The June quarter was historic and tumultuous. Less than 3 months ago the headlines were all about the Nasdaq and Russell 2000 indices falling from their December 2024 highs into ‘bear market territory’. The decline began in the first quarter on the back of the “DeepSeek” shock to the AI narrative, casting doubt on the cost of building AI models and the power consumed by AI, sending market leaders sharply lower.
Then came Trump’s sweeping tariffs, disrupting global trade and business in a similar way to covid in the sense of ‘what just happened’ and the significant impact tariffs could have on economies, inflation, industries and global trade.
The chaos was short lived, when on April 9th at 1.15pm Trump announced a 90 day pause on tariffs for a broad list of countries. That same morning, Trump had posted on social media that it was a ‘great time to buy’. And he was right. The S&P 500 closed up 9.5% and the Nasdaq 12.2% on that same day.
Fast forward to the end of the quarter and we see the S&P 500 at all-time highs, capping a rally of 24% in 89 trading days, the swiftest ever recovery back to a closing high after a 15% decline, according to Dow Jones Market Data.
It’s been a remarkable recovery and one can be forgiven for wondering if markets have succumbed to the “Contrast-Misreaction Tendency”, one of Charlie Munger’s 25 human cognitive biases. This describes the situation where we evaluate things on how they compare to other options or reference points, not on their inherent worth.
Trump’s tariff strategy, assuming there was one, involved loading impossible 125% tariffs only to then pull those back to 30%. Upon the announcement of the pull back markets rallied and have continued to rally.
According to FactSet, the forward 12-month P/E ratio is 21.9, which is above the 5-year average (19.9) and above the 10-year average (18.4).
Interest rates were volatile in the quarter due to both geo-political risks ebbing and flowing and Trump policy uncertainty. Whilst US Treasury Secretary Scott Bessent is articulating the case for lower interest rates, Fed Chair Jerome Powell remains ‘on the fence’ regarding the direction of prices and the economy. “Most economists inside and outside of the Fed” Powell says, “still expect tariffs to push inflation higher.” Powell also said he expected to see tariffs’ impact on prices to emerge in the next few months, starting in June. The June inflation report comes out on July 15th.
While the main indices have risen, we have also seen gains in assets generally associated with higher risk. Gold futures posted a 25% gain in 2025, the best start to a year since 1979. Utilities which are considered defensive have outpaced the S&P500. Further, stocks that tend to rise when the economy is booming such as consumer discretionary and small caps are lagging behind.
Locally
The NZ share market continues to lag, gaining 1.5% in June and 2.7% in the quarter. Year to date NZ equities, even including dividends have fallen by -3.9%. The NZX50 is only 5% above its pre-Covid levels. At that point in time, February 2020, the NZ share market had been one of the standout markets in the world with 10-year compounding gains of 13.6% p.a., well above the S&P500’s 10.0% p.a. and not far behind the Nasdaq’s 14.4% p.a. The ASX All Ordinaries which is a broad measure of the Australian market rose just 7.9% p.a. over those ten years. These were golden years for NZ investors. With interest rates likely going lower, some local managers are optimistic about returns going forward. With interest rates likely going lower, some local managers are optimistic about equity market valuations in our local market.
Europe
The European central bank cut rates by 0.25 in June to 2%, their ‘terminal’ rate and right in the middle of the 1.75% -2.25% which the ECB consider to be their best estimate of the neutral rate, where rates neither stimulate nor restrict growth. The market though, is pricing a terminal rate of 1.75%, reflecting its concerns about the risks around EU/US trade negotiations.
European equities have outperformed US so far this year in dollar terms, yet according to Bloomberg are still trading at a 35% discount to their US peers.
“While profit growth in Europe may not be as strong as in the US, the valuation gap remains very big,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs Group Inc. This can be seen in investment flows. According to BofA citing EPFR Global data, European-focused equity funds have attracted $46 billion of fresh money since the start of 2025, on track for the second-largest annual inflows ever. That’s a sharp contrast to last year, when there were $66 billion of outflows.
But it would be wrong to assume US market leadership will end any time soon. There is not a single public company in Europe valued at over $400bn, and the AI trade appears to be back on after the Deepseek sell-off. Europe doesn’t really have any AI plays, and the US market is 70% of the MSCI World so will continue to attract the bulk of the passive flows.
Currency
This year the Euro is up 13% against the USD despite the interest rate differential in favour of the US. Tariff uncertainty and concerns around the US budget deficit are weighing on confidence in the USD.
The NZD and AUD were firmer against the USD in June bringing YTD gains to 9.0% and 6.3% respectively.
There are signs that IPO markets are opening again, and this could ignite interest in small and micro-cap stocks which have languished in recent years. There were 44 IPOs in the US in the second quarter, raising US$7 Billion. In Australia, the regulator, ASIC has introduced reforms to make it easier for companies to list after experiencing a significant decline in listings with 2024 marking a 20-year low in listing activity.
There were five IPO’s in June including $2 billion land lease developer GEM Life Communities, and Bain Capital re-listed Virgin Australia with a market capitalisation of $2.57 billion.
If you’d like to discuss the above market update in more detail, please get in touch with Mark or Sam.