Investment Market update: February 2025

Markets broadly performed well in January, but inflation continued to rise in several regions and economic growth remained slow overall.

5 min read

With several regions experiencing inflation above optimum levels and slow economic growth, find out how markets performed in January 2025, and what’s behind these developments and how they could affect you.

Whilst this article focuses in the main on January 2025 market news, there are references to events and market performance from previous months.

US

The US annual inflation rate climbed for the third consecutive month, reaching 2.9% in December 2024, up from 2.7% in November¹. This uptick was largely driven by an increase in energy prices².

In response to rising inflation, the Federal Reserve (Fed) held the Federal Funds Rate steady at 4.25% – 4.5% in January, following three consecutive cuts since September³.

US economic growth slowed towards the end of last year, as GDP grew by 2.3% between October and December, down from 3.1% in the previous quarter. This was partly due to the country facing declines in trade and investment, compounded by the effects of hurricanes and labour strikes⁴.

The S&P 500 gained 2.8% in January amid continued optimism fuelled by President Trump’s promises of deregulation and tax cuts. However, the tech sector dipped late in the month as the wide release of the AI model DeepSeek caused Nvidia to lose nearly $600 billion in a single day⁵.

UK

The latest figures show that UK inflation was at 2.5% in December, down from 2.6% in November⁶. The decline was driven by falling hotel prices and slower increases in airfares, but inflation remains above the Bank of England’s (BoE) target rate of 2%⁷.

In November, the UK economy grew for the first time in three months, but at just 0.1%, the growth fell short of expectations. The modest uptick was driven by stronger trade in pubs, restaurants, and the construction sector. However, with further tax increases set for April, the slow growth has raised concerns that economic stagnation could persist⁸.

In response to weak growth, the BoE cut the base rate from 4.75% to 4.5% in its February meeting. However, with inflation still above the target level, economists have warned that rates may need to be held higher for longer⁹.

UK stocks performed well in January, with the FTSE All-Share rising 5.5%. The sharp decline in the pound provided a boost to the index, as three-quarters of its revenues come from overseas¹⁰.

Europe

In the Eurozone, inflation rose to 2.5% in January, up from 2.4% in December, driven by a rise in energy costs¹¹.

As expected, the European Central Bank (ECB) cut its key interest rates by 25 basis points in January 2025, lowering the deposit facility rate to 2.75% and the main refinancing rate to 2.9%¹².

This marked the fourth consecutive cut, and the ECB hinted at further cuts as inflation could be back at its 2% goal by late summer, economic growth is slow, and a trade war with the US is a possibility¹³.

The MSCI Europe ex-UK Index was the best-performing major equity market in January, growing by 7.1%. The gains were driven by the financial and consumer sectors, thanks to a strong global economy and early signs of improvement in the eurozone's economic data¹⁴.

Asia

China's inflation dropped to 0.1% in December, down from 0.2% in November, marking the lowest level since March. This highlights the ongoing risk of deflation in the country, despite the government’s stimulus efforts and the central bank’s supportive monetary policy¹⁵.

In Japan, inflation rose to 3.6% in December 2024, up from 2.9% in November, reaching its highest level since January 2023¹⁶. In response to this uptick, the Bank of Japan increased interest rates to 0.5%, the highest level in 17 years¹⁷.

The Japanese market lagged in January, with the TOPIX rising just 0.1%. Meanwhile, in China, equities saw slight gains, but the weak performance of the Indian market held back the MSCI Asia ex-Japan Index, which rose just 0.8%¹⁸.

What this means for you

With slow economic growth and the ongoing threat of tariffs affecting several regions, there may be further interest rate cuts in the coming months, despite inflation continuing to be relatively high (except in China). This presents a complex landscape for policymakers as central banks attempt to balance economic support with inflation control.

Markets are posting positive returns, making investing an increasingly attractive option in the current climate, as equities tend to offer a better chance of outpacing inflation than cash.

Please note: This guide is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content of this guide was accurate at the time of writing. While information is considered to be true and correct at the date of publication, changes in circumstances, regulation, and legislation after the time of publication may affect the accuracy of the guide.

Sources:

FP2025-068

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