Against a backdrop of geopolitical jitters and looming protectionist rhetoric, global equity markets have delivered a surprisingly strong performance thus far in 2025. Despite concerns that a wave of US-imposed tariffs could stifle growth and unsettle business and investor confidence, markets have bounced back vigorously following an early-April sell-off. Per the chart below, most major equity indices are now well above their pre-Liberation Day highs. With elevated headline risks still lingering, why are stocks now worth more than before the world was introduced to President Trump’s giant cardboard sign?

The year began with renewed concerns of a trade war, as the US administration threatened sweeping tariffs against trading partners and engaged in a tit-for-tat escalation with China. Markets initially wobbled, pricing in worst-case scenarios that included retaliatory duties, disrupted supply chains, and dampened corporate margins. However, those fears gradually eased as it became clear that the harshest measures would either be delayed or avoided altogether. Instead, the US signaled a willingness to return to the negotiating table, striking a more pragmatic tone aimed at extracting concessions without derailing global trade.

That policy moderation coincided with a broader pivot in fiscal policy across several key economies. Europe, long challenged for its fiscal conservatism, moved decisively toward stimulus, with Germany and the EU announcing infrastructure and green investment packages. Similarly, China ramped up domestic spending, particularly in high-tech and consumer sectors, seeking to counteract any potential external headwinds with stronger internal demand.

Perhaps the most dramatic policy shift, however, came from Washington itself. The passage of the so-called “One Big Beautiful Bill” marked a sharp departure from the short-lived belt-tightening efforts of Elon Musk and his “DOGE” colleagues.  

Already, Europe had entered 2025 with solid economic momentum – thanks to improving consumer confidence, accelerating loan growth, steady employment gains, and easing inflationary pressures. The combination of this entrenched strength and policy tailwinds created an ideal environment for equities to thrive, particularly in pro-cyclical sectors. For more on Europe’s robust markets, please see our recent Postcard From Europe piece.

At the same time, a falling US dollar and declining crude oil prices have provided an inherent “tax cut” for much of the world. A weaker dollar has helped ease financial conditions in emerging markets and supported commodity-linked economies, while lower energy costs have decreased import bills and boosted margins across a wide swath of industries. Together, these dynamics have strengthened corporate earnings and further underpinned equity valuations.

So is the year-to-date rally justified? Perhaps. But investors now face a more nuanced environment. On the one hand, momentum is strong and shows no sign of breaking yet. Despite the growth-arresting nature of US tariffs, economic fundamentals remain strong, and continued fiscal support is expected into 2026. On the other hand, signs of froth have begun to re-emerge, most notably in the speculative corners of the market. The return of “meme stocks” – driven by retail investors using social media to coordinate rapid price surges – is a notable red flag. Valuations in certain sectors, especially technology-centric industries, have widened back out after temporarily coming back down to Earth. Accordingly, the next leg of the journey will require a more selective and risk-aware approach. A globally-diversified portfolio is ideally suited for this environment. 

The US dollar appears to be at a critical inflection point; rolling over against most major currencies from a starting point of over-valuation. At the same time, the recent change in Canadian leadership marks a shift to a more business-friendly, pro-growth political landscape. We have increased the Canadian dollar hedge on US asset class exposures in client portfolios.

Fiscal profligacy concerns and policy risk are impacting US asset prices, with US bonds and the dollar coming under pressure. Simultaneously, the weak dollar and relatively prudent fiscal policy in most emerging market (EM) countries have created a favorable outlook for local currency-denominated EM debt. We have added to existing positions in EM local currency sovereign bonds and trimmed exposure to US aggregate this quarter.

Global equity markets are learning to cope with erratic policy communications from the US government, after a panicked response to the “Liberation Day” reciprocal tariffs. While uncertainty remains elevated, the likelihood of spiraling global trade wars has decreased significantly since the White House announced a pause and willingness to negotiate with trade partners. We have maintained a modest overweight to equities in client portfolios.

The Reserve Bank of India has pivoted to a more accommodative stance, initiating a rate-cutting cycle supported by moderating inflation. This has helped turn around foreign investor confidence, with net inflows resuming this year. Conversely, Brazilian equities have done remarkably well year-to-date, but the lagged impact of sharply tighter monetary policy on the domestic economy has created vulnerability looking forward. We have elected to take profits on the position in Brazilian equities and initiate a new position in Indian equities in growth-oriented strategies this quarter.

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