Key takeaways

• Many of the world’s leading economies seem to be in a stronger position now than they were in January, despite the turbulence of the first quarter
• Uncertainty over the impact of trade policy has knocked market sentiment in the US. But this is still a quality market and the economy is holding up well
• Europe has responded to US tariffs, spearheaded by increased defence spending and a German fiscal U-turn. Structural problems still linger, however - we remain cautious over the region
• China has reasserted its tech capabilities and brought the private sector back to the fore. The government is in a strong position to offset any tariff-related damage

We may be looking at a new world order.

For markets at least, the early months of Donald Trump’s presidency suggest some regional recalibration is in order. After initially focusing on the positives of the White House’s policy agenda, investors have signaled their concern at an increasingly hawkish approach to trade in particular. 

Meanwhile two of the US’s prime targets have actually rebounded well this year. Europe has been buoyed by policymakers’ renewed fiscal vigor, while China has shown it is serious about lifting domestic consumption to mitigate the impact of tariffs.

As the world adjusts following a bumpy start to 2025, we are thinking of the next quarter primarily along these diverging regional lines.

Don’t underestimate the US 

There are clear risks circulating around US markets now. We anticipate a potential battle between reflation - driven by fiscal easing - and stagflation - with tariffs and a restrictive immigration policy likely to hamper growth. 

Clearly markets are beginning to worry. An equity correction in March saw US stocks fall from their all-time highs, and concerns are starting to feed through to consumer confidence. The extent of that decline is not yet clear, but some of our US-focused analysts are noticing the impact on their companies: one describes a “significant decrease in consumer sentiment as concerns around tariffs, inflation, and a consumer slowdown create a very cautious narrative for the near-term outlook”. 

But it is worth remembering that all this has happened remarkably quickly, and Trump does have an end game in mind - an improved trade balance and the onshoring of manufacturing - which would potentially benefit US stocks over time. And the S&P 500, despite its recent reversal, remains full of quality companies that are relatively well insulated against the impact of tariffs. These still warrant a place in any investor portfolio.

Moreover, the economy has proven broadly resilient, even if some soft data is starting to turn downwards. Corporate and household balance sheets are strong, which should support higher profit margins, abetted by the prospect of further tax cuts and deregulation.

This year, and this presidency, are just three months old. The picture is likely to stabilise soon. And history tells us that investors who bet against the S&P do so at their peril. 

A new Euro vision

Uncertainty in the US has encouraged investors to look elsewhere. For the first time in a while, eyes are turning across the pond. 

That’s due in large part to the European response to the US’s more isolationist approach, spearheaded by the new German government. The region has finally turned on the fiscal taps, investing heavily in defence. German Chancellor Merz, meanwhile, has managed to engineer the fiscal U-turn that brought the previous government to its knees. 

In years to come could this be seen as the watershed moment that inspired a long-evasive period of European growth? The market seems to be thinking in these terms, rallying especially around the defence and industrial names most likely to benefit from Europe’s fiscal injection. 

But it is easy to get swept up by market noise, good as well as bad. It is not clear how this spending filters into wider European earnings beyond the immediate beneficiaries. Nor does it necessarily solve some of the demographic and technological problems that have curtailed growth in Europe for the past decade. Policymakers in the region have grappled with plans to increase the region’s competitiveness, but with little sign so far of tangible progress. And we shouldn’t dismiss the risks emanating from US trade policy just yet. 

For the short-term at least, an improving narrative could prove self-fulfilling. One equity analyst looking at European industrials says: “German stimulus is a modest positive for fundamentals (given companies’ global exposure). But it is a bigger positive for sentiment and multiples”.

It has been some time since you could say that of Europe. 

China is back

The Trump administration has imposed a total of 20 per cent additional tariffs on Chinese imports, moving trade policy forward at a much faster pace than in his first term.

Yet our analysts are not unduly concerned. Only around a quarter of those focusing on Chinese companies expect tariffs to negatively impact profitability (compared with nearly three-quarters of US analysts).

In part that’s because China has made clear its intentions to mitigate the impact of US tariffs by boosting consumer spending. The two appear to be correlated: one equity analyst focusing on Chinese consumer companies notes that “if higher tariffs are imposed, the Chinese government will need to do more demand stimulation in the domestic market, which could be positive for consumer companies”. 

The government now recognises increasing disposable income and hiring as its top priority. Recent measures designed to achieve this aim have been significant if not stupendous, while Premier Li has expanded the overall fiscal package by raising the official deficit target to 4 per cent of GDP.

China has also reasserted its tech capabilities this year. Long considered to be vastly behind the US, the success of DeepSeek’s latest model, built at dramatically reduced cost to comparable efforts from US companies, has reversed that narrative and suggests investors will be encouraged to reconsider allocating to the country. This too may be related to activity across the Pacific - tech analyst Jonathan Tseng recently highlighted how tariffs and trade restrictions in advanced AI chips forced Chinese companies to improve their efficiency, “to make do with less”. He says that “DeepSeek succeeded because of restrictions, not in spite of them”. 

The Chinese government appears to be capitalising on this trend towards innovation by actively improving relations with private technology companies. The success of AI in the country could then prove a wider boon to productivity, translating into improved earnings across the economy. 

Once again, China is pushing itself towards the front of investors’ minds.