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Why Markets Keep Rising Despite All the Problems
Despite all of the pressing problems at hand—political risk in Japan, war in Southeast Asia, inflation that refuses to fall in line—global equity markets keep pushing higher. The S&P 500, for instance, touched fresh all-time highs last week, driven by the strength in tech earnings and a wave of option-driven flows. The MSCI ACWI, which measures the performance of equities in both the developed and emerging markets, is up 3.7% month-to-date.
Chart 1: MSCI Worldnet TR Index
Source: Bloomberg
So, What is Fueling the Advance?
First, corporate earnings this quarter have beaten analyst expectations. Early results from S&P 500 companies show year-on-year EPS growth of around 4.5%, well ahead of the consensus’ 2.8% earnings growth estimate. While costs have escalated, margins are holding up, and top-line growth remains positive in sectors like industrials, consumer tech, and even financials.
Second, there’s growing belief that the worst of central bank hawkishness is behind us. Even if rate cuts are delayed, they are still on the horizon. No major central bank is talking about raising rates anymore.
Third, fiscal policy remains broadly expansionary. In the US, Europe, Japan, and even India, governments are still spending heavily—on infrastructure, defense, and decarbonization. Markets see a floor under demand, even if growth cools a bit.
This is a market willing to brush aside short-term noise, betting that liquidity will remain abundant and that earnings will keep surprising positively. At this juncture, we won’t know the truth of the balance of risks until the new tariff levels have had time to work through the system. We still believe there are clouds to form before we are back to blue skies. We advise staying engaged in markets but avoiding leverage to high beta.
Fed Holds Steady but Trump Pressure Complicates the Narrative
The Fed meets this week with the market widely expecting no change to rates. The upper bound of the Fed Funds target remains at 4.25% to 4.5%, and there’s little immediate data to push them off that path. But the political temperature is rising quickly. Donald Trump’s unexpected and orchestrated visit to the Fed last week was seen as an attempt to put pressure on the Fed for a rate cut.
While Trump’s intervention might not have an immediate bearing on Fed policy, it does raise the stakes. It’s not lost on markets that Powell’s second term ends in 2026—and that Trump, if re-elected, could install a far more dovish (or loyalist) successor. That risk premium is beginning to be reflected into longer-dated Treasuries. Ten-year yields briefly rose to 4.35% late in the week, despite the soft housing data.
US inflation, meanwhile, is not on a downward path. The June CPI printed at 3.1% year-over-year, but core inflation remains sticky at 3.5%, and the Fed’s preferred PCE measure – out this week – is expected to show a similar pattern. Shelter inflation remains elevated, and wage pressures have proved to be stubborn. We would be carefully watching the upcoming Employment Cost Index. Any sign that unit labor costs are reaccelerating could further delay the expectations for the first rate cut, which the markets now price around November or December.
Chart 2: Market pricing of US rate cuts
Source: Bloomberg
Trade Gets Interesting Again: EU- US agreement and the UK–India Deal and Post-Tariff Reactions
As the weekend closed, the US and EU appear to have agreed a trade deal at 15%, which sounds like quite an achievement after all of the threats of even 50% at one stage. However, for the US consumer it represents an increase from the 1.2% that prevailed before.
While the focus will now switch to the US–China tariff détente which looks likely extend into August, what’s more noteworthy is the positive momentum building elsewhere. We have made the point before that the noise from the US has acted as a catalyst for other countries to sew up trade agreements, particularly those that extend free trade zones.
The UK and India last week finalised a wide-ranging trade agreement that cuts tariffs on 99% of Indian exports to the UK and reduces UK tariffs on Indian goods by an average of 12 percentage points. It also includes mutual recognition for digital services, data sharing, and mobility of skilled workers. Indian pharma, textiles, and IT services poised to benefit significantly. British goods in machinery, spirits, and auto components get a cost advantage in India’s rising middle class market. Trade between the two stood at around $36 billion in 2024 and is targeted to exceed $100 billion by 2030. The deal also unlocks over £6 billion ($8.06 billion) in direct investment commitments.
Table 1: Impact of UK-India Trade deal
| Impact | £bn estimate, applied to 2040 projections | % change from the baseline |
| Change in UK GBP | 4.8 | 0.13 |
| Change in UK exports to India | 15.7 | 59.4 |
| Change in UK imports from India | 9.8 | 25 |
| Change in total trade between the UK and India | 25.5 | 38.8 |
| Change in UK exports to the world | 6.5 | 0.67 |
| Change in UK imports from the world | 6.5 | 0.64 |
Source: DBT CGE Modelling
Japanese Politics in Flux, Markets Push Higher Regardless
Japan’s political backdrop has been quite volatile—unlike its markets. As suspected, the ruling LDP–Komeito coalition lost its majority last weekend in the upper house—an unprecedented development. Support for Prime Minister Shigeru Ishiba has crumbled as inflation, especially in food and energy, has hammered household budgets. Right-wing populist parties made historic gains, and the fragmented Diet may now stall structural reforms.
Yet, despite those developments, equity markets have barely blinked. In fact, the Nikkei is up 12% since mid-June, trading near 41,000—levels not seen since the early 1990s. Foreign inflows have surged, driven by the weak JPY, signalling a revival in corporate governance reforms, and solid Q2 earnings across autos and semiconductors.
Chart 3: Nikkei 225 break out
Source: Bloomberg
JGBs, by contrast, are under pressure. The 30-year yield touched 2.07%—a level unimaginable just 12 months ago. Markets are beginning to price in the chance that the BoJ may pivot more quickly than expected, especially as core inflation runs north of 3.3%. Governor Ueda will be in the hot seat at this week’s policy meeting 30-31 July. A change in forward guidance, or even another tweak to yield curve control, can’t be ruled out.
Southeast Asia on Edge: Cambodia–Thailand Dispute Becomes Tense
The border dispute between Cambodia and Thailand escalated into direct military conflict last week, although a pause for talks at the weekend have raised hopes for sense to prevail.
The roots of the conflict are deeply personal—fueled by a bitter rivalry between the Shinawatra family in Thailand and the Hun family in Cambodia. The immediate trigger was a skirmish over disputed land near Siem Pang, but the larger context is political instability in both capitals. Thailand’s new populist government is struggling with inflation and slow growth; Cambodia’s Hun Manet is trying to consolidate power under the shadow of his father’s legacy.
The conflict is a threat to regional stability. Trade routes through the border are critical for agricultural exports and labor migration. ASEAN has so far failed to broker calm, though Malaysia is attempting mediation. Investors are beginning to price a small risk premium into Thai assets. The baht weakened to 38.2 per USD, while Cambodian bonds saw modest outflows.
The Week Ahead – Heavy Data Calendar
This week brings an unusually dense calendar of data and events. The Fed meeting will be in the limelight, but equally important are:
Japan will also report on industrial production and retail sales, with the BoJ meeting in focus. China releases July PMIs, which could confirm or challenge the consensus view that the recovery is faltering. Europe will deliver flash inflation and GDP numbers. The ECB isn’t expected to move soon, but any inflation surprise could shift that outlook.
Markets may consolidate recent gains if data is solid but not hot, justifying a patient Fed. But surprises on inflation or wages could be challenging.
Gary Dugan – Investment Committee Member
Bill O’Neill – Non-Executive Director & Investor Committee Chairman
28th July 2025
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