Black Swan Capital Market Update March 2025

In an environment where news headlines are having a larger impact on financial markets than normal, and with an air of uncertainty, it is a good time to reflect on what is happening in the markets and consider where we may be headed.

Our position since the start of 2025 has been one of cautious optimism. This was a continuation of our quarter four 2024 assessment which was a downgrade on earlier last year. Back in November last year we were suggesting a more cautious approach to portfolio management advocating derisking and profit realisation where appropriate. You can read that again here.

Moving towards the end of quarter one 2025 we are leaning more towards the cautious with a smaller serving of optimism.

Here is our assessment of global markets. Note that what is relevant today may be passé tomorrow, and that some of our comments may not be relevant or applicable to your specific circumstances. If you are unsure, contact us and we can review your position.

US Markets

The US looks like it will be entering a more difficult period domestically and internationally. Whilst this will likely have a knock-on effect in international markets, it does present more opportunities for European and Asian countries and companies to step in to the vacuum that will be created by US tariffs and general distrust of the US administration.

This needs to be considered in the context of recent US stock market performance and the importance of the detailed composition of that performance. The S&P500 – the largest 500 companies on US stock markets by market capitalisation- at a headline level performed very strongly over the last 2 years.

However, a drill down into the details shows there was a performance disparity with a concentration of returns in the largest, mostly tech focused companies.  The seven companies known as the Magnificent 7 (Apple, Nvidia, Meta, Alphabet, Amazon, Microsoft, Tesla) generated more than 53% of the total S&P500 returns in 2024. Put another way, these seven performed stronger than the other 493 listed companies combined.

What does this mean for US stocks?

Whenever there has been strong growth, it follows that there will be profit taking. Due to the scale of these 7, if they underperform, they also drag the whole market down.

But, it also suggests that many of the other 493 have not performed as strongly, may not be overheated, and have potential for growth in 2025.

Clients should be ensuring they are well-diversified in 2025. There is a stronger argument for tactical and sector positions as well as an increased importance in dividend paying stocks. A reliable yield (another word for income) can provide stability and consistency to portfolio returns, ameliorating potentially poorer market performance.

ESG

Many clients are asking about sustainable investing. ESG (environmental, social, governance) programs may struggle in the US under the current administration, but in the rest of the developed world, we may see more investment in sustainable energy from a defence perspective, along with an increase in traditional defence spending in the EU and UK in particular.

You need to consider your own assessment of how important ESG investing is for you, along with your timeframe, risk profile, and objectives.

UK shares remain attractive, despite hitting record highs

There’s been plenty of news on these shores too, particularly on the interest rate front with the Bank of England lowering base rates from 4.75% to 4.5% in February. Two of the nine-member Monetary Policy Committee voted for a larger reduction, indicating further cuts are possible in the months ahead. At the same time, officials halved the UK’s GDP growth target for 2025, from 1.5% to 0.75%. This suggests borrowing costs could be lowered further to help support spending and economic activity levels.

UK shares have performed strongly, hitting fresh record highs. In the current environment it provides global diversification away from the US and with a record of not following the US performance path in recent years can be a useful portfolio component for some investors.

Bonds (Fixed Income) role in a diversified portfolio

To mitigate market risk, it is wise to seek reliable income streams such as via dividend paying stocks, as mentioned above. You can and probably should also look beyond the stock market.

Fixed interest can also a useful source of income and portfolio stabilisation. In the current environment, it is expected that the UK’s Bank of England, and the European Central Bank will continue to reduce interest rates. This will lead to lower returns from bank term deposits to below the inflation covering level of acceptability.

Falling interest rates generally correspond with a lift in returns from fixed interest though and they do often (but not always) tend to move in the opposite direction of stock markets. For these reasons, if appropriate for you, the addition of government and corporate bonds can be a useful component of a diversified portfolio in 2025.

Uncertainty typically presents opportunities 

Context and perspective are critical.

Events seem magnified in importance in the moment. It’s important to remember that bouts of volatility often present opportunities for investors. It takes courage to stand one’s ground, but investors that do so are often rewarded,

By selling in market dips, you are handing future profitability to more patient investors.

Maintaining a long-term focus

Generating favourable returns over time requires an ongoing re-evaluation of the risk/reward trade-off of potential investments as prices fluctuate, as well as a preparedness to exploit opportunities with conviction as and when they arise. Maintaining this mindset will remain critical as the year progresses, as uncertainty seems likely to persist for the foreseeable future. Undoubtedly, markets will not move in straight lines.

Separately, the latest media headlines or market movements shouldn’t divert attention from your long-term goals, and should not prompt knee-jerk reactions. Well-diversified portfolios are more likely to generate superior returns over time than more conservative, cash-based allocations and timing markets is more or less impossible.

To discuss this further and review your financial plan and investments, contact us at info@blackswancapital.eu.