Nutmeg investor update: March 2025

At a glance

• European stocks rose, while US markets declined, led by weakness in growth-focused sectors.
• The US macroeconomic picture saw some negative signals, such as US consumer confidence hitting an eight-month low. However, we think the positive long-term picture remains intact.
• In Europe, there are some signs of changing sentiment, with indications of renewed confidence in the region’s prospects.

What happened in financial markets in February?

It’s been an interesting month in global financial markets. Investors had a lot of geopolitical news to digest, especially from the US, where the new Republican Administration was busy during its first month in office. Global stock markets saw some divergence in performance. Regions such as Europe and China have performed well, while others such as the US have seen a dip in stock market performance.

In Europe, there are some signs of changing sentiment, with indications of renewed confidence in the region’s prospects. European stocks made gains, up 3.5% over the month, while there were notable gains in German and Italian equity indices, up 6.3% and 7.2%, respectively. Alongside better-than-expected company earnings, hope began to build that we could see a resolution to the Russia-Ukraine conflict. This path is by no means certain, and as you will likely have seen, the tone of recent meetings on the world stage about the conflict has been mixed at best.

In the US, we saw stocks fall back a little over the month. The S&P 500 index – which reflects the performance of the 500 largest companies in the US – was down 1.3% in February. That decline was led by growth-oriented stocks such as those in the technology sector, which finished the month on a weaker footing. The growth-focused Nasdaq index declined 2.7% over the month.

The most recent earnings season demonstrated the US stock market’s potential to deliver earnings that outperform expectations once again. But investor enthusiasm in February was tempered by the US macroeconomic picture. Consumer confidence fell to an 8-month low, while investors were disconcerted by service sector data that indicated a surprise contraction of activity. Against a backdrop of a changing tariffs narrative, and geopolitical worries, some investors are beginning to question the stability of US economic growth and the case for US exceptionalism.

Does this change how the Nutmeg investment team views the US as an investment destination?

We think it is far too early to conclude that US economic growth is on a weakening trajectory. Despite several high-profile data points offering a more muted viewpoint, manufacturing activity appears to be turning up, consumption remains strong, and the labour market’s key indicators are robust.

We continue to take the view that a recession in the US is unlikely. But, as we flagged in our 2025 investment outlook, both stock market valuations and elevated geopolitical and policy risks increase the potential for market volatility. So, we retain our preference for US assets across our portfolios but as always, we also remain globally diversified.

A good example is our exposure to European stock markets, where we remain ‘neutral’ relative to our long-term allocation. That is to say, in the short term, we do not think the overall case for investment in the region is stronger or weaker than in the long term. However, we do have some preferences for certain countries and sectors where we believe the investment case is strongest, for instance European industrial companies within our equity holdings.

The industrials sector comprises a wide variety of companies such as those in machinery, manufacturing, and defence and aerospace. Industrial activity tends to benefit from buoyant global trade, and despite the looming risk of potential US tariffs, global trade volumes have seen a steady rise over the previous 12 months. We think European industrials are supported by three main drivers:

• rising global trade
• the potential for upside in corporate earnings, and
• the potential for a meaningful increase in European defence spending in the current geopolitical environment.

We also currently favour the Nordics over broader Europe. We think the macro-economic picture for the Nordic countries is currently brighter than that of the wider European bloc. Nordic stock markets have demonstrated strong relative performance over the previous decade in comparison with their European peers.

Is the Nutmeg investment team making any portfolio changes?

We have made an adjustment to portfolios’ US equity holdings, adding a position in the financials sector, which comprises banks, insurance firms and credit providers.

We have done this for several reasons:

• Firstly, we think the economic backdrop for financials remains attractive. The US economy appears to be growing at a steady pace, and we expect banks to continue to expand activity through lending as the economy grows.
• Secondly, interest rates remain elevated, yet at the same time off their peak. The Federal Reserve is in no rush to cut interest rates and we expect it will take a steady approach as it balances the pressures of inflation and growth. Higher interest rates tend to be good for financial institutions, as it can increase their earnings potential, so long as they are not constraining economic activity. We think we might reach an interest rate ‘sweet spot’ for US banks over the coming 12 months.
• Additionally, we believe that there is the possibility of further deregulation under the new Republican administration, including the watering down or scrapping of proposed costly regulations.

Our position in financials really reflects us remaining positive on the overall US economic trajectory, while leaning towards a sector we expect to benefit from both the current stage of the economic cycle and the current policy approach of the Republican administration.

About this update: This update was recorded on 4 March 2025. All figures, unless otherwise stated, relate to the month of February 2025. Source for figures: MacroBond, Nutmeg and Bloomberg.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance. We do not provide investment advice in this article. Always do your own research.