Market Stories By Fathom, 04/07/2025

The first half of the year brought its fair share of drama. April kicked off with a sharp global equity selloff, sparked by renewed U.S.-China trade tensions. That brief storm wiped out some early gains, but it didn’t last long. A wave of central bank U-turns, more dovish tones, and surprisingly resilient corporate earnings helped lift sentiment again. By the end of H1 the S&P 500 clawed back into positive territory, and European and Asian markets especially Germany and Hong Kong had a stellar performance.

But while headlines fixated on the impressive Q2 rally, another story was quietly taking shape beneath the surface: the U.S. dollar was tumbling. The DXY index fell by 7.1% in Q2 and Emerging Markets didn’t waste the opportunity. They rallied 12.2% in the quarter helped by supportive local fundamentals but also boosted by a macro tailwind. There’s a well-documented relationship here: over the past five years, a 5% drop in the dollar has typically translated to a 4% bump in EM returns each quarter. The math held up.

Of course, performance depends on your vantage point. For euro-based investors, the U.S. equity euphoria told a different story. In euro terms, the S&P 500 is actually down 11% from its February highs — a reminder that FX can make or break global returns.

Meanwhile, liquidity quietly keeps rising. The U.S. M2 money supply hit a record $22 trillion in May, up 4.5% year-over-year even higher than its March 2022 peak. Historically, every 1 percentage point increase in M2 growth adds about 2.3 percentage points to the S&P’s 12-month forward returns. In other words: liquidity continues to be the unsung hero of this cycle.

On the policy front, the U.S. Congress passed the latest Senate-amended bill by a razor-thin 218–214 vote. The numbers are huge: $3.4 trillion in additional deficits through 2034 and a $5 trillion increase in the debt ceiling, which the Treasury estimates will keep the lights on through 2027. The policy narrative has obviously shifted from cost cutting (DOGE acts) to boosting nominal growth, and fiscal dominance over monetary stability.

The bill passage has now greenlighted Trump’s renewed trade offensive. With the bill signed, he’s preparing to unilaterally set new tariff levels ahead of a July 9 deadline floating rates between 10% and 70%. The U.K. and Vietnam are among the few countries with temporary reprieves via bilateral deals. The U.S.-China trade truce remains in place until mid-August, and we have seen concessions from both sides. But talks with Japan are stalling, and EU negotiations continue quietly in the background. Trump made it clear: no extensions are on the table. As we have already seen so many policy swings, his words should be taken with a bit of salt.

Despite the looming trade risks, sentiment in the eurozone has taken a surprising turn for the better. After weathering the energy shock, the region’s economy started showing signs of resilience — growing 0.6% in Q1. Some of that was driven by frontloading ahead of U.S. tariffs (Irish pharma exports, for example), but domestic demand has also picked up. Germany is ramping up defense and infrastructure spending, Spain and Portugal continue to outpace expectations, and investors are increasingly viewing the eurozone as a stable alternative to the U.S. The market implication is a surge in demand for Euro credit.

Still, the trade clouds are gathering again. That Q1 boost from early exports is already fading, according to April data, and new tariffs are starting to disrupt supply chains. Anecdotal signs of excess Chinese supply hitting Europe are also mounting. All this points to a likely Q2 contraction for the eurozone. The uncertainty is weighing on both business investment and consumer spending — the engines of growth.

Looking ahead, we’re cautiously optimistic. Rate cuts are underway, credit is expanding, real incomes are rising, and fiscal spending (especially in Germany) should support growth later this year. But the next few months will be tricky.

That political trade tension makes the ECB’s job even harder. Inflation hit target in June and is likely to undershoot in the coming months. Combined with weakening trade and external demand, this gives the ECB reason to continue cutting. But if policymakers are confident domestic demand will hold up, they might look past this tariff-induced slowdown and keep some dry powder for the next downturn. A pause for now is justified.  

Alexandros Tavlaridis