Market Update 14th July 2025

46,500,000 miles and 65,700 degrees

It’s easy to be in a bit of a spin about markets. After all, over the first six months of the year, we have travelled 46.5m miles around the sun and spun round in 180-odd circles. So let’s try and make sense of it all…

It has been a half of two halves. If we take the first part of our half as the bit in the old 2024/5 tax year, its main legacy will be hastily constructing a wall of worry around tariffs.

The foundations were built on bluffs, so it hardly took a huff and a puff to blow the whole thing down. A relief rally followed and since then, the market has been almost one way traffic. However, that does not mean similar challenges cannot reappear – this year or further into the future. Trump’s trading relationships are still potentially volatile. But you know all of this already, and history is only worth studying if we can learn from it.

So what have we learned? Given that my day job is to focus on company analysis, it’s perhaps inevitable that my first thought is on the companies themselves. Factset-compiled information shows UK large cap earnings per share estimates for 2025 are 10% down on where they were at the start of the year. Or from a slightly different viewpoint, we’ve seen a decline in operating profit forecasts (where estimates are available) of close to £20bn for this calendar year. These facts rather jump off the page. But is it as bad as it looks? And where have these downgrades come from?

Intuitively, negative revisions make sense. Economic growth is still fairly fragile and there have been plenty of uncertainties that could have caused analysts to reach for the red pen. In particular, we have seen negative commentary in sectors like advertising, retail, and travel – ie those which are particularly sensitive to the unstable macro. However, beyond that, there are not too many examples. ‘Blow ups’ have been few, and far between. So perhaps we need to turn over a few more stones to uncover what is going on.

Fittingly, churning through stone is actually where the biggest part of the answer comes from. The price of iron ore as well as oil and other industrial commodities has been trending down, and lower commodity prices translate to lower earnings. If we take the declines from just five UK-listed companies in that space (BP, Shell, Rio Tinto, Anglo-American and Glencore) we can explain around 80% of the drop in earnings.

As for the remainder – there are two other factors in play. One is the US effect. Excluding the companies mentioned above, around 20% of the sales from the rest of the UK’s biggest businesses come from the US. The value of the US dollar has fallen against good old sterling by over 7.5% since the start of the year as Trump’s tariff stance and the fiscal impact of his ‘Big Beautiful Bill’ unsettle markets. That currency effect means sales made in the US are worth less when translated back to sterling. It’s the opposite of the effect seen after the Brexit vote, if you recall that phenomena. Combined with a loss of consumer confidence (which generally prompt negative revisions and thus compounds the translation issue) it is safe to say Uncle Sam’s contribution to UK plc has been negative this year.

The final thing to consider is that it is perfectly normal for estimates to be revised down over the first half of the year. It has happened in each of the last two years in the UK, and in America this century, the average negative revision seen in the first half has been 2.8%.

With all of that in mind, the underlying health of the typical UK business is actually pretty good in our view.

We have been espousing the virtues of the UK for some time – and the fact it is only just back at its longer term average on a price to earnings basis is a useful reminder of the wider context, and justifies our belief that it was just too cheap before. For that reason, we do not see the UK rally this year as concerning, or a sign it is overbought. We remain fans of our home market.

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George Salmon – Senior Research Analyst

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