Markets in the first quarter

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Trump’s vacillating approach to US trade and tariffs made for something of a bumpy ride for share prices. The S&P 500 Index of large US companies might have touched an all-time high in mid-February, but it still fell 4.6% over the quarter. In contrast, US government bonds outperformed over the quarter. The yield on the ten-year Treasury fell by 36 basis points (bps) as prices rose.

Global equity indices – many of which have considerable exposure to the US market – also dropped. The MSCI World Index was down 1.8% in dollar terms, while the price of gold surged – finishing the quarter almost 20% higher at over $3,100 per Troy ounce.

A testing time for tech

Given events since, January seems like the distant past, but its defining moment for the US market was a surprise for the so-called Magnificent Seven tech stocks. Shares in Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla, which together account for more than 25% of the S&P’s market value, fell sharply. The cause? A Chinese start-up taking the world by surprise with the launch of AI-model DeepSeek, putting the brakes on the recent Big Tech-driven rally.

For the rest of the quarter, volatility in the US equity market was largely a result of the Trump administration announcing - then in some cases rescinding or reducing -- tariffs on imports from many of the country’s biggest trading partners. Among those affected were Canada, Mexico, China, Japan and the European Union. Corporate earnings remained relatively strong, and in policy news the US Federal Reserve (the Fed) kept interest rates steady at 4.5% at its March meeting.

Europe and the UK: equities shine

Meanwhile, a significant change in German fiscal policy aided the performance of European stocks over the quarter. The likely partners of the incoming coalition have agreed to sweeping reforms, including lifting restrictions on borrowing for defence spending and creating a fund that will invest up to €500 billion in German infrastructure over the next 12 years. The yield on the ten-year Bund rose sharply (prices fell) in response to the news. Despite giving back some gains in March, largely because of how tariffs might affect the region’s car manufacturers, the EURO STOXX 50 climbed 7.2% over the three months.

Large companies in the UK also did well over the quarter, reflected in a positive total return of 5% in sterling terms for the FTSE 100 Index. Gold miners were among the strongest performers, as the backdrop of global uncertainty spurred demand for the precious metal. The banking sector also made gains, driven by investors’ belief that the Bank of England is likely to leave interest rates higher for longer. For the most part, markets were unmoved by the Chancellor’s Spring Statement, as it contained few surprises. Confirmation of gilt sales to the value of £299.2 billion over fiscal year 25/26 was in line with market expectations. Gilt investors also warmly welcomed news that issuance would be skewed towards the front-end of the yield curve and away from longer maturities. Gilt yields moved a little higher over the quarter.

Mixed returns from other equity markets

Among other stock markets, Japan trailed the wider Asia Pacific region. Japan’s economy is dominated by exporters, so the threat of higher US tariffs on goods from some of its biggest industries caused share prices to fall. The broad-based Topix Index was down 3.4% in yen, total return terms.

By contrast, Chinese stocks did well, boosted by strong returns from the tech sector and optimism about new stimulus measures. As a group, emerging markets also turned in a strong performance over the quarter. Those in Europe were among the leaders, boosted by the news of Germany’s policy changes. Overall, the MSCI Emerging Markets Index returned 2.9% in US dollar terms.

What’s ahead?

The US government is moving to address trade imbalances and to try to champion US manufacturing. On 2 April 2025, or “Liberation Day”, as he dubbed it, President Trump announced significantly more punitive tariffs than investors had expected.

The policy includes a 10% tariff on all imports from all countries (excluding Canada and Mexico) and higher tariffs on countries with large trade deficits with the US. These ranged from 1% to 50%. Some of the new rates, such as the 20% on the EU and 10% on the UK, were broadly in line with analysts’ expectations, but there were higher rates for most Asian economies.

On 8 April, however, Trump hiked the duty on Chinese goods to 104%. In the following days, he raised it still further to 145%, at the same time announcing a 90-day pause on additional rates (those over 10%) for 75 other countries. Markets responded positively to the pause, with many global indices surging.

Certain sectors – including aluminium, steel, copper, timber/lumber, semiconductors, and pharmaceuticals – are so-far exempt, although Trump has warned that tariffs on pharmaceuticals will be coming. Goods that fall under the US-Mexico-Canada agreement (USMCA) are also currently unaffected, but tariffs on both of these groups could be announced in future. Indeed, Trump has warned that tariffs on pharmaceuticals will be coming.

In short, the average trade-weighted tariff rate on goods imported by the US is now over 20%. This rate is higher than it was during the Great Depression – it hasn’t been as high as this since the early 1900s.

The new structure explicitly penalises foreign producers to encourage domestic manufacturing. We view the new tariffs not as temporary, but as the foundation of a long-term framework for US trade policy. It has become a whole lot more expensive for other countries to access the US market.

The moves have led to many questions from investors. Below, we consider some of them and some possible answers.

Could there be more to come?

This is a difficult question to answer. While President Trump left the door open for future tariff-lowering negotiations, he also left room to make them higher-still in the event of a trading partner retaliating.

It seems unlikely that the 10% baseline duty will be negotiated down, but there’s a chance that the additional rates could be reduced after talks with trading partners.

How long will the tariffs last?

If the past is a guide, once trade barriers are put up, they are hard to bring down. So these tariffs could prove to be stickier than the market expects. Indeed, President Trump has said that he might be willing to bear a mild recession.

How much retaliation will we see?

