Welcome to the Autumn edition of On the Marc. In this edition, we will review the markets for the first quarter of 2025, examine the extraordinary events that occurred in April, and consider the outlook for the foreseeable future.

Market update 

Global equity markets were weaker during the quarter owing to policy uncertainty, weaker US economic data and persistently higher inflation reports. During the quarter, the S&P 500 and Nasdaq declined by 4.3% and 10.3%, respectively, while the S&P/ASX 200 Accumulation index was down 2.8%.

The quarter began well for global markets with the US Federal Reserve (‘the Fed’) flagging that inflation was tracking in the right direction and favourable U.S. employment numbers pointing to strength in the underlying economy. However, in February, market sentiment shifted notably as US economic data started to show signs of weakness across non-farm payrolls, retail sales, housing and services. Concerns also increased surrounding the potential impact of Trump’s trade tariffs, as well as broader policy uncertainty related to DOGE, Ukraine and the upcoming Federal election in Australia.

Against this backdrop, the release of the latest version of China’s DeepSeek AI model raised worries over U.S. leadership in the space, leading to a sell-off in the AI-related names more broadly. Despite initial optimism early in the quarter, inflation expectations increased, partly due to concerns about the impact of tariffs. These dynamics led to a market rotation away from expensive Consumer Cyclicals, Financials, Tech and Growth stocks that were trading at record valuations, and into more Defensive and ‘Quality Value’ stocks.

Embedded in the Australian market’s 2.8% decline for the quarter, the best performing sectors in the ASX200AI were Industrials (+2.6%), Utilities (+2.2%) and Communication Services (+1.5%), whilst Information Technology (-17.5%), Healthcare (-9.1%) and Property (-6.8%) lagged.

“Liberation Day” on April 2 heralded a new era for equities, as Trump championed a new world order with respect to international trade, announcing headline tariffs that were substantially higher than the market expected (Figure 1).

While these tariff levels were established as a starting point for negotiations with trade partners, the final tariff levels remain uncertain, and the negotiation pathway is likely to be volatile and drawn out. At the time of publishing, US tariffs on China are 145%, while China's tariffs on US goods are 125%. Trade tensions between the two largest economies in the world are extremely elevated, while tariffs for other countries have been set at a 10% floor with higher levels ‘paused’ for 90 days.

Equity markets are reflecting this heightened volatility and uncertainty. The impact of rapid-fire news flow has also led to extreme intra-day moves in the US share market.

Uncertainty in equity markets stems from various areas, including future central bank actions. Central banks, particularly the US Federal Reserve (Fed), now face additional inflationary pressures from the tariffs, which typically put upward pressure on interest rates. However, given the disruption to Trump’s tariff agenda, the Fed is also likely to confront data pointing to slowing growth, a weaker labour market, and weaker consumer and business confidence.

These factors will all place downward pressure on interest rates, adding another layer of complexity for the Fed, which can only have one policy decision. Ultimately, we anticipate that the Fed will continue to cut rates, but given the inflationary risks and the need to contain inflation expectations, the pathway to achieve that remains slower and more uncertain than equity investors would like.

Compounding the Government policy risk and heightened central bank uncertainty are ongoing geopolitical tensions encompassing the Ukraine-Russia war and tensions in the Middle East, as well as escalating tensions over trade between China and the US.

Concerns over global growth and increased supply have contributed to weaker oil prices in recent weeks (Figure 2). Meanwhile, gold prices have held up well (dipping less than 4% below highs during the peak of the market sell-off and making new highs since), delivering as a defensive and uncorrelated asset class (Figure 3).

For equity markets, we observed a rotation in February and March from AI/Tech stocks and Growth names more broadly towards Value stocks. Simultaneously, we saw the outperformance of the undervalued UK/Europe markets relative to the US. The Growth-Value rotation is justified after a two-year period of enormous outperformance and re-rating of Growth equities, which we discussed in our 2024 quarterly On the Marc Reports. While Growth stock valuations in Australia have contracted, they remain very elevated relative to historic levels. Growth valuations have only been this high on two other occasions in the last 45 years: during the COVID-19 pandemic in 2020 and the Tech Bubble in 2000. On both occasions, these stocks underperformed significantly in the following 1-2 years.

