Monthly Market Outlook – May 2025

100 days of chaos…but don’t write off the US yet

It’s been 100 days of President Trump’s second term in office, characterised by much more stock market volatility than usual. Global events and economic concerns have heavily influenced market moves. The revival of major trade tensions – first with China, Mexico, Canada, and Europe and then extending globally – and signs of slowing US growth have tested investors’ nerves. But even though Trump’s trade tariffs have raised the spectre of recession, the investment team at atomos thinks investors should not be too quick to write off the USA.

Unlike his first term, Trump’s second term has begun with policies that markets don’t like because they could hurt growth. More market-friendly policies such as tax cuts and deregulation are expected to be announced later in the year. Investors are also increasingly cautious about valuations (how much a company’s shares are deemed to be worth) of US stocks, especially technology companies. This may be because they feel Trump 2.0 cares less about boosting the stock market than he did during his previous term.

In contrast, European equities have benefitted from growing optimism around higher defence spending across Europe, major government spending in Germany, and hopes for peace in Ukraine, which could also bring down energy costs. Large European companies have performed better than their US rivals so far this year, and they also look cheaper. Does this mean European stocks will beat the US for the next few years? Not necessarily. If you look at what really drives company profits and economic growth, the investment team at atomos thinks it’s too soon to count the US out.

Is the US heading for a recession?

April saw significant volatility in both US and global equity markets, with some of the sharpest daily and weekly moves of the past two decades. The US’s major stock market briefly entered bear market territory, meaning a 20% fall from its recent peak in February.

Markets rebounded after reassurances from policymakers and a more constructive tone on trade. But, despite the recovery of the past couple of weeks, the team expects market volatility to persist. The risks to global and US economic growth in 2025 remain. Recently announced tariffs are likely to weaken economic growth, leading to lower US and global GDP outlook for the year.

Key risks include:

• Higher consumer prices, as businesses pass on tariff-related costs
• Lower real income and reduced household spending due to higher prices
• Changes in financial conditions, including shifts in interest rates and equity and bond pricing
• Lower imports if there are shifts from imports to domestic manufacturing.

Overall, we expect US economic growth this year to fall short of the economy’s long-term potential growth rate of 2%. While we’re not predicting a recession as the most likely scenario, uncertainty around economic policy could dampen growth as business investment and consumer spending slows. The chart below illustrates our current thinking and shows how a modest drop in economic growth over the next few quarters could result in two consecutive quarters of negative GDP growth, meeting the technical definition of a recession.

Outlook for US Economic Growth

Even if a recession occurs, we expect it to be short-lived and shallow. Corporate and household balance sheets are in better shape compared to past periods of prolonged economic downturns, such as the global financial crisis of 2008-9. Even though trade tariffs usually push prices up (causing inflation), the economic slowdown they cause would actually help bring inflation down. That means the Federal Reserve could feel more comfortable cutting interest rates. Lower rates would help the economy bounce back more quickly and could be good news for investments that do well when growth picks up, like stocks.

Given the risks to US economic growth, investors should be prepared for further stock market wobbles, but we expect a fairly quick rebound back to the previous market peak. Consequently, we believe investors should look through the short-term noise and stay the course, focusing on the broader, more sustainable long-term growth trends.

US earnings season kicks off

The first-quarter corporate earnings season is underway in the US, against a backdrop of changing trade policy. Analysts have steadily lowered their earnings expectations for the US’s largest listed companies over the first three months of the year. Q1 2025 earnings are now forecast to grow at 8% year-on-year, down from the 11% predicted at the start of the year and the 18% expected at the end of 2024. With tariff announcements made in early April and final policy details still uncertain, first-quarter results are unlikely to capture the impact of recent trade measures. We are closely monitoring management commentary for insights into consumer and business health, corporate strategy around tariffs, and the potential implications for US economic growth and inflation. This and the next earnings season will be critical for gauging fast-moving trends.

Large US banks, as usual, were among the first to report. While less directly exposed to tariffs, they are vulnerable to secondary effects such as a slower economy affecting lending activity. Many reported strong Q1 earnings, although equity and debt capital market activity remained subdued. This could weigh on these businesses which are reliant on capital markets to fund their growth.

Americans are still spending

Banks and card payment companies are reporting that Americans are still spending money, and have strong household finances, good credit scores and few missed payments. But some of this recent spending may be due to people stocking up before prices go up because of the new tariffs. If people and businesses lose confidence in the economy, this could lead to job losses, higher unemployment, and reduced spending and borrowing.

Companies are still trying to soften the blow of trade tariffs by raising their prices and cutting costs. They’re doing this by improving their supply chains, moving production closer to home, and making their operations more efficient. However, a growing number of them are also warning that future sales and profits may be lower than expected. Capital expenditure, or capex, meaning how much companies plan to spend on things like new equipment or technology, is an important indicator of how confident businesses feel. This is especially important for the US technology companies that have been driving so much of recent stock market growth. Many of these firms have said they are sticking to their 2025 spending plans – a positive sign which has been welcomed by the markets. We will be watching closely to see if these business investments actually pay off. 

Around a third of the largest listed companies in the US have reported so far. We will share another earnings update in the coming weeks as more results come through.

Stock highlight of the month: Howden Joinery

Howden Joinery has shown consistent growth to become the UK’s largest supplier of fitted kitchens, with an estimated market share of around 30%. This figure is based on UK kitchen installations, and we believe the total market opportunity to be greater when considering commercial and other joinery-related products. Howden focuses only on the trade customer (rather than the consumer that only returns once every 15 years) and owns most of the value chain – being the brand, manufacturer and distributor through its highly dense depot network. Crucially, depot managers have the power to adjust pricing based on local market conditions. The company’s latest trading update landed well with markets, with management noting a positive start to the year, with growing revenues and the company on track with its outlook for 2025, including plans to open around 25 new depots in the UK this year.

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Source: atomos. Information correct as of 1 May 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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