CIM Market Update - August 2025

The Art of the Deal

· Global equities rose as US trade deals and fiscal policy clarity boosted sentiment despite ongoing geopolitical tensions.

· US GDP rebounded in Q2, but first-half growth slowed overall; inflation remained manageable despite new tariffs.

· UK Gilt yields rose on hot inflation and higher-than-expected government borrowing, raising fiscal sustainability concerns.

· Corporate earnings remained strong, especially in the US, with cyclical sectors and mega-cap stocks leading gains.

· Oil prices jumped 9% on Middle East tensions, renewing inflation concerns and supporting energy sector performance.

Markets made gains in July as new trade agreements and the passing of the One Big Beautiful Bill Act in the United States brought greater clarity on future policy. Positive sentiment was supported by fresh deals with Japan and the European Union, which set most tariffs at 15%. While still above pre-Trump levels, the agreements helped ease fears of a wider trade war. A continued truce with China also contributed to a more stable backdrop for investors.

The maths on the impact of Trump’s new tariffs is striking. The US imported $3.3tn in goods last year. Tax that at 15% and it generates just under $500bn in revenue.

The questions are what the impact on spending, savings and investment will be, and how these will show up in corporate profitability and the US fiscal outlook. Our investment team is closely watching sectors such as autos and clothing, which are particularly dependent on imports and could bear the brunt of tariffs. This could lead to lower employment in these areas and higher prices, creating inflationary pressure and dampening consumer spending. Over time, tariffs induce corruption and reduce competition, which slows productivity growth. Even though the EU, Japan, UK and others conceded to Trump’s demands for a quick deal and may be able to live with 15% across-the-board tariffs, they will likely adjust their behaviour to reduce reliance on the US as a trading and investment partner. Watch out for China pulling up in the rear-view mirror.

Data released towards the end of the month showed that the US economy grew at an annualised rate of 3% in the second quarter of 2025, rebounding from a contraction three months earlier. The second-quarter figure beat Wall Street expectations of 2.6%, and contrasted with a 0.5% contraction in the first quarter. Overall, the average rate of growth was about 1.3% in the first half of the year, marking a significant slowdown from 2.8% in the final six months of 2024.

Bond markets faced mixed signals in July. The US Federal Reserve chose to keep interest rates unchanged as it weighed conflicting inflation and employment data. Political pressure for lower borrowing costs increased following additional fiscal stimulus. June inflation figures came in slightly softer than expected, with core inflation rising 2.9% year on year. Although some early effects of tariffs are beginning to show, their overall impact on prices remains limited, helped by supply chain adjustments and inventory management. US Treasury yields rose during the month, reflecting both improving growth expectations and concerns about the fiscal outlook. Corporate bonds outperformed government debt, as strong earnings helped to narrow credit spreads.

In the UK, government bond markets came under pressure in July following a higher-than-expected inflation reading for June. Headline inflation rose to 3.6%, driven by increased costs in transport, clothing and recreation. Gilt yields also climbed after official data showed the government borrowed £20.7bn in June, well above the forecast of £17.1bn. This added to concerns about the sustainability of the UK’s public finances.

The rise in borrowing was largely due to a sharp increase in interest payments on existing debt, much of which is linked to inflation. As prices rise, so too do repayment costs, placing additional strain on the budget. Investors are increasingly focused on how the government will manage its fiscal position while supporting a sluggish economy. Persistent deficits raise the risk that taxes may need to rise or spending may be curtailed, either of which could have broader implications for economic growth and market sentiment.

These concerns contributed to a rise in 10-year Gilt yields to 4.6%, as investors demanded higher returns for lending to the government. While equity markets reacted more calmly, the outlook for UK assets remains clouded by fiscal uncertainty and the prospect of tighter budgetary policy.

Global tensions remained elevated, particularly after US strikes on Iranian nuclear sites and Israeli airstrikes early in the month. Oil prices rose sharply, gaining 9% and renewing concerns over energy costs. This did not prevent global developed equity markets from reaching new all-time highs. Strong second-quarter earnings supported sentiment, particularly in the US, where around 80% of S&P 500 companies reporting so far have beaten expectations. Robust results from US mega-cap stocks and cyclical sectors, such as industrials and materials, helped drive market gains. The S&P 500 Index ended the month up 5.8% in sterling terms. The UK FTSE 100 Index was not far behind, ending up 4.3%, supported by earnings upgrades in energy and materials.

Emerging market equities kept pace with developed markets, led by strong performance in Greater China and Korea, where the macroeconomic outlook improved. This supported a 5.6% gain for the MSCI Emerging Markets Index.

Calmer political signals and stronger corporate earnings supported investor sentiment in July. Will the market continue to take a relatively sanguine view on tariffs and geopolitics as it waits for easing financial conditions and more meaningful interest rate cuts? Time will tell. While uncertainty remains, we continue to favour a diversified approach and limited exposure to areas we believe are overvalued, given ongoing risks around inflation and economic slowdown.

As for trying to time any market corrections and reinvest from cash – I’ll leave you with this quote from Peter Lynch:

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”