revenue from overseas markets.

European developed market equities ex-UK returned +5.3%, whilst the MSCI Emerging Markets Index returned +5.4% over the quarter. A weaker dollar reduces the servicing costs of any dollar-denominated debt held by governments and businesses, whilst the TACO trade gave a boost to companies entrenched in the AI (Artificial Intelligence) supply chain, primarily semiconductor chipmakers in Taiwan and South Korea.

Fixed Interest

G7 government bond yields traded mixed throughout the first quarter across markets as investors attempted to digest global tariff policy flip-flopping, divergent central bank policy paths, and fiscal largesse plans from several European countries.

This now includes Nato’s 32 member states embracing its "ironclad commitment to collective defence’’ charter through pledging to spend 5% of GDP on defence and security by 2035, following an effective choke hold from Team Trump. Good news on the face of it, given desperately needed productive investment and growth across swathes of the EU. However, these plans must be paid for somehow!

(Source: Bloomberg, TEAM)

As expected, the European Central Bank cut its deposit rate by another 0.25% to 2% in June but with a surprisingly hawkish twist. In the press conference following the decision, President Christine Lagarde told attendees that the central bank had “nearly concluded” cutting rates in this monetary policy cycle, which caught many investors flat-footed.

Money markets reacted immediately to the comments and are now pricing in just one more quarter point cut this year, in either October or December, bringing the deposit rate down to 1.75%:

(Source: Bloomberg, TEAM)

Whilst Lagarde acknowledged that uncertainties surrounding trade policies muddies the outlook, the central bank lowered its inflation forecast for this year to its target rate of 2%, down from March’s forecast of 2.3%, and lowered next year’s estimate from 1.9% to 1.6%, reflecting the stronger euro and weaker energy prices and wage growth. It left its GDP growth forecasts unchanged at 0.9% for this year, and 1.1% for 2026, passing the baton on to governments, such as Germany, to provide stimulus through fiscal initiatives.

The Heat Is On

Across the Atlantic, the political heat is being turned up on the Federal Reserve to restart its cutting rate cycle, and money markets have recently started moving in sympathy with that view. Despite positive headline numbers in labour markets, downward revisions to the monthly nonfarm payrolls report have become the norm in 2025, whilst private sector lending is barely growing, and personal income and consumer spending trends have been turning lower. A September quarter point cut is now fully priced in:

(Source: Bloomberg, TEAM)

The fly in the ointment to that view could be any near-term upside surprises to inflation from the 10% blanket tariffs which remain in place, or a (re)imposition of more aggressive, targeted tariffs by an emboldened Trump. The inflation report for May pointed to only a modest impact on consumer prices, but it can take up to three months before companies pass on their higher costs, especially with much uncertainty over which countries will reach trade deals with the US and what the rate of tariffs will be in the coming months.

Stagnant UK

After holding rates steady at 4.25% since 19 June, markets now anticipate the first cut to 4% at the MPC’s 7 August meeting. As things stand, money markets are pricing a further two-to-three quarter-point cuts through to December 2025:

(Source: Bloomberg, TEAM)

The Bank of England expects a slow pivot to lower interest rates this summer, emphasising that inflation remains above target and that future moves will hinge on real-time data and global developments. However, the view is by no means consensus, with more dovish policy committee members including Alan Taylor calling for up to five cuts this year given weakening demand and trade disruptions. The situation underscores the challenges, and tensions, that central bankers face in a world of growing policy unpredictability.

Commodities

Platinum aside, a poor quarter for the commodity space as markets effectively called Trump’s bluff, taking the position that ‘Liberation Day’ was an elaborate negotiating tool rather than a legitimate threat, and ignoring any subsequent tariff drama as noise. Consequently, any subsequent corrections or dips in markets have been treated as opportunities to buy, driving capital flows away from alternative assets and towards equities.

Oil witnessed incredibly volatile moves in both directions during the quarter, with the lens of the market focused squarely on supply dynamics. News of OPEC+ turning on the taps to produce more than 400,000 additional barrels a day was the major development in this regard. And, whilst prices initially spiked sharply higher on news of the US bombing Iran, they swiftly retreated on the relatively benign military response from Tehran and (subsequently) successful ceasefire.

