Monthly Market Outlook – March 2025

Strong start to the year for European equities

European equities performed well in the first quarter, significantly outperforming US and global stocks. The rally has been broad, with all major European sectors and country indices including the German DAX and French CAC delivering positive returns. Some possible drivers of this could be:

Hopes of a Russia-Ukraine peace deal
A rise in industrial and defence stocks on higher spending expectations
A rebound in global luxury goods demand from the US and China which has supported consumer discretionary stocks in Europe
IT stocks benefitting from the AI theme
Loose monetary policy from the European Central Bank making it cheaper for banks to borrow than lend, boosting the financials sector

However, the recent rally has only helped partially catch up the underperformance in 2024 and previous years (see chart), and our Manager does not think it is the start of a sustained period of outperformance.

Outlook for Europe

Overall, our Manager believes the ‘easy gains’ for investors in Europe are behind us and the recent strong performance from European stocks is unlikely to continue. It doesn’t expect higher energy costs to come down quickly, even with a Ukraine-Russia peace deal. US trade tariffs on the EU are likely, which could have a notable economic impact depending on their scale. Europe has also lost market share of exports and faces increasing competition from Chinese goods.

Europe has experienced a decade of weak economic growth and low productivity, which will be challenging to reverse. However, the German government spending package is a clear plus for economic growth.

Markets fall on tit-for-tat tariffs

President Trump confirmed that additional tariffs on goods imported from China, Canada, and Mexico took effect on 4 March 2025, following a one-month suspension from February. Specifically, a 25% tariff was imposed on imports from Canada and Mexico, with Canadian energy resources subject to a reduced 10% tariff. Tariffs on Chinese imports were increased from 10% to 20% . In response, China announced retaliatory tariffs of 10% to 15% on certain US imports, effective 10 March 2025 . These actions have contributed to a global equity market downturn, as investors react to escalating trade tensions.

Our Manager was monitoring the potential for a US government shutdown if lawmakers failed to agree on the federal budget or temporary funding measures by the 14 March deadline.

However, Congress passed a continuing resolution, extending federal funding and averting a government shutdown. This resolution ensures government operations continue through the end of September 2025.

Given the dynamic nature of trade policies and fiscal negotiations, our Manager continues to closely monitor these developments. At this time, there has been no revision to its outlook or investment views, as the impacts remain within the range of anticipated scenarios for this year.

America’s biggest companies post impressive earnings season

The fourth quarter of 2024 was a standout earnings season for America’s largest listed companies, which recorded earnings growth at a three-year high, beating expectations. However, the percentage of companies posting positive earnings surprises was below the five-year average.

Earnings growth broadened out, with all sectors (except energy) recording growth. The financials, consumer discretionary, and communications services sectors led the way with double-digit earnings growth and significant earnings surprises.

Morgan Stanley data revealed mentions of ‘AI adoption’ in earnings transcripts hit a record high, pointing to the increasing use of artificial intelligence in big business. A key trend to watch is whether lower training costs accelerate AI adoption and shift focus from AI infrastructure to applications.

US Shoppers hunt for deals

Credit card companies reported increased consumer spending, driven by holiday purchases, but it seems shoppers are looking for bargains. Major US retailers noted retail strength but observed selective consumer behaviour influenced by promotions. With a short-term drop in consumer confidence in February, consumer spending remains a critical US macroeconomic indicator to monitor.

Sector in focus: Energy

While energy stocks are up in absolute terms, the energy sector has been one of the worst performers since January 2024. The broader MSCI World has increased 25%, while the MSCI World Energy sector has risen 6% in total return terms. Price changes have primarily been driven by shifts in valuation, reflecting expectations of higher profits due to rising energy spot prices. Sector performance is influenced by three main factors: supply, demand, and geopolitics. Overall, our Manager sees these forces as being largely balanced. US supply has been plentiful and is expected to continue. President Trump has declared a “national energy emergency”, embracing fossil fuels and degrading or rescinding clean energy policies. However, OPEC+ is likely to continue to mitigate this effect by restricting supply to defend prices.

The demand picture has been mixed across core economies, which is likely to remain the case. Our Manager expect US growth to remain robust, while it is less optimistic about European prospects. Also, while it expects reasonable growth in China in 2025, downside risks to this and China’s energy demand remain. Finally, geopolitical risks remain two-sided relative to market pricing. Our Manager continues to monitor developments in the Middle East and Ukraine closely.

Stock highlight of the month: Cisco Systems

Cisco Systems is the dominant force in enterprise networking and is well positioned to benefit from the trend towards hybrid working and cloud environments. Historically the group has been focused on selling networking hardware such as routers, but has made good progress in shifting its business model towards software solutions and cloud capabilities that generate subscription-based recurring revenues.

Our Manager thinks this journey is starting to bear fruit and could pave the way for improved growth and margins. Increasing levels of network demand (think 5G, Internet of Things, big data, artificial intelligence and so on) should benefit infrastructure players like Cisco in the first instance. This will leave the group well placed to grow, invest its significant cash flows to accelerate innovation, and continue to pay an attractive and growing dividend to shareholders.

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Source: atomos. Information correct as of 7 March 2025.

atomos is the trading name of both Atomos Investments Limited (FCA No: 122588, Company No: 2041819) and Atomos Financial Planning Limited (FCA No: 193503, Company No: 3879955), both authorised and regulated by the Financial Conduct Authority and registered in England and Wales. Registered offices: 2nd floor, 5 Hatfields (alto), London, SE1 9PG.

The information and opinion contained in this article should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested.

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