Market returns for major indices

Below is a table showing the percentage returns of the major market indices to 31st March 2025.

The outlook for the year ahead 

Market developments in April 2025, driven by escalating trade tensions and resulting volatility, have significantly clouded the investment outlook for the remainder of the year. Investors need to be prepared for continued uncertainty and potential shifts in market trends.

The increased economic uncertainty and potential for slower growth may prompt central banks, including the Reserve Bank of Australia (RBA), to consider more aggressive interest rate cuts to support their economies. However, the potential for tariff-induced inflation complicates the policy outlook for central banks, such as the US Federal Reserve.

• Technology: The tech sector has been particularly sensitive to the trade tensions, especially regarding restrictions on chip exports to China.

• Resources: Mining and resource companies have seen varied impacts depending on specific trade policies, with some benefiting from counter-tariffs.

• Manufacturing and Industrials: These sectors face potential disruptions to supply chains and increased costs due to tariffs, which could pressure corporate earnings.

Many companies during the recent reporting season refrained from providing guidance on future performance due to the uncertain environment. At the end of the day, it is essential to remember that Trump has a vision he believes will lead to greater prosperity for the US, and if this eventuates, it should result in a healthy global macroeconomic environment. The challenge at present is that his vision of how it will play out is not being well communicated, so it is hard for everyone, from market participants to the general public, to look into the future with confidence.

The US Government midterm elections are scheduled for 3 November 2026. This means that Trump has just over 18 months to have the economy humming along so that the Republicans retain a majority in the House of Representatives and Senate. This will enable his agenda to continue being implemented. Should the economy not be firing on all cylinders, or is there uncertainty among Americans, then the Republicans will lose control, resulting in an inability to push through reforms.

Did you know?

It is timely to revisit the long-term benefits of compounding returns and the importance of keeping a long-term perspective when investing in growth assets. Below is an updated chart comparing the returns from investing $1 in a bank account and reinvesting the interest earned each year to investing $1 in the bond market and the Australian share market, with reinvesting the dividends received.

There have been extreme events since 1900, including WWI & WWII, the Great Depression, the 1987 crash (Australian share market halved in two weeks), the GFC (57% pullback) and the COVID sell-off (37% in five weeks). The market has always taken out previous highs, and the major pullbacks appear somewhat insignificant when looking at the big picture.

Final reMarc

Following the 90-day pause on reciprocal tariffs announced on April 9, we are hopefully past the period of maximum uncertainty. The US S&P 500 Index closed up almost 10% in one day! President Trump has demonstrated he will respond to market volatility. However, the environment is still extremely uncertain. It feels somewhat like the early days of the COVID pandemic.

We will leave it to others to comment on whether COVID was a natural or man-made disaster, but we surely know the origins of the current situation. The current trade policy situation has gone off the rails, with China’s emphatic response to President Trump escalating tension. Stock markets are moving trillions of dollars in value based on speculation and headlines, both real and fake, rather than fundamental business analysis.

If and when some degree of normalisation occurs, stock markets are likely to bounce strongly and immediately. However, should tensions continue to escalate and policies continue to be a tit-for-tat increase in tariffs, we believe there will likely be further pressure on the stock market and real damage to the global economy, as well as to America’s international standing.

" The most successful entrepreneurs I know are optimistic. It’s part of the job description. "

Caterina Fake

Key Facts & Figures

1. Australian Cash Rate was reduced by 0.25% in March to 4.10%.

2. The RBA Cash Rate is likely to decrease in May when the RBA next meets - 20th May (62% chance of a 0.5% rate cut).

3. Our annualised inflation rate is 2.4%. This is within the RBA’s target band of 2 - 3%.

4. Australia’s unemployment rate is 4.1%.

5. The US Federal Reserve cash rate band is 4.25% - 4.50%.