QARP - Q2 2025 Equity Market Outlook

2025-04-19 02:25:00 ET

Summary

• When the U.S. announced a fresh round of tariffs on April 2, the U.S. economy was still gaining momentum and, in our view, more resilient to exogenous shocks than investors had appreciated.
• We do acknowledge that a worsening trade war, further fiscal austerity or yet another exogenous shock on an already weakened economy may ultimately trigger a recession.
• With a significant amount of tariff shock now priced in, we are constructive on global equities for the rest of the year.
• We believe an ongoing recovery in the $28 trillion global industrial economy may be dampened, but not derailed, and that underlying momentum in the goods economy may support equities that are most levered to it.

By Raheel Siddiqui

While surging tariffs and a hard sell-off have sown uncertainty, we expect negotiations to bring some relief on initial tariff proposals, and that sharply slower growth seems more likely than a U.S. recession. We also believe stimulus in Europe and China may rejuvenate global industrial activity (albeit at a slower pace), and recommend styles, sectors and regions that are most geared to it.

Investment Themes and Views ¹

We have retooled the methodology behind our equity recommendations to provide more actionable guidance for active asset allocators and portfolio managers. Our methodology is designed to assess developing risk and opportunity cycles at the index and subcomponent levels (countries, sectors, regions and styles) and be more responsive to changes in market sentiment. The targeted investment horizon for these recommendations is approximately 12 months, but we expect more frequent adjustments at the sub-index level.

Tarrifying Shocks

The announcement of DeepSeek’s cost-efficient generative AI model in January rattled the Magnificent 7, ¹ the main drivers of the broader market’s bull run in 2023 and 2024. Already under pressure from DOGE cuts, weakening CEO and consumer sentiment, the rapid escalation of the trade war hit the U.S. equity market hard: As of the close on April 4, the S&P 500 Index had tumbled more than 1000 points (17.4%) from its peak, generating widespread recessionary fears.

While we believe an overdose of growth-inhibiting policy can push even a relatively healthy economy into recession, we think the U.S. hasn’t yet reached that point, and that the market’s action thus far is incongruent with the onset of a recession. Rather, we think the performance during the sell-off suggests relative strength in some of the more cyclical economic sectors in the U.S. and around the world:

• Value stocks, which tend to be more sensitive to movements in the overall economy, outpaced growth stocks during the sell-off in both large caps and small caps. ²
• Traditionally cyclical sectors such as Financials, Industrials, Materials and Energy have outperformed the broader index. ³
• As demand for global goods has improved (as we anticipated in previous reports ), global markets in more cyclical regions—including manufacturing-heavy Europe and Japan, as well as EM and EAFE—have made notable gains against the less cyclically sensitive U.S. market: Year-to-date, the MSCI World Ex-U.S. Index has outperformed the MSCI U.S. Index by 15%—its largest calendar-year gap since 1993. ⁴
• The U.S. dollar, historically a countercyclical currency, weakened as investors rotated out of expensive U.S. stocks and into more attractively valued and faster-growing non-U.S. markets.
• Credit spreads, often sensitive to rising economic stress, have widened only modestly. ⁵

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