Nutmeg investor update: May 2025

At a glance:

• There were steep, headline-grabbing falls in many financial markets in early-April as investors digested the full implications of the US tariff announcements made on 2 April.
• As the month progressed, investors found steadier ground and confidence recovered. This saw many asset classes finish the month around where they started it, after sustained recoveries.
• The S&P 500, which reflects the performance of the 500 largest companies in the US, was down 0.7% in April, while the growth-focused Nasdaq was up by 1.5% in US dollar terms.

What happened in financial markets in April?

April was a month where so many things happened that it is difficult to know where to start. Of course, the major event that spooked markets was the announcement of the ‘Liberation Day’, levying tariffs on the US's largest trading partners.

These tariffs were significantly higher than had been anticipated or communicated ahead of the event. Many asset classes, including equities, fixed income, and currencies, reacted very negatively to the announcement. They then started to recover after President Trump announced a 90-day pause a week later, which saw one of the best single-day gains on record for US equity markets.

A second period of volatility in the latter part of the month was linked to the potential replacement of the chair of the US Federal Reserve, Jerome Powell, which was received very poorly by investors, before being refuted by the US president.

The main impact was on the US equity market, which nevertheless managed to recoup most of its initial losses. The S&P 500, which reflects the performance of the 500 largest companies in the US, ended the month down 0.7%. That decline was led by energy and healthcare stocks, with the former particularly impacted by fears of lower growth in the US potentially affecting the energy sector. The growth-focused Nasdaq index actually increased during the month by 1.5% in US dollar terms.

In Europe and the UK, which were similarly volatile, returns for the month were largely flat. We saw a similar outcome in other regions, with only Chinese stocks down more significantly by 4.5%, impacted by the extremely high tariffs imposed on China.

The bond markets have also been impacted, seemingly caught between two dynamics:

1. Investors worried about economic growth and seeking the safe haven attributes of fixed income with a view that central banks may need to reduce interest rates, and
2. Investors worried about inflation and their fear that banks will need to keep rates higher, even in a weaker growth environment.

As a result, the UK’s Gilt market, similar to US Treasuries, experienced some weakness during the month. However, it still managed to finish April largely positive, up 1.7%. Some of Nutmeg’s lower-risk investors would have felt the effects of this volatility on their portfolios, but this was largely recouped by the end of the month. 

Currency risk: why does it matter?

For those of you interested in how currency risk works and why it matters to how we manage portfolios, it is worth noting that market performance can be quite different depending on which currency is used. For example, the S&P 500 was down 0.7% in US dollars (as we usually quote them in local currency terms), but looking at it from a pound perspective (so for a typical UK-based investor) it would have been down by 4%. This difference impacted our portfolios as we only partially hedge currency risk, and it was particularly felt with the strength of the pound versus the US dollar.

What has the volatile environment meant for portfolio positioning?

As discussed in our previous updates, we had been running a small equity overweight this year – meaning we were holding modestly higher equity exposure than our long-term benchmark. This was on the basis of improving global growth and positive momentum in the US economy. With the level of uncertainty added by the tariff announcement, we reduced our portfolio exposure on the following trading day by selling a small amount of holdings in mostly large US companies, retaining the proceeds in cash.

We think it is a prudent move in the current environment. We believe a more bearish tone would have been inappropriate in a market that was spooked by the tariff implementation and indeed rebounded strongly, following the 90-day pause on many of the most severe tariff rates. Similarly, right now it seems potentially premature to add more riskier assets (such as equities) to portfolios, despite the tariff pause.

Trade barriers have still been increased significantly since the turn of the year, particularly in China where escalation has resulted in a punitive 145% effective rate. So, we expect tariff headlines to continue to dominate the news over the coming weeks, and equity markets to continue to react to that news flow. We will, however, update exposure rapidly if we perceive some improvement or deterioration in the environment.

What is the Nutmeg outlook for the US economy and global financial markets?

Clearly, trade barriers such as tariffs represent a shock to economic activity both within and outside the United States. We believe that tariffs will persist to some degree – the US administration has made this a core policy anchor. Therefore, we expect US economic growth to be lower, and inflation to be higher than our previous expectations. But against all of the negative headlines, there are also reasons for cautious optimism:

• The labour market is highly resilient
• Wages are growing in real terms and consumption has remained strong

There is no doubt that tariff announcements are a headwind for economic growth and consumer and business confidence, but our current base case expectation is not for a US recession. We believe these positive dynamics remain in place and will be enough to keep the US economy growing.

• Firstly, we expect the tariff regime to evolve over the coming weeks and months
• Additionally, we think earnings growth for US corporates will remain largely positive as the country relies on imports and exports far less for economic growth than many other developed markets

We continue to monitor portfolio performance and risk on a daily basis. Following our reduction in equity holdings in early April, as prices have recovered we have allowed the portfolios' exposure to drift positively without rebalancing. We are looking for further opportunities to refine our exposure, which will depend on incoming macroeconomic news and market data.

For deeper analysis on April’s market volatility, you can also view the replay of our recent webinar delivered to our clients by Nutmeg’s Head of Investments, James McManus, and Head of Financial Advice and Guidance, Claire Exley. You can also read about the Nutmeg Investment Team's views on the Bank of England's recent interest rate cut and the potential path for rates for the rest of the year. 

Risk warning

This update was recorded on 6 May 2025. All figures, unless otherwise stated, relate to the month of April 2025. 

Sources: MacroBond, Nutmeg and Bloomberg. As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not a reliable indicator of future performance. We do not provide investment advice in this update. Always do your own research.