Market Update: Markets recalibrate to Trump 2.0

What a week. No sooner had the US shocked the world by bombing Iran’s nuclear facilities than President Trump declared a ceasefire and subsequent end of the Israel-Iran war. More astonishing still was that the Israeli and Iranian governments obeyed, albeit only after their strikes made ‘the Donald’ lose his rag in the most unpresidential manner the White House lawn has ever witnessed in public.

We wrote last week that US military involvement was ‘priced in’, and therefore should not knock markets too badly. Quite the understatement. After a very short-lived surge in Asian trading, oil prices rapidly fell on Monday to where they were before the conflict broke out. US stocks have now risen beyond February’s all-time highs. Markets’ positivity and willingness to look past the scary headlines is remarkable. Things are slightly less rosy below the surface, but that decisive swing of sentiment towards relentless optimism puts us in good stead for the challenges ahead.

Resilient markets are back to ‘seriously, not literally’.

Oil’s rise and fall was the starkest sign of how quickly the mood changed. Brent crude sold off rapidly at the very moment that Iran fired its missiles at the US air base in Qatar (rather than oil tankers in the Strait of Hormuz). Oil traders took the attack as confirmation that Iran was only interested in a symbolic response to Washington’s ‘bunker buster’ attack, and the conflict would therefore die down.

Without the oil scare, investors were able to focus on an improving outlook for US earnings and their recalibration to Trump 2.0. Markets now see the president’s actions as an extreme “art of the deal”, but not a real attempt to destroy the existing global economic order. We discuss whether disparate US earnings are a good economic indicator separately.

There are rational arguments for markets’ historic positivity. The growth of the US shale industry – now the world’s largest oil producer – means Middle Eastern tensions are less of a concern for western economies. On the contrary, the fact that China, the world’s biggest oil consumer, now relies so heavily on Middle Eastern production, means that blockading the Street of Hormuz these days would amount to more of a win for the US than a threat.

Markets may be justified in predicting de-escalation after every US policy shock. The Iranian regime is clearly weak, unable to drag out any conflict in the absence Russian or Chinese backing, while Trump has repeatedly shown his desire to finish fights early. The ‘Trump wants a deal’ narrative is bolstering sentiment, while his show of strength has allayed fears that he will want to prove he is no ‘chicken’ (re: TACO trade) over the 9^th July expiry of the 90 day reciprocal tariff moratorium.

Consequently, investors are now somewhat confidently predicting that the 9^th July tariff suspension deadline will be rolled over. It feels like markets are back to the “seriously, not literally” Trump interpretation they had at the start of the year. They just had to adjust to Trump 2.0’s new extremes.

UK and European stocks lag, but have potential.

British and European stocks lagged behind this week (in local currency terms) leading some to say that American exceptionalism is back. On a year-to-date basis, though, the UK and Europe still lead of the US by about 4%. Moreover, the fact our stock markets did not burst upwards makes our prices look a little more stable.

NATO’s newly agreed defence spending target, 5% of GDP by 2035, means European fiscal expansion. Trump – and perhaps even Putin – will be gone by the time the bill comes due, so we are very sceptical that the 5% target will ever be hit. It nevertheless shows Europe’s spending aspirations.

Defence stocks are clearly the big winners, but it was notable that the spending pot includes 1.5% earmarked for defence-adjacent investment. That kind of spending is where long-term tech advancements come from, and could be a big help for Europe’s economy.

UK defence companies are among those winners – shown by Babcock’s announced share buyback. For the UK stock market more generally, it was good to see Norwegian software company Visma choose London for its share IPO. We wrote last week that UK markets have a liquidity problem, which is holding back investment, but the Visma news is one of several recent signals  that things are improving.

There are risks ahead, but markets are in a mood to breeze past them.

Investors are bullish overall, but not unwaveringly so. Indeed, it was counterintuitive to see the US-dollar index (measured against a basket of global currencies) continue its decline this week – to its lowest value in years. The US currency has now lost 10.5% since the beginning of the year, which increases the return gap for non-USD based investors like us. That is despite US assets strengthening as investors appear willing to take risks again.

Dollar weakness is an increasingly large concern for international holders of US assets. In dollar terms, the S&P 500 sell-off has fully recovered, but when you count in sterling, 2025 returns are 13-15% behind the FTSE 100 and Eurostoxx 600 respectively.

We have said before that dollar weakness is about capital outflows, but that makes slightly less sense this week, considering the rally in other US assets (and lack of an equivalent rally in Europe). Perhaps the weakness is now more about export nations’ financial actors converting their dollar payments from sales to the US into local currencies – where in the past they would just hold them in dollar assets. That is speculative, but it would make sense for a world with less US trade.

For now, investors’ optimistic sentiment is good preparation for the risks ahead: fiscal fears from Trump’s “Big Beautiful Bill” of tax cuts, and the 9^th July tariff deadline. Investors seem more scared of missing out on a recovery rally – like the steep one that followed the “Liberation Day” selloff – than of the risks. We should be under no illusion that these risks are real, and perhaps will only materialise with a long lag. We just hope optimism pulls us through until then.