Gold and silver finished essentially flat in US dollar terms over the reporting period, a respectable outcome given the ferocity of the rally in risk assets. In absolute price terms, the yellow metal broke through three thousand five hundred dollars per ounce level for the first time in its history during April.

The barbarous relic, as it is known by investors unconvinced by its allure, has now outperformed the S&P index by approximately 2.5 times since the year 2000. Silver also broke through long-term resistance at $35, before consolidating into quarter-end.

TEAM Positioning & 3rd Quarter 2025 Outlook

What worked during Q2 2025: Asia ex Japan ex China, Nasdaq technology and American large cap growth stocks, corporate and high yield bonds and precious metal mining stocks.

What did not work during Q2 2025: Physical gold, owning cash, developed market property companies.

As we enter Q3 2025, our asset allocation for the core TEAM MPS multi asset range and equity strategy is shown relative to neutral weightings in the table below:

Equities

The S&P 500’s remarkable V-shaped rally from the early April lows has been amongst the most ferocious and impressive in recent history. Yet, despite the noisy headlines, the reality is that most major markets remain down for the year so far in currencies outside of the US dollar, for example Euro’s, Pound Sterling, or Swiss Francs.

The US Dollar index has declined 10.7% in the first half of 2025, its weakest start to a year since 1973, largely due to the more combative foreign policies of the White House administration which have undermined America’s trusted, safe-haven status, internationally. Whilst we have little conviction in the short-term on almost anything, the overvaluation of the dollar, a ‘weak dollar’ strategic initiative from Team Trump, and the deteriorating US fiscal deficit situation all point to continued dollar weakness over the longer term.

Whilst this may be relatively good news for larger companies that generate a healthy proportion of overall revenues from international markets, it does not bode well for domestic focused businesses. Smaller companies struggling with prevailing debt servicing costs, and who may also be exposed to a significant increase in import costs that will ultimately feel this impact through reduced profit margins. To recap, SME businesses (those with 250 employees or less) are responsible for over 70% of US private sector employment.

TEAM’s equity exposure continues to exhibit a balance between US and ex-US markets, with an increasing tilt to the latter. Our investment framework continues to point to a narrowing US market, led by an increasingly concentrated group of mega cap growth stocks, that are heavily distorting the overall price and earnings picture.

Valuations for the top 10 S&P 500 index constituents have only been eclipsed twice before, in the late 1990’s/early 2000’s and during the COVID-induced meme stock mania. Looking back at history, this is not a great starting point for subsequent 1 year and 10-year returns. It could be argued that one is essentially betting on a spectacular bubble for further meaningful US market outperformance from here:

(Source: JP Morgan Asset Management, TEAM)

We see more far more attractive opportunities in Europe (relative valuation merit, fiscal largesse catalysts, well-capitalised banking and insurance sectors), the UK (less domestic, more global value companies listed in London), EM with a preference for Taiwan, South Korea, and Brazil, and China.

Within China, our preferred method of exposure remains the Chinese internet space that, considering the resurgent Nasdaq last quarter, trades at a substantial discount (approximately 65% to the Magnificent 7) to American counterparts, whilst corporate earnings in China are continuing to inflect upwards, a promising signal. What is underappreciated by the market in our humble view is China’s growing competitiveness in high-tech sectors. This is not just EVs or batteries but also robots and automation.

Fixed interest

We continue to remain sceptical about the pricing of longer-term interest rates in the UK, Europe, and the US. Do 10-year Bund (2.7%), Treasury and Gilt (4-5%) yields offer investors adequate compensation for the risks that inflation becomes more structural due to competition for scarcer resources, political risk, and/or for the supply of bonds needed to fund budget deficits? We don’t think so.

Global policy activity during the quarter has added fuel to the fire. At the time of writing, Trump’s ‘OBBB’ (One Big Beautfiul Bill) has recently passed into law. This legislature will likely create a huge fiscal impulse boost for the economy soon but carries a substantial longer-term price tag:

Independent analysts estimate it will add between $3 to $4 trillion dollars (or more including interest and if temporary provisions are made permanent) to the national debt through 2034, pushing debt-to-GDP from c. 100% currently to 120%+. Short-term economic gains may be overshadowed by long-term debt stress, and the spectre of fiscal dominance becomes a very real possibility. This occurs when government debt is so high that the central bank must help fund it, by printing money or keeping interest rates artificially low.

However, the US is not alone in this regard. Long-dated debt costs in the UK have risen to their highest level in decades on debt sustainability concerns. The UK’s DMO (Debt Management Office) will sell 300 billion pounds (£) of bonds this fiscal year, of which just 13.4% will be long-dated (greater than 15 years in duration) bonds, down from 18.5% last year, and the smallest proportion in the DMO’s 27-year history.

Faced with a record supply of government bonds to fund mounting debts, investors are demanding higher returns to lend long-term to governments. As a result, long-dated government bond yields have risen to their highest level in decades. This phenomenon is forcing treasury departments to sell more short-term bond issues, where demand is stronger, machinations US Treasury Secretary Scott Bessent has called ‘Activist Treasury Issuance’.

In our view, this represents a short-term fix, which over time will encourage fiscal authorities to interfere, and inhibit, monetary policy, i.e. create looser financial conditions when central bank officials are aiming to achieve price stability and avoid economies from overheating.

A deeper, more troubling development would be using these proceeds to buy back/retire long dated government bonds to artificially supress yields. In essence, robbing Peter to pay Paul.

Which leads on to perhaps the most significant strategic decision within the fixed income asset class we have taken in recent years.

In short, physical gold has replaced long duration bond exposure across the TEAM multi asset range. The rationale is the backdrop of mounting government deficits and a wall of new supply over this cycle that could create refinancing problems for weaker companies.

Within fixed income, we will continue to focus our investments on intermediate dated bonds, or the ‘belly’ of the curve (typically between 3 and 8 years in duration), which we think offer the most attractive risk-reward profile. Our preference in the space remains high quality investment grade corporate credits and financial hybrid bonds issued by well capitalised European banks and insurance companies.

Alternatives and Cash

Physical gold and global miners remain essential portfolio insurance in the context of long-term dollar debasement (the loss of purchasing power). The simple case for ownership is that gold has outlasted every stock market in history, and 10kg of the yellow metal will still buy an average family size home, just as it did nearly 100 years ago.

The brutal reality facing the US government is that 96% of existing US interest payments are directed to Medicare, Medicaid, and Social Security, which are essentially ‘untouchable’. Elon Musk’s brief reign as DOGE (Department of Government Efficiency) Czar has exposed the practical realities of chipping away at the enormous, and growing, US debt mountain, which currently stands at over 37 trillion dollars, excluding unfunded liabilities:

(Source: USdebtclock.org)

Gold continues to shine, with the price touching new all-time highs during the quarter across many major currencies. Shown below, gold in dollars (purple line) being led by an equal-weighted basket (teal line) which prices gold across eight major currencies including the Swiss Franc, Japanese Yen, Euro and Pounds Sterling:

(Source: 3Fourteen Research, TEAM)

We will be introducing physical silver alongside our physical gold exposure on account of a chronic supply deficit for the next 5 years and increasing industrial use from data centres for AI application, EV’s and solar sectors. Selective high-quality precious metal mining stocks also look to offer excellent upside potential, with companies delivering a renewed focus on capital efficiency, significant cash flow generation at current spot prices, and scope for meaningful share buybacks and/or special dividends through this bull market cycle.

It would not take much in the way of global capital flows to put a bid under the sector. This is now playing out.

As always, rather than attempt to look around corners and predict outcomes, we rely steadfastly on our systematic investment process, which has successfully navigated an array of market conditions during this post-pandemic cycle and delivered respectable risk-adjusted returns for our investors.

Thank you for your continued support and interest in TEAM.

(Cover Image Source: Stephen Dawson)