The big three (May 2025)

1. UK and US reach a deal

On 8th May, the US and UK announced a preliminary trade agreement aimed at easing recent transatlantic tensions and providing targeted relief to key industries. The deal reduces US tariffs on British steel, aluminium, and cars, while the UK agreed to expand market access for US beef, ethanol, and agricultural machinery. Although the agreement maintains a 10% tariff on most UK goods, it allows up to 100,000 British vehicles to enter the US annually at a reduced 10% tariff, down from 27.5%.

While economically modest - given that the UK accounts for only a small portion of US trade - the deal is symbolically significant, signalling a shift toward renewed trade diplomacy. It also sets a precedent for potential agreements with other nations, with over 75 countries initiating trade discussions with the US and 15 reportedly receiving proposals. The announcement contributed to a positive market response, reflecting broader investor optimism amid easing trade tensions and a favourable earnings season.

2. To cut or not to cut

On May 7th, the US Federal Reserve maintained its benchmark interest rate, reflecting a cautious stance amid persistent inflationary pressures and a resilient labour market. Despite signs of moderating economic growth, the Fed emphasised the need for sustained evidence of inflation aligning with its 2% target before considering rate reductions. Recent data indicated that while inflation has eased from its peak, it remains above desired levels, and the labour market continues to exhibit strength, with unemployment rates near historic lows.

In contrast, the Bank of England reduced its base interest rate by 25 basis points to 4.25% the next day, marking its fourth cut since August 2024. This decision was driven by concerns over subdued economic growth and the impact of global trade tensions, particularly US tariffs affecting key UK exports. The BoE acknowledged that while headline inflation is projected to rise temporarily to 3.7% in Q3 2025 due to energy prices, underlying domestic inflationary pressures are moderating. The BoE anticipates that inflation will return to its 2% target by late 2027 and has revised GDP growth upwards to 1% for 2025.

3. US earnings strong despite uncertainty

With the US market well into Q1 earnings season, broad corporate resilience amid a complex macroeconomic backdrop has been the overarching theme. S&P 500 companies delivered 12.8% year-over-year earnings growth in Q1 2025, marking the second consecutive quarter of double-digit expansion. Approximately 76% of companies reported earnings above estimates*.

Earnings strength was seen in sectors such as communication services, technology, and healthcare, while commodity-sensitive sectors like energy and materials faced pressures, reflected in the energy sector’s -14.4% earnings decline*.

However, forward-looking sentiment remains cautious, with analysts reducing Q2 2025 earnings estimates by 2.4% in April, a steeper cut than historical norms. Valuations remain slightly elevated, with the S&P 500 trading at a forward P/E ratio of 20.2, above both five- and ten-year averages, suggesting measured investor optimism amid ongoing economic uncertainty*.

*Source: FactSet, 02/05/2025