Tailwind for stocks: Markets enter new phase of 2025 with momentum

Paradigm Shift

S&P is close to 5700 and just -3.7% YTD. The Nikkei is up 20% from its April lows. The FTSE is logging the longest streak of consecutive winning days in its history (16 straight days up). The DAX, fueled by fiscal and defense policy, is up 17% for the year. And… our old favorite… Bitcoin… is back above $100,000.

~100 days into Trump 2.0… and here’s where we are:

In some ways, the world has changed… but in others, we’re right back where we started.

If January/February was a period of hope, expectations, and overconfidence… then March/April brought despair, disappointment, and anxiety. That said… after some political ping-pong… media bingo… and market whipsaws… we find ourselves almost right back where we began the year. Analogy: January felt like leading 3–0 with 10 minutes left… best players (Mag 7), best stories (AI, growth, strong dollar), best conditions (tariffs, Dogecoin, deregulation, M&A)… only to concede 4 goals in 10 minutes and trail 3–4 in extra time… pessimism everywhere… just to score a “Hail Mary” equalizer at the last second to make it 4–4… and we go to overtime.

That’s what 2025 feels like so far. Trump’s inauguration was the high… the tariff announcement and trade war escalation the low… then a gradual rebound (with wobble over Powell firing threat)… and now we’re back to where we started… and it’s just beginning.

As one investor put it – it seems the Trump administration responded to a few things:

1. The bond market,
2. The need for a populist president to stay popular (nothing like tariffs hitting people directly to curb enthusiasm),
3. And the realization that what works in real estate with “the art of the deal” and maximalist thinking… doesn’t translate to transatlantic and global policy and trade. Some games have winners/losers… others require win-win—or at least a slight edge to someone.

After the “liberation day” and the hard lines that were drawn, we’ve seen a number of turns:

• Less talking/tweeting.
• More Bessent, less Lutnick.
• Less escalation, more de-escalation (especially with China).

There’s not enough credit given to the “management team” that laid out a strategy (budget balancing), set a maximal negotiating position (end of the world), and then gradually backed off. Time will tell what the final outcomes are in terms of deals, tariff revenue, and the cost to the dollar, capital flows, American exceptionalism, and trust. But… at least the turns happened… and a more flexible approach emerged that might still deliver the original goals… though with many bumps along the way.

The recent narrative is one of pullbacks and de-escalation.

The focus has shifted to tariff delays, exemptions, negotiations, and trade deals. The end goal seems to be China. Europe will get some relief and likely attract capital and time (lower energy prices for starters). But… there’s a path to a more globalized world. The US acknowledges the significance and interdependence of its economy with China. Both countries hold levers for mutual pain (tariffs and embargoes vs. monopoly on rare earths and manufacturing).

Maybe this wasn’t the end of history… just a pause.

Positioning is “clean,” markets are up, and there’s a lingering risk of forced repositioning (especially for long/short funds). There’s a potential path to genuine market support from deregulation, foreign investment, FX normalization, and a delayed M&A cycle. There’s a chance of more foreign inflows (e.g., Novartis). But not all is rosy. The VIX is still firmly in the 20–25 channel… well above pre-“liberation day” levels. Concerns remain about corporate sentiment, earnings, and downward revisions (many dismiss Q1 as outdated hindsight).

Funny enough, the only real winners from the dips/recoveries were Mr. and Mrs. Retail Investor.

Long live buying the dip.

Capital Flows

It seems the US selling narrative was overdone. There was undoubtedly net issuance. It clearly rotated across asset classes (dollar, bonds, equities)… but… despite the hit to confidence in the US… and despite being merely “exceptional” now, not “truly exceptional”… the country still stands as a compelling place to park capital. Speaking with investors… there’s a shift toward neutral weight in Europe… rising concern about underweighting the region due to themes (defense, German fiscal policy), safe-haven flows, and valuation gaps vs. the US (e.g., oil firms, banks). There’s definitely rotation into India and Japan… and ongoing interest in MENA. But the most telling stat is the collapse in volumes. After April’s surge… May has returned to 2024-style pace… with a dramatic drop in daily volumes as markets normalize.

The Consumer

The data is fascinating. The US shows a lower savings rate but higher equity ownership. On one hand, this (~50% of the market) has been a massive wealth engine… on the other—cash reserves are being drawn down (partially for investment). In the UK—surprises from domestic consumption, likely supported by seasonality and 2025 weather. In the UK and Europe, savings rates remain high… employment (so far) too… and there’s potential for 3 rate cuts from the ECB and BOE in 2025, offering relief to consumers (shorter-term and more debt-heavy mortgage financing). Potential deflation due to cheaper Chinese imports… and possible effects of fiscal spending on real estate. For me… I’m watching employment. Boardroom anxiety and uncertainty may lead to preemptive layoffs… plus the looming threat of AI efficiency, reducing human labor needs.

The Constant Buyers

Retail investors and buybacks. Many noted that in April, retail was almost the only buyer—somewhat true. But also, this structural and annual dynamic of corporate and household buybacks is significant. The combined buying power of about $1 trillion per year acts as support in an IPO/issuance drought. But… if unemployment hits 7–8%?… Then those 53% of US equities held by households/401(k)s may be needed—turning from a tailwind into a headwind. On the other side… what can governments and regulators in Europe and the UK do to revive a culture of retail participation in their own capital markets?

University Endowments

It’s interesting how much chatter there is around endowments and foundations selling PE assets. The Yale/Swensen model (shifting toward private assets) evolved over the past 5–10 years. With that came more exposure to private markets, longer duration, higher returns… at the expense of liquidity. But the past 5 years have been hard (especially for 2020/2021 PE assets), fundraising is harder (DPI-focused), and exits are fewer. IPO markets remain shaky, and some funds face mismatches between assets and liabilities in the short term. “Private for longer” remains a relevant theme.

Europe

It’s May, and Europe is still outperforming. That… never happens. Usually, it’s January optimism that fades by March and is forgotten by May. Maybe it’s just about relative value, but I’ll take it. Europe has several tailwinds: deflation, fiscal stimulus, looser monetary policy supporting lending and SMEs (the backbone of Europe). The valuation gap with the US remains huge. Below $10 billion market cap, there are many opportunities still going into PE rather than public markets. We’re seeing early signs of consolidation – Italian banks, Saipem. The region remains under-positioned – for example, UK pension funds hold only 4% of their domestic market. Sometimes… boring is good – especially if you don’t want to guess the next US tweet.

Themes

The big themes of the past 12 months: AI and AI capex, Trump, defense and rearmament, Ukraine. In a theme-driven market, what’s ahead in the next 6 months? Unemployment, US defense budget, naval expansion, UK construction firms, commercial real estate, mainstream crypto, emerging markets.