Monthly Market Outlook – August 2025

Domestic strength powers Japan’s rebound

Over the past month, the United States has hammered out new trade deals with several Asian economies including the Philippines, Indonesia, Vietnam and Japan. Each pact lets Washington charge import duties of up to 20% and includes rules designed to stop Chinese goods from being shipped through partner countries to dodge US tariffs. Taken together, the agreements show that America is shifting towards permanently higher border taxes.

The headline deal is with Japan. The US has dropped its plan to slap a 25% tariff on Japanese imports, including cars, cutting the rate to 15% instead. In return, Japan has promised to invest as much as $550bn in key US sectors such as semiconductors, energy and pharmaceuticals. The US has also pledged to treat Japan the same as other allies in any future tariff moves, and both sides agreed to work more closely on sensitive supply chains. While the fine print still needs to be settled, the agreement removes a big source of guesswork for Japanese businesses, policymakers, and investors.

Momentum builds after ‘lost decades’

Japan entered 2025 with real economic momentum. After decades of falling prices and economic stagnation, the country is now seeing steady inflation and chronic labour shortages, which are finally pushing wages higher. Those bigger pay packets are feeding consumer spending and justifying business investment, lifting overall economic output and giving Japanese shares a stronger foundation.

Even so, America’s tougher trade stance had been an immediate worry. Exports make up about 17% of Japan’s economy, so higher US tariffs and risks of a slowdown in global trade threatened to dampen company profit expectations, spending and hiring. By trimming the tariff rate on Japanese goods, the new trade deal significantly eases the pressure.

Nevertheless, with the tariff rate still elevated at 15%, it may continue to weigh on exporters’ profitability.

Room for a rate hike as risks fade

Japan’s economy still looks healthy. Inflation remains higher than usual, which means the central bank can finally move away from the ultralow interest rates it has kept for years. Tokyo’s Consumer Price Index, a widely-watched economic indicator, rose 2.9% in July, comfortably above the Bank of Japan’s (BoJ) 2% target.

Forward-looking signs are fairly positive. The Bank’s own Tankan survey, a study of Japanese businesses conducted by the BoJ every three months, shows large manufacturers still showing resilience. July’s early Purchasing Manager Index surveys (a summary of the state of market conditions) were mixed: manufacturing slipped into decline, matching the global slowdown in manufacturing, but the services sector kept growing. Services matter most because they are an important growth engine, making up about 75% of the economy.

Homegrown demand is solid thanks to rising incomes and government spending, even as overseas demand is weak. The jobs market is tight: unemployment is steady at 2.5% and wages are still climbing.

With trade tensions easing, the outlook for growth and policy looks more balanced. The BoJ could lift interest rates from 0.5% to 0.75% as soon as the September or October meeting, since inflation has so far stuck around and external risks have eased enough to give policymakers room to act.

The investment team at atomos has been positive on the investment case for Japanese equities for some time, and this is still its view as Japan transitions towards a self-sustaining economy.

Why UK government bonds are worth another look

UK government bonds (gilts) have been volatile this year. The yield on the 30-year gilt has swung between just under 5% and a little above 5.5% and now sits at 5.4%, near the top of that range. The same pattern shows up in long-dated bonds from the United States, Germany and Japan. This is despite their central banks (apart from Japan) cutting short-term policy rates. Investors are asking to be paid more to hold very long bonds while governments ramp up borrowing.

Big spending plans lie behind the worry. The UK’s last autumn Budget and the recent US tax-and-spend bill (nicknamed ‘the Big Beautiful Bill’) both widen fiscal deficits and push total debt higher. That raises questions about whether governments are living beyond their means, and how easily they can service what they owe. At the same time, central banks are shrinking their balance sheets.

The Bank of England (BoE) is selling the gilts it bought during the pandemic, boosting supply and putting downwards pressure on prices (meaning yields rise).

The investment team does not think public finances are at a tipping point. Bond risk premiums (what investors are paid to hold bonds) had been unusually low and are now normalising, and quantitative tightening (central banks selling their bonds) won’t last forever. A 5.4% yield on a 30-year gilt looks attractive against long-run inflation.

Weak UK growth and fading price pressures should lead the BoE to keep cutting interest rates, lifting demand for long-dated bonds and nudging yields lower. If the central bank slows its gilt sales and the Debt Management Office leans towards issuing shorter-dated debt, supply pressures should ease further, improving near-term returns for investors.

Early observations as US earnings season kicks off

The second quarter US reporting season has begun, and analysts have trimmed their forecasts in response to a shaky economic outlook and shifting trade policy. At the end of June, data provider FactSet predicted earnings from the US’s largest listed companies would rise 5% in the second quarter compared to a year earlier, down from roughly 13% growth in Q1 and the slowest pace since the fourth quarter of last year. Sales growth and profit margins should also cool, although margins are still likely to sit above their five-year average.

Tech remains the main profit driver

Big-cap technology firms are set to deliver a large portion of the index-level earnings increase once again. Capital spending by the cloud ‘hyperscalers’ (large cloud service providers that can rapidly scale their infrastructure to meet the needs of their customers) has dominated recent quarters. Investors will pay closer attention this time to how those outlays translate into cash flows and efficiency gains in artificial intelligence and cloud services.

The consumer sector is another focal point. Overall spending is still solid, yet new tariffs, shoppers trading down to cheaper brands, and diverging habits across income groups act as a counterbalance.

With earnings still steady and monetary policy turning more investor-friendly, equity valuations have room to hold up over the next 18 months. Many strategists also expect large US companies to outpace their overseas peers in profit growth during the coming year.

Stock highlight of the month: Alphabet

Google’s parent company Alphabet reported strong results in the second quarter, with revenues of $81.7bn comfortably beating analysts’ expectations. Every key business unit saw accelerating revenue growth, led by Search. This suggests Google is maintaining a very high percentage of search queries despite increasing competition from OpenAI’s ChatGPT. Google offered plenty of encouraging points to investors in its latest update, including growing numbers of monthly users of its own AI tool, Gemini. Ad revenues from short videos hosted on its subsidiary YouTube point to a healthy digital advertising market. Analysts suggested this part of the business offers an underappreciated opportunity.

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Source: atomos.

Information correct as of 30th July 2025. 

FOR PROFESSIONAL INVESTORS ONLY.

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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This is a Section 65 approved fund under the Collective Investment Schemes Control Act 45, 2002 (CISCA). Boutique Collective Investments (RF) (Pty) Ltd is the South African Representative Office for this Fund. Boutique Collective Investments (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002).

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