November – January 2025

Returns for a Sterling investor over the last three months for a selection of indices are below:

Donald Trump’s election on 4^th November was a key driver of market returns over the period. The initial reaction of financial markets was extremely positive, with the S&P 500 rising +5.60% and the Russell 2000 +9.72% through to month-end. Through December and January, however – market enthusiasm gave way to a more grounded analysis as investors began to digest the impact that spending increases, tax decreases, immigration crackdowns, and tariff implementations would have on the US economy. On 20^th January – the day of Trump’s second presidential inauguration – the president declared that Canada and Mexico would face 25% tariffs from 1^st February, announced the withdrawal from the 2015 Paris Agreement on climate change, as well as the removal of subsidies for electric vehicles – underlining his focus on energy and oil by claiming the US would ‘drill, baby, drill’. The S&P 500 was broadly flat through December and January, rising just +0.14%, whereas the Russell 2000 fell -6.04%.

On 18^th December, Fed Chair Jerome Powell gave markets a rather gloomy Christmas by warning that ‘we are going to be cautious about further rate cuts in 2025’. In what was subsequently dubbed a ‘hawkish cut’, this statement came alongside a reduction in their base rate of 25bps, an acknowledgement that the cut was a ‘close call’, and disappointment that inflation had moved ‘sideways’ in recent months. The S&P 500 fell -2.79% from this statement to the end of December, with the Russell 2000 falling -4.45% – ensuring there was no ‘Santa Rally’ in 2024. By the end of January, money markets were implying a 60% chance of two cuts in 2025, with a 40% chance of either zero or one – contrasting with markets pricing in four cuts at the start of November.

In late January, markets were rocked by Chinese startup DeepSeek’s release of an AI chatbot capable of rivalling market leader ChatGPT’s ‘o1’ – but developed for a fraction of the cost. The company claimed it only took 2 months and under $6m to create – raising questions about the necessity of multi-billion dollar investments in Nvidia-based AI infrastructure by tech giants like Microsoft, Google, and Meta. The news significantly impacted the chip sector, with Nvidia and Broadcom falling -16.97% and -17.40% on 27th January. Whereas this development challenges the outlook for US mega-cap tech companies – analysts have been highlighting that ‘Jevon’s paradox’ could ultimately play out, where increased efficiency leads to higher overall demand and resource consumption. Additionally, it has also been noted that this could inject new competition and innovation into the AI landscape.

It was a tumultuous 3 months for Europe, with politics, economic data releases, and index returns all grabbing headlines. Michel Barnier’s tenure as Prime Minister ended abruptly in France due to a no-confidence vote following his attempt to implement an austerity budget. Similarly, Germany saw the collapse of its three-party coalition on 6th November, leading to the dissolution of the Bundestag on 27th December and elections scheduled for 23rd February. On the economic data side – headline inflation for January reached 2.5%, above expectations of 2.4%, and marking the 4th consecutive monthly increase. GDP growth was also lethargic, with initial figures for Q4 2024 coming in flat – though it was particularly noteworthy that Germany saw a decrease of -0.2%, marking its longest period without consecutive growth quarters since Q1 2022. Despite this, January saw strong market returns, with the S&P Euro Plus rising +6.81%. This suggests investors may be anticipating potential improvements in the market environment, having already factored in much of the negative news.