Global equities recovered strongly during the second quarter – the MSCI All Country World Index gained 11.0% in USD – to close June up 9.1% since the start of the year. The market has rallied against a backdrop of continued volatility – the VIX Index has averaged above 20 during the first half and peaked at over 50 in April – largely due to trade and geopolitical tensions sparked by Liberation Day and the ongoing conflict in the Middle East.
Dollar weakness has been another key theme of 2025. The currency has fallen by over 10% in the first half – its worst start to the year since 1973 – as investors have rethought their US exposure in the wake of President Trump’s erratic trade and economic policies. Its depreciation has helped the S&P 500 index climb 5.4% over the first half to hit a new all-time-high in June, with US stocks also lifted by the prospect of trade agreements with China and the EU plus growing expectations for interest rate cuts by the Federal Reserve.
Non-US equities have climbed even higher on the back of a weak dollar. The STOXX Europe 600 index trounced the S&P 500 by 16 percentage points in USD terms over the first six months – its best relative performance since 2006. Fears over a sluggish Eurozone economy and the threat of tariffs have been offset by the rotation away from US equities and the region’s commitment to increase military spending, particularly in Germany, which has driven European aerospace and defence stocks to a staggering USD gain of over 70% for the first half.
Weakness in the US dollar and stock market helped emerging markets (+13.7%) beat developed ones (+8.6%) over the first half and are on track to outperform for the first year since 2020. They have also benefited from strong performance among AI-related companies in Taiwan (+9.2%), China (+15.5%) and Korea (+37.6%).
This also helped the broader technology sector to recover in the second quarter – the Mag 7 index delivered a 3-month gain of 19.1% to end June flat for 2025[1] – while industrials, materials, financial services and utilities continued to perform strongly and delivered double-digit returns for the first half. Value (+9.4%) has outperformed growth (+8.8%) as a result and is on track to have the upper hand for the first year since 2022.
I am pleased to report that all bar one of SKAGEN’s funds outperformed their respective indices in the second quarter and all are ahead of benchmark year-to-date. This has been driven by good stock selection and sell discipline with portfolios re-balanced to maintain high-conviction holdings at attractive valuations. You can read about the individual funds in their quarterly reports on the SKAGEN website.
Sunny sentiment, hot valuations
We enter the summer with markets in buoyant mood. In keeping with financial performance, June’s Bank of America Global Fund Manager Survey showed investor sentiment at a three-month high and back to pre-Liberation Day levels. This positivity is reflected in flow data, particularly for European focused equity funds which have attracted $46 billion of new money since the start of 2025 and are on track for their second largest ever annual inflow[2].
Investors’ new-found optimism is likely to be tested in the coming weeks with the release of second quarter earnings. Estimates have steadily fallen this year due to concerns over the corporate impact of tariff and geopolitical pressures, but profits are still expected to be positive in the US year-on-year. With the pause on reciprocal tariffs also set to end in early July – although Trump recently said that he could extend or shorten the deadline – we are likely to see further market volatility.
The combination of rising share prices, improving sentiment and falling earnings estimates has inevitably stretched valuations. Earnings multiples generally are above historic averages and US equities are back trading at a 50% premium versus international stocks. In Europe, valuations have climbed above their 35-year average over the first six months, leaving little room for earnings disappointment on either side of the Atlantic.
Emerging market pricing – notably in China and Korea – remains attractive versus long-term averages, while small caps are also still historically cheap across most geographies. With valuations generally higher than the start of the year, stock picking is increasingly important. It should also help to navigate a market environment that continues to present considerable challenges, not least macroeconomic and geopolitical uncertainty.
Across our funds, the teams remain focused on identifying fundamentally undervalued stocks with clear, company-specific catalysts for revaluation, while maintaining balanced portfolios diversified across geographies, sectors and underlying factors in order to keep delivering the best possible risk-adjusted returns. I look forward to keeping you updated on their progress through the second half of what promises to be an eventful year.
NB: All figures in USD as at 30/06/2025 and based on MSCI data unless stated.
[1] Source: Bloomberg Mag 7 index
[2] Source: Bloomberg, EPFR.