Markets – May 2025
What was the point of April’s market chaos?
The fog of uncertainty created by U.S. President Donald Trump’s trade war is suddenly lifting, although doubts over its longer-term economic impact will linger. What was the point of all that ‘Liberation Day’ chaos and confusion?
Trump’s tariffs were forecast to raise US$2.7 trillion in federal revenue over the next decade. Given the size of the US Federal budget deficit, the tariffs were all about reining in the deficit and increasing investment in American manufacturing.
2024-2025
However, the initial reaction created chaos and clogged up the wheels of the global trading system.
Large multi-nationals and small manufacturers reported signs of a complete breakdown in US/China trade. Shipping contracts were being cancelled, as orders for Chinese-manufactured goods were ripped up. Businesses in both the US and China were cutting sales targets, reviewing staffing levels and business plans.
The walk-back of US-China tariffs now sees general tariffs on China’s imports reduced to 30% for 90 days. Investment markets celebrated by posting strong gains over the week of the announcement.
US recession outlook has improved
The tail risk of a US recession has fallen markedly. Consensus among economists now is the chance of a recession at around 35%—down from more than 50% in early April. The removal of this risk, along with recent strong US quarterly corporate earnings and a weaker US dollar and oil price, have all supported equities.
But caution is needed. There has been a significant bounce – but some consolidation is likely, given there is still high uncertainty over global trade policy and the US economy.
Whether this was chaotic ‘policy-on-the-run’ or a grand plan, there are two takeaways to emphasise:
- The Trump administration has shown it is unprepared to tank the US economy in pursuit of its long-term economic agenda. This is unsurprising given the midterm elections will take place in November 2026.
- The US economy has more momentum than investors appreciated. Growth has been more resilient despite sentiment indicators being weak. Corporate earnings have surprised on the upside, which underpins jobs and investment.
- The tariff rate is now materially higher than at the start of the year. This will lead to higher prices and eat into consumer spending power;
- We are still unclear whether the fall in business and consumer sentiment indicators will translate into lower business investment and consumer spending;
- We do not know if the US can reach a constructive deal with Europe; and
- Finally, the US equity market trades on a relatively high multiple of 22 times the next 12-month earnings. With less transparency on earnings growth and the market consensus still around 11% earnings per share growth in 2026, expect more volatility if corporate earnings fail to deliver.
It is also essential to watch the bond market, which may present another risk if yields rise too high. They have continued to increase over the month, though they are still manageable at around 4.5%.
The US fiscal deficit position is an important factor here. Moody’s downgrade of the US credit rating reflects its longer-term concern that the current deficit is unsustainable and has consequences.
Australia’s outlook remains strong
Recent employment data in Australia suggests the Australian economy is in good shape. Employment growth was up +89K in April versus a consensus of +20K, and the unemployment rate held steady at 4.1%.
The outlook for the Australian share market remains positive due to: the supportive domestic economic environment; the ongoing growth of the Chinese economy feeding into commodity demand; the RBA’s cut in interest rates this week; and the federal government’s ongoing high fiscal expenditures.
Despite ongoing tariff uncertainties, the U.S. economy continues to demonstrate remarkable resilience. Its strength lies in deep and liquid capital markets; a dynamic entrepreneurial culture; a competitive and open economic system; a robust venture capital and technology sector; and institutions that have historically served investors well.
Australia remains one of the few countries to retain a AAA credit rating. We benefit from a consistent trade surplus; a well-regulated and well-capitalised banking system; abundant reserves of future-facing commodities; and a young, growing population.
High-quality equities continue to offer attractive income returns—comparable to cash and term deposits—while also providing exposure to economic growth, corporate earnings, and investment activity.
As always, investing comes with its challenges. Navigating these is an inherent part of the investment journey.
Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.
I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.
Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au
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