- The first half of the year saw heightened volatility as the US market slid before recovering to new all-time highs repeatedly
- The US tariff rate was expected to be at 25% but has now reduced to less than 15% as trade deals are made1
- Growth is slowing in the US as continued trade policy uncertainty is starting to weigh on consumers and corporates
What happened in H1 2025?
The US market experienced heightened volatility in the first half of the year. On 27 January, Chinese AI developments caused US tech stocks to pullback before recovering to all-time highs. Then sentiment took a turn with consumption and retail sales falling causing the market to slide through the second half of Q1. The second quarter was marked by a sharp drop of 11.5%2 in the S&P 500, the main US stock market index, caused by ‘Liberation Day’, where Trump declared a national emergency over the US trade deficit and announced a two-tier tariff system:
- 10% baseline on nearly all imports
- Country-specific reciprocal tariffs (11-50%)3
Whilst Trump had been very vocal about implementing tariffs on the rest of the world, the scale of the ones announced on Liberation Day were unprecedented. This caused markets to plunge as economists feared an ensuing global trade war which would see economic growth halt and inflation resurge. A week later and Trump backtracked, pausing the individual tariffs for 90 days and announcing exemptions on key sectors. In this negotiation window, deals have been made and the US effective tariff rate has pared back from 25% to under 15%, however, this is still the highest level they’ve been since the late 1930s. Regardless, the US market rallied strongly on the pause and finished the first half of the year at all-time highs (again).
US effective tariff rate, %
Source: JP Morgan Guide to the Markets
What to expect in H2 2025
Tariffs create upward pressure on prices which has bumped up inflation expectations for the US. The fear of rising prices has made consumers nervous in the US, as evidenced by declining consumer confidence and how they view the environment for making purchases of durable goods (graphed below). Additionally, the trade policy uncertainty has caused companies to ‘wait and see’ lowering their hiring and capex intentions. In essence, it is the fear of the unknown that is causing economic growth to slow in the US.  This puts the Fed in a tough spot as they want to cut rates to stimulate the economy but can’t with the danger of resurgent inflation. Whilst the market expects two more rate cuts this year, we think there is a good chance that they sit on their hands and don’t cut at all.
Source: JP Morgan Guide to the Markets
Despite these headwinds, we are conscious that the US has just hit all-time highs and double-digit earnings growth is expected from US corporates through this year and next. Tech earnings have a very strong correlation to capex (R&D spend) so it is very possible we see earnings downgrades in the near future if companies do begin to spend less. There is particular pressure on AI spending following DeepSeek and China’s cheap AI innovation we witnessed in Q1.
Source: JP Morgan Guide to the Markets
Bowmore Portfolios
It is important to note that a slowdown does not mean a recession and our base case is still for the US to avoid a recession. However, we think there is a strong possibility of other Equity regions outperforming the US on a medium-term basis, putting an end to US exceptionalism (for now). This will likely be compounded by a weaker dollar as capital flows out of an uninspiring US market. We have recently reduced our US Equity exposure, having participated in the ride back up through May and June to all-time highs, in favour of Emerging Markets which should benefit from a weaker dollar.
Source: LSEG DataStream, data as at 17/07/2025
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.
Sources:
1JP Morgan Guide to the Markets
2Refinitiv Workspace, July 2025
3Capital Economics, July 2025