LGT Snapshot: Q1 2025: tech stumbles, Europe soars, rotation continues - 2nd April 2025

The first quarter of 2025 has been a tale of two markets. Fluctuating economic conditions, geopolitical uncertainty, and a shift in narratives helped some markets surge while others experienced volatility. Headwinds remain, but there have been plenty of bright spots, and as we head into the second quarter of the year, there is a sense that opportunities may emerge from the turbulence.

China leads the way

One of the biggest success stories of the quarter has been China. The Hang Seng Index has increased nearly 18%, driven by a sharp rebound in investor confidence and a renewed sense of optimism around China’s technology sector. At the heart of this rally is the country’s aggressive push into artificial intelligence, where domestic firms are making major strides in challenging US dominance. Government-backed investment, favourable regulatory policies, and a concerted effort to stimulate innovation have all contributed to bullish market sentiment.

Europe’s quiet strength

While China has been the standout, Europe has also had a solid start to 2025. The Euro Stoxx 50 and Germany’s DAX have both posted significant gains, supported by a wave of government spending, particularly in defence and infrastructure. With geopolitical tensions prompting many European nations to increase military budgets, the defence sector has been a large benefactor. European Financials performed very well during the quarter too – being one of the more cyclical sectors, they benefitted from an uplift in economic sentiment. They also started from deeply discounted valuations, making them attractive as investors rotated into undervalued sectors.

US markets face a test

In contrast to China and Europe, the US stock market has experienced more turbulence. The S&P 500 entered correction territory, falling more than 10% from recent highs. A key driver of this downturn has been Trump’s aggressive tariff policies, which will not only raise costs for businesses, but have also fuelled concerns about potential trade wars. Sectors with significant international exposure, such as technology and automotive, have been particularly affected due to fears of retaliatory tariffs from other nations. 

Tech stocks bore the brunt of the sell-off after having been the dominant force in markets over the past two years. The AI-induced rally markets had been experiencing which had propelled companies like Nvidia to record highs cooled slightly as questions arose about competition, supply chain disruptions, and shifting investor sentiment. However, despite the pullback, many investors see this as a natural consolidation rather than a fundamental breakdown, with the potential for a recovery if macroeconomic conditions stabilise.

Looking ahead: key themes for Q2

• Any shift in US trade policy could have significant implications globally. If tensions ease, it could provide a strong catalyst for a market rebound.

• Investors will be watching closely to see how companies are managing cost pressures and whether consumer demand remains resilient. Strong earnings reports could help restore confidence.

• Tech giants faced headwinds in Q1, but their dominance in their respective fields remain intact. A shift in investor enthusiasm could spark them back into life in Q2.

• Central banks’ next moves will be crucial. If inflation begins to ease, it could open the door for more accommodative policies, supporting risk assets.

Despite the turbulence of Q1, markets have shown resilience, with different sectors and regions stepping up after years of US exceptionalism. This diversification has been a welcome shift, demonstrating that opportunities exist beyond the usual market leaders in Q2 and beyond.

Source: LGT Wealth Management UK LLP

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