April brought fears of a global economic hit from tariffs, but May made it clear: tariffs were just a bluff. One columnist aptly dubbed it the "TACO trade" - Trump Always Chickens Out.

Markets responded with a strong 6% rally, buoyed by fading trade tensions, solid tech earnings, and improving global confidence. The S&P 500 approached all-time highs, and European markets set new records. However, a weaker US dollar has meant KiwiSaver accounts remain 5–10% below their March peaks despite global gains.

*Source: Factset: Kōura returns are pre-tax and post-fees. Returns over 12 months are annualised. Local market returns use the relevant markets indices; NZ Equities uses NZX50 index; US Equities uses S&P500 index; Rest of World uses MSCI EAFE Index; Emerging Markets uses MSCI Emerging Markets Index, Fixed Interest uses Bloomberg Aggregate NZ Composite Bond Index. Bitcoin return is the USD change in price of Bitcoin. The return for an Aggressive Portfolio represents the equivalent of 95% growth and 5% income assets investing in core Kōura Funds. The return for a Growth Portfolio represents the equivalent of 80% growth and 20% income assets by investing in core Kōura Funds. Returns are calculated by Kōura.

*Past performance is not a reliable indicator of future performance. Returns are not guaranteed, and investment values may fluctuate over time.

The Tariff Drama Fizzles

Trump’s early April rhetoric hinted at reviving 1960s-style US manufacturing through tariffs. But after only two days of negotiations in Geneva, both the US and China backed down, avoiding the trade war many feared. Xi Jinping’s firm approach proved successful.

Later in the month, a US trade court ruled the tariffs illegal, challenging their justification under national emergency laws. While the ruling will likely move to the Supreme Court, there are still legal paths to impose tariffs - just more complex ones.

Markets are now confident that tariffs will amount to little. The takeaway? Ignore the drama and remember the TACO trade.

Europe Takes the Lead

European equities continued to shine, making the region 2025’s standout investment destination. Investor sentiment has been driven by falling energy prices, optimism around Ukraine, and rising defence spending.

Concerns over US currency and sovereign risks have also shifted investor preference to Europe. Still, history shows European outperformance is often short-lived.

U.S. Debt Concerns Mount

Congress passed the "Big Beautiful Tax Bill," cementing Trump’s 2017 tax cuts and expanding relief for the wealthy - without the promised spending cuts.

The Congressional Budget Office projects the bill will add US$3 trillion to the deficit over eight years, pushing it to 7% of GDP and national debt to 133% of GDP.

Markets are nervous. The USD has fallen nearly 10% since the start of the year, and long-term bond yields are climbing. Investors fear the US is veering into an unsustainable debt trap. While modest deficits can be managed over time, a 7% deficit risks making interest payments the largest item in the federal budget.

Tech Earnings Impress

May’s US earnings season was robust, with 78% of companies exceeding expectations - led by tech.

AI-related concerns eased as more efficient models emerged and China produced new chips, alleviating supply constraints. The industry continues grappling with soaring demand: AI query volumes are up 50x over the past year.

Investors are focusing on AI’s long-term potential. The Nasdaq outpaced the S&P 500, driven by names like Nvidia, Microsoft, Meta, and Amazon.

New Zealand Rate Cuts Signal Weakness

RBNZ Governor Hawkesby cut the OCR to 3.25% and lowered the forecast terminal rate, with further drops to 2.85% expected by  March 2026. September.

New Zealand’s economy remains subdued. Government spending is down, urban areas face housing market stagnation, and consumer sentiment is weak. Rural regions are faring better thanks to high commodity prices, though gains are being used to reduce debt rather than fuel local spending.

We anticipate further rate cuts, possibly reaching 2.25% by early 2026, a reflection of underlying economic fragility rather than stimulus.

Bitcoin Briefly Hits New High

Bitcoin briefly reached a record high of $111,000 before settling around $105,000. Drivers included deregulation (pension funds can now invest in crypto), Trump Media’s $2.5 billion Bitcoin acquisition, and broad concerns over USD stability.

Whether this is the start of a sustained bull run remains to be seen.

Looking Ahead

Expect more headline-grabbing policy moves from the White House, followed by fast reversals when markets react. The US economy remains resilient, and Europe is gaining ground.

Stay level-headed. Ignore the panic and hold your course amid the noise.

Disclaimers:

*The views and opinions expressed in this article are those of Rupert Carlyon. This content is for informational purposes and should not be considered financial advice. Before making any financial decisions, consider consulting a financial adviser.

*Bitcoin is highly volatile and not suitable for all investors. Before investing part of your KiwiSaver balance in the Bitcoin fund, ensure you fully understand the risks associated with cryptocurrencies: https://shorturl.at/U6Mkp.  and/or consider seeking financial advice. 

*Kōura Wealth Limited is the issuer and manager of the Kōura KiwiSaver Scheme. A copy of the Product Disclosure Statement is available at kourawealth.co.nz/documents