US strength drives market performance

In our latest monthly market update video, our Investment Analyst Jack Amy looks back at a positive month for equity markets in June and explores whether US can stretch its fiscal position before bond markets react. You can also find a written version of his commentary below.

June saw a return of calmness to equity markets. Buoyed by a period of relative policy stability, better than expected economic data, and crucially a more optimistic outlook for corporate profitability, global equities did well. Much of this performance was driven by US strength – with the S&P 500 hitting its first all-time high since February, and marking a full recovery since its fall in early April. 

Geopolitics did, albeit briefly, return onto investors’ radars. Israel and the US led attacks against Iran, with both nations claiming the Iranian nuclear weapons programme had hit a critical point. Energy prices jumped – with the oil price jumping by $10 overnight. However, a limited Iranian response led to energy markets round-tripping to their pre-strike levels. 

Economic data was mixed. Inflation data (particularly the Personal Consumption Expenditures measure followed by the Federal Reserve) was slightly higher than expected. Jobs data, though, remained relatively strong. Minutes from the Federal Reserve suggest they remain concerned about inflation risks in the US. In the UK, strong GDP growth in the first quarter of 2025 was confirmed in the last revised numbers, but the UK economy suffered in the second quarter, and the Bank of England is concerned that this economic malaise could continue. 

Markets also began to consider who would lead the Federal Reserve when the current Chair, Jerome Powell’s second term ends in 2026. The prospect that the new Fed chair would be more swayed by President Trump’s demands for looser monetary policy sent rates lower towards the end of the month. 

June also saw details added to the Trump administration’s flagship fiscal bill – the ‘One Big Beautiful Bill’. Despite cuts to various welfare programs, the bill looks like it will further increase the US’ deficit. Whether this is fiscal profligacy or a policy manoeuvre that will keep the US economy growing faster than its peers remains to be seen.

Data for the month

This month’s figure is $4 trillion. This is the amount the Trump Administration’s One Big Beautiful Bill Act will add to the US’ deficit by 2034. While US government bond markets are yet to punish the US government for its fiscal largesse – we think the US’ growing deficit will eventually lead to a higher borrowing cost for the US government.

Question for the month

How far can the US stretch its fiscal position before bond markets react?

The latest budget from the US contains a large amount of unfunded spending. Unless the US economy grows at a fast pace for a number of years, their fiscal deficit – relative to the size of the US economy – will grow. Usually, fiscal irresponsibility is punished by markets. An example of this is the premium the UK government has to pay relative to the US – despite broadly similar debt-to-GDP ratios. 

However, the US enjoys a privileged position. It issues the world’s reserve asset, has a very wealthy population which it taxes, and in recent history has benefitted from consistently strong economic growth. The prospect of fiscal pain is not appealing though. Higher taxes would likely slow economic growth. Printing more dollars would cause it to be a less attractive currency to hold. These are not attractive scenarios for bond investors, though. 

Currently, it seems markets are pricing in a future where the US is able to muddle through, and there is no ‘breaking-point’ reached. This optimism may not hold. 

So, what does this all mean for portfolio positioning? 

We continue to hold a slightly conservative stance, with the potential for tariff-induced inflation or economic slowdown potential issues for both the US and the rest of the world. We also maintain an underweight to longer-dated bonds, given the upside risks to inflation, as well as the potential fiscal impact of the US budget. Conflict in the Middle East, regardless of how quick, reminds us of the role that commodities can play to manage geopolitical risks.