Economic and Markets Update – May 2025

Markets Recover, but risks remain

Key Points:

• Markets cheered Trump’s tariff reversal, but global risks remain.
• Australian equities are trading at elevated valuations despite weaker earnings.
• The RBA resumed easing, while the Fed remains cautious.
• US recession risk has eased, but downside remains.
• We remain defensively positioned with increased cash allocations.

Markets have rallied on President Trump’s tariff reversal, but inflation, policy uncertainty, and elevated valuations continue to cast a long shadow. Australia’s rate cuts offer relief, but in the US, the Fed remains cautious. Valuations look stretched, especially in equities, and our portfolios are positioned defensively while awaiting better entry points.

President Trump’s ‘Liberation Day’ may have passed, but the aftershocks of his trade policy linger. Even the US Court of International Trade is getting in on the act saying the tariffs are illegal and need to go through Congress. The reversal of earlier tariffs has lifted market sentiment, with investors hopeful that geopolitical tensions may ease. However, in our view, this optimism is running ahead of fundamentals. In the US, inflation remains stubbornly high, complicating the Fed’s ability to act despite slowing growth. Meanwhile, in Australia, inflation has returned to the target band, and the RBA has resumed rate cuts, offering some tailwind to domestic assets.

Click here to view the full update.