2025 Themes….So Far
As expected, market volatility has increased in 2025 with Trump 2.0. We all know Trump is unorthodox and is always willing to shake up the status quo. There is always a level of uncertainty at any point in time, but it seems like that uncertainty is very high for investors with all the questions about how far Trump will go with tariffs and the potential consequences of those actions. I’m of the opinion that there is more bark than bite with these bold statements. Yes, there will be tariffs, but not nearly as high as Trump has threatened nor as wide across so many countries and goods that have been mentioned. Trump considers the stock market performance as an important part of his scorecard, and I believe the majority of these tariff threats are more negotiation tactics than anything.
Besides tariffs, the other big topic of discussion so far this year has been international developed markets outperforming US equities. I believe a big contributing factor in that outperformance is the wide dispersion of equity valuations. Over the last 10 years, European equities have traded at approximately a 23% average discount relative to the United States. That discount started the year at a much deeper 36%. So far into 2025, investors have been buyers of that valuation gap,
with it narrowing it by five percentage points to 31% year-to-date. With US equities trading at frothy valuations, it leaves little room for disappointment, especially for the very rich valuations in Technology. The news of Deepseek has put pressure on those Mega Tech valuations. As of last Friday, Technology was one of two sectors with negative YTD performance. International equities are trading at more attractive valuations with the Euro Stoxx 50’s forward PE at
14. With stocks trading at those valuations, a little good news can go a long way and provide some pop in those stock returns. European stocks have some tailwinds gathering behind them including an easing ECB, a potential de-escalation of the Russia-Ukraine conflict, which could open it back up to Russian energy, and positive earnings growth in the 4th quarter after 6 negative quarters.