China’s Ministry of Commerce has already retaliated to “resolutely take safeguard its own rights and interests” imposing an 125% tariff on imported US goods. Ursula von der Leyen, President of the European Commission, said the EU was ready with countermeasures if talks with Washington failed. According to media reports, the UK government is not planning to act in response, but instead to negotiate a trade deal.

What is the economic impact?

• Uncertainty is the enemy of growth for the US
  To put it simply, tariffs raise the price of imported products, adversely affecting US domestic consumers and making investing in equipment and infrastructure more expensive. Other countries are likely to follow China’s lead and retaliate, which could hurt US exporters. Finally, policy and economic uncertainty make businesses more likely to delay investment and hiring.
  
  Since the tariff increases are so large, it is difficult to confidently provide a precise point-estimate on US growth and inflation. We are more confident, however, that risks to inflation are to the upside for the US and growth to the downside globally.
  
  Recession risk has risen materially, with sell-side analysts suggesting tariffs are likely to shave between 1 and 1.5 percentage points (pp) off gross domestic product (GDP) growth over the next one to two years. This would take 2025 GDP down to a around 1.5%. They also expect inflation could be around 1.5pp higher, reaching 4% this year, and forecast that the unemployment rate will rise to 4.6% by the fourth quarter.
   
• A more complex outlook for the EU
  This change in global trade policy affects exporters in two different ways. First, there’s the direct influence on trade flows. But second, and perhaps more significantly, there’s the uncertainty it creates: delays in investment and consumption decisions could lead to a sizeable slowdown in economic activity.
  
  In 2023, the average tariff on goods entering the US from the EU was just over 3%, so, the jump to 10% (and possibly higher) is a significant one. It’s unlikely the 25% tariffs on autos can be absorbed by reduced margins, so there’s a good argument for non-linear effects. The EU might stop exporting some goods completely.
  
  The hit to growth could be close to 1pp over 2025 and 2026, with the peak effect coming in the second half of this year. We had previously predicted growth of 0.8% in 2025 and 0.9% in 2026, but these negative shocks could bring the Eurozone economy back to the edge of recession in late 2025. Germany, Italy and Ireland are likely to see more adverse effects from the tariff hikes than France or Spain.
  
  The US tariffs are likely to be minorly disinflationary, even with retaliation. The growth slowdown and redirection of global goods oversupply into Europe will put downward price pressures on goods. The only inflationary offset should have come from the currency devaluation, that typically occurs alongside tariff increases. This doesn’t seem to be playing out for now, however.
   
• A softer landing for the UK?
  The UK looks relatively better off, with most US tariffs at 10%. This excludes duties on cars and steel, which will still be charged at 25%. But according to the World Trade Organisation, the weighted average tariff that the US currently applies to non-agricultural goods imports from the UK is 0.5%. A move up to 10% is still a big jump.
  
  The Office for Budget Responsibility estimates a 1pp reduction to UK GDP growth, assuming US 20% universal tariffs and its trading partners taking action in response. Given that the increase in the average effective tariff rate in the US is around 20pp, (although less for the UK), a hit of 0.5pp looks sound to us, taking 2025 GDP growth down to 0.6%.
  
  Sterling has held up well and trade diversion from China and the EU poses a meaningful downside risk to goods inflation. This means inflation implications should be muted.

What about the monetary policy response?

• European Central Bank (ECB) – The case for further easing of monetary policy looks even stronger now. Not only has the growth outlook deteriorated, but only a theoretical inflationary effect for Europe as a result of US tariffs is a euro depreciation – which is not playing out. We expect three 25 basis-point cuts to the deposit rate (the rate at which banks can make overnight deposits with the ECB) by summer.
   
• Bank of England (BoE) – In its February Monetary Policy Report, the BoE concluded that while UK GDP growth was likely to be hit as a result of US tariffs, the inflation outcome is unclear. For that reason, we still expect three 25bp cuts to the Bank Rate bringing it to 3.75% by the end of 2025. We also expect a further two 25bp cuts to 3.25% in 2026.
   
• US Federal Reserve (the Fed) – The US central bank faces a much trickier decision, with inflation and unemployment rising, and tariffs affecting both the demand and supply side of the economy. We maintain our call that the Fed’s rate-setting committee will cut rates by 25bp twice this year, but we acknowledge the increased uncertainty around the rate path.

What does this mean for your clients’ pension investments with Standard Life?

Below, we consider what the recent tariff-related volatility may mean for clients who are invested in the Standard Life Future Advantage range or the Standard Life Smoothed Return Pension Fund.

The Future Advantage risk-rated range is diversified across a number of asset classes including equities, corporate and government bonds, direct property, REITS and money market investments. Those exposures are global in nature, from developed to emerging markets and as such, have a level of diversification which can help during times of market turmoil. You can see the latest quarterly breakdowns on pages 11 and 12 of our Future Advantage range report

The Standard Life Smoothed Return Pension Fund is a risk-rated, multi-asset solution that aims to grow clients’ pensions savings over the medium to long term (five years plus). Using a ‘smoothing’ process’, it aims to provide investors with a more stable investment journey amid the daily uncertainties of investing. The Fund is diversified over a range of different asset classes, spread across different countries and regions. These include equities, fixed income, index-linked securities, property and other specialist investments. As such, it has a level of diversification that can help during times of market turmoil. You can see the latest quarterly breakdowns on page 1 of our Smoothed Return report.

Finally, we’ve put together a range of content that could aid your conversations about market volatility with your clients. This includes a short article, an in-depth Q&A and an animation.

The information in this article should not be regarded as financial advice and is based on our understanding in April 2025.

Money invested is at risk.