The Implications of Strong US GDP Data on Global Equity Markets and FTSE 100 Outperformance: Assessing the Sustainability of Gains Amid Diverging Growth Dynamics

The U.S. economy's explosive 3.8% annualized GDP growth in Q2 2025 has sent ripples through global equity markets, creating a stark divergence in performance between U.S. and international benchmarks. While the S&P 500 surged 10.9% in the quarter, the MSCI ACWI ex USA Index outperformed with a 12.0% gain, driven by a weaker dollar and divergent monetary policy trajectories An analyst’s FTSE 100 forecast for 2025^[3]. This backdrop raises critical questions about the sustainability of the FTSE 100's gains, which hit a record high of 8,679.46 points in January 2025 but later faced headwinds from U.S. tariff policies and trade uncertainty Why the FTSE 100 index could rise further after a fresh record high^[2].

U.S. GDP Growth: A Double-Edged Sword for Global Markets

The U.S. GDP rebound in Q2 2025—revised sharply higher to 3.8% from an initial 3.0% estimate—was fueled by robust consumer spending (up 2.5% annually) and a narrowing trade deficit Gross Domestic Product, 2nd Quarter 2025 (Third Estimate), GDP^[1]. This growth, coupled with Trump-era tax cuts and deregulation, has reinforced investor confidence in U.S. equities, particularly in the Magnificent 7, which delivered 19.1% returns in the quarter Q2 2025 Market Review: Rollercoaster Ride and Global Shifts^[4]. However, the same policies have introduced volatility. The April 2025 tariff announcements, which raised average U.S. effective tariffs to 22.5%, reduced real GDP growth by 0.5–0.9 percentage points and triggered a 10% depreciation in the dollar year-to-date US tariffs are expected to weaken the dollar as GDP growth slows^[5]. This depreciation, while boosting international equities for dollar investors, has also heightened concerns about global economic stability and corporate earnings for export-dependent markets like the UK Tariff tremors: The global impact of US trade policies^[6].

FTSE 100: Attractive Valuations, Fragile Momentum

The FTSE 100's trailing P/E of 12.91 and forward P/E of 12.48 as of July 2025 suggest it trades at a discount to historical averages and global peers An analyst’s FTSE 100 forecast for 2025^[3]. This valuation, combined with strong earnings from sectors like healthcare (e.g., AstraZeneca) and banking (e.g., Barclays), initially drove the index to record highs amid weak U.S. Q1 GDP data FTSE 100 outperforms as US GDP disappoints^[7]. However, analysts caution that the FTSE 100's gains are precarious. UBS notes a “slow earnings recovery” and highlights the index's reliance on energy and financials, which remain vulnerable to commodity price swings and interest rate uncertainty An analyst’s FTSE 100 forecast for 2025^[3].

The index's exposure to U.S. trade dynamics further complicates its outlook. While UK exports to the U.S. account for only 2% of GDP, the FTSE 100 derives 27.7% of its revenue from U.S. markets Tariff tremors: The global impact of US trade policies^[6]. Tariff-related volatility and the Trump administration's broader protectionist agenda have already caused the index to dip from its peak, as investors priced in risks to corporate margins and trade flows FTSE 100 steadies as investors weigh corporate …^[8].

Sustainability: Balancing Optimism and Caution

The FTSE 100's ability to sustain its gains hinges on three factors:
1. Earnings Resilience: Q3 2025 earnings reports show upward revisions to EPS estimates, with FactSet noting positive guidance from companies US tariffs are expected to weaken the dollar as GDP growth slows^[5]. However, UBS warns that a “slow earnings recovery” could limit upside potential, particularly if U.S. tariffs escalate An analyst’s FTSE 100 forecast for 2025^[3].
2. Valuation Attractiveness: The index's 11.4x P/E multiple, below its long-run average, offers a buffer against short-term volatility US tariffs are expected to weaken the dollar as GDP growth slows^[5]. Yet, with the Buffett Indicator signaling U.S. stock overvaluation, capital may continue to flow toward undervalued international assets Q2 2025 Market Review: Rollercoaster Ride and Global Shifts^[4].
3. Trade Policy Uncertainty: The UK's limited trade agreement with the U.S. (capping tariffