Investment Viewpoint: climbing the walls of worry

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Markets and macro insights with Brian Flavin, Senior Research Analyst

What was situation in the markets last week?

• The underlying trend remains one of gradual recovery from the ‘Liberation Day’ equity drawdown. World equities rose another 3% in euro terms last week, leaving them 8% off their lowest levels in April but still at around 12% below the February highs.

• The marginal newsflow around trade and tariffs has been better, and continued last week with confirmation of tariff relief for cars and auto parts, as well as signals from China that it is open to talks with the US.

What further positive signs are there?

• The good news regarding potential tariff relief comes on top of some prior de-escalation of China-US trade tensions and reports of progress on trade deals with other countries. Additionally, there has been reinforcement from the results of the Q1 reporting season, particularly in the US. Last week’s focus turned to some of the ‘Magnificent 7’, with, most notably, Microsoft and Meta issuing better than expected reports and maintaining or increasing their capital expenditure commitments to AI. The more consumer-exposed Apple and Amazon warned on the impact of the tariffs but there is a sense that much of the negative effect has already been priced in. More broadly though, about 70% of the S&P 500 have reported so far and are tracking a significantly higher earnings growth than the 6% year on year (y/y) previously expected.

What was the situation in Europe?

• In Europe, about 45% of the Stoxx Europe 600 have reported to date, but the earnings surprises are more modest, and the consensus is to expect a single digit percentage decline in the region’s Q1 y/y earnings number. Such a decline would be its first quarterly reduction since Q1 of last year.

• Not surprisingly then, European equities have seen the largest downward revisions to 2025 earnings since the end of March. The consensus is that we should expect a 3% growth in Europe excluding the UK in 2025, down from nearly 9% previously. By contrast, the US has seen downward revisions of just 2% over the same period and consensus is still predicting 11% growth in 2025.

What has the response to the tariff threat been?

• Focus has turned to how companies have altered their planning in view of the tariffs already announced, and in this regard, many have been turning their attention to mitigation strategies such as shifting supply chains, expanding domestic capacity and improving operating efficiencies. The ultimate impact on corporate profits should therefore be less than initially feared.

• This improves investor confidence and barring an outright recession means we are likely travelling through or past peak policy uncertainty right now. We should bear in mind that investors have already seen the Trump administration blink twice since ‘Liberation Day’ as a result of falling markets.

What was the news on current economic growth?

• The news was busy on the economic front last week as well. In the US, data showed that Q1 GDP contracted at an annualised rate of 0.3%, which was below typical expectations but distorted by a jump in imports in advance of the tariff deadline, so not after all surprising. On inflation, core PCE for March on an annualised basis came in as expected at 2.6%. This is the figure the Federal Reserve will be watching closely over the coming months in order to assess the impact of any tariffs on prices. The ISM Manufacturing Index came in at 48.7, ahead of the 48.1 estimate but still in contractionary territory.

• The April US jobs report released last Friday showed that the labour market remained resilient even after the tariff announcements. 177k jobs were added, higher than the 135k expected. However, this figure is a lagging indicator, and we would note that other data, such as job openings and weekly initial jobless claims did signal modest softness in the labour market earlier in the week. The report’s results can nevertheless still be seen as favourable for markets.

How should the overall situation be viewed?

• Every indicator suggests a US mid-cycle slowdown or possible technical recession as opposed to a full-fledged recession, similar to 2022 or 2018. In that case, we may already have seen the worst of the market lows in April. In Europe, the Eurozone economy grew by 0.4% in Q1 2025, accelerating from 0.2% in the prior quarter and beating market expectations. However, these numbers could also be distorted by businesses and consumers stockpiling goods before implementation of US tariffs. Eurozone core inflation for April came in higher than expected at 2.7% y/y (above than the 2.5% predicted), driven by spending on services caused by the timing of the Easter holiday. This is unlikely to deter the European Central Bank from easing rates further.

How has Goodbody responded?

• Within the equity mix, we reduced our overweight to the US region in January because we felt that the relative performance of the US versus the rest of the world had become extreme. We also felt that the strong dollar at that time—along with the developments in US trade and immigration policies—could affect the growth of US companies.

• Rolling forward a few months, we can see that the US market has underperformed significantly, and the exchange rate has now adjusted. Therefore, we have started to gradually increase our exposure to the region once again. However, the ongoing volatility means that at asset allocation level we retain a neutral view on equities overall.

The week ahead: what to watch out for

This week, the key highlight on the macro calendar is the decision from the US Federal Reserve on Wednesday regarding interest rates. No alteration is expected for the moment, although the market is currently pricing in four cuts by the end of the year. In Europe, we get March Retail Sales data on Wednesday, followed by the Bank of England rate decision on Thursday. The Bank is expected to cut rates by 25bps next week. Finally, we receive Chinese April trade data on Friday, which should prove interesting given the recent trade tensions.