Q1 2025 Market Review: US Stock Volatility, AI Disruption & European Equity Strength

Welcome to the Middleton Private Capital Newsletter for Q1 2025 Summary

This is a taste of the type of information we provide our clients for the purpose of demonstrating our thinking to the Professionals UK audience.

If you would like to review your own portfolio or just chat financial markets, please contact me directly.

Q1 2025 Market Review: US Stock Volatility, AI Disruption & European Equity Strength

Despite a solid earnings season and a fall in inflation to 2.8% in February following four consecutive monthly increases, US stocks fell in Q1. January saw the release of Chinese tech company DeepSeek’s AI model, which purported to cost significantly less to develop and train than its US peers, throwing into question the amount that companies have invested in AI capex over recent years. This caused a sell off semiconductor manufacturers, which spilt over into other sectors and dragged the averages down as investors questioned whether current levels of investment in Artificial Intelligence would continue. The second half of the quarter was dominated by tariff talk, with the President imposing import levies on cars, aluminium and steel, in addition to more broad-based tariffs on Canda and Mexico.

The first two weeks of April saw one of the most volatile periods on record for US equity markets, as Trump slapped “reciprocal” tariffs on trading partners far in excess of expectations, causing a two-day loss of more than 10% for US stocks. Tariffs were in effect for only a few hours before a 90-day pause was announced for all countries except China, as trading partners opted to negotiate new terms rather than retaliate. This caused US stocks to leap 10% in a single session, despite the escalation between the US and China, which have tariffs in excess of 100% on one another.

UK and European large caps, performed well in Q1 as investors rotated out of US equities following a strong two-year run. Domestically-focused UK small and mid-cap stocks fared worse, weighed down by a benign outlook and spending cuts announced in the Spring Statement.

In Germany, the CDU/CSU alliance secured the most votes in the February election and are in negotiations to form a coalition government with the SPD, paving the way for Friedrich Merz to become Chancellor in May. German’s parliament also passed a significant bill to increase defence and infrastructure spending in response to heightened security concerns and to boost economic growth. This decision contributed to a rally in German large-cap stocks, particularly defence, supporting a strong start to the year for European markets overall. European stocks did however fall towards the end of the month as the threat of a trade increased.

Market Drivers

In a clear sign of risk-off sentiment, defensive sectors including consumer staples, healthcare and utilities were the strongest performers in the US during Q1. Energy also performed well on higher oil prices.  Philip Morris was amongst the S&P 500’s best performing stocks, rising 32% over the quarter on the back of strong revenue and earnings growth, particularly from smoke-free products. The world’s largest gold mining stock, Newmont, also outperformed, surging 30% as the precious metal continued benefit from a number of macro tailwinds. At the other end of the scale, Tesla was the second worst performer in the Index, falling 36% as the EV maker faced backlash over Elon Musk’s foray into politics.

Aside from energy, gold miners Fresnillo and Endeavour posted impressive gains, whilst aerospace and defence stocks (BAE Systems, Rolls-Royce and Babcock) were all boosted by a commitment to increase defence spending across Europe.

Portfolio Contributors

Rolls-Royce was one of largest contributors to portfolio gains over the first quarter, with strong Q4 earnings and upgraded guidance solidifying the company’s turnaround story and sending the stock to fresh all-time highs. BT was another contributor to performance, with the stock climbing consistently over the quarter as management continues to execute on its turnaround strategy.

Looking Ahead to Q2

Volatility is likely to persist in the second quarter as tariff tensions between the US and its trading partners remain front and centre for the global economy. The lack of a consistent trade policy, with rapidly shifting tariff announcements, has created a difficult environment for businesses attempting to plan ahead. Many firms are expected to delay investment decisions due to unclear input costs and potential retaliatory measures from trade partners, which could dampen capital expenditure and hiring, both of which contribute to economic growth.

For equity markets, the uncertainty is equally damaging. Whilst the tariff back and forth caused volatility to spike in the short-term, further uncertainty may inhibit companies from issuing forward guidance to investors at the upcoming Q1 earnings season. This inability to confidently forecast earnings or margins could undermine investor sentiment and market valuations.

The portfolio has weathered the volatility well and by the beginning of the second quarter was down only marginally on the year, limiting losses better than UK and US equity indices. We are currently taking advantage of the correction to add high quality names to the portfolio at attractive valuations.

Middleton Private Capital Adaptable. Active. Transparent.

With over 40 years of experience managing investments for private and institutional clients, Middleton Private Capital delivers expert, highly personalised portfolio management that offers real value, not vague promises.

Our Edge: We Don’t Outsource. We Outperform. Unlike most wealth managers who delegate investment decisions to third-party fund managers, we stay in control. That means every investment is selected by us, giving us the power to adapt quickly to shifting markets, and to build portfolios that are as individual as your needs.

Adaptable

We don’t follow rigid models or benchmark-chasing strategies. Our flexible, bespoke approach allows us to respond to ever-changing market conditions and to your unique goals. No generic portfolios. Just intelligent, responsive investing.

Active

We aim to outperform markets, not just track them. Through hands-on portfolio management, led by in-house research and selective external insight, we make every investment decision count, always aligned with your risk appetite and preferences.

Transparent

We invest directly in shares and bonds, using funds or derivatives only when essential. You’ll always know what you own, why you own it, and how it’s performing, line by line. With clarity comes accountability, and we take that seriously.

Who We Work With

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Looking for clear, confident investment management or a second opinion on your portfolio? Let’s talk.

DISCLAIMER This article is for information purposes only and no part of it or its contents are deemed to be nor should be taken as advice. It does not constitute recommendations to buy or sell any securities or funds mentioned. Past performance is no guide to future returns, and you may get back less than you invested. Capital at Risk.

Middleton Private Capital Ltd is authorised and regulated by the Financial Conduct Authority, No. 804197. Middleton Private Capital Ltd is registered in England and Wales, No. 11148660. Registered Office: Cavendish House, Welbeck, Worksop, Nottinghamshire, S80 3LL.

Middleton Private Capital (Head Office) Cavendish House Welbeck, Nottinghamshire S80 3LL Telephone: 01909 261071 [email protected]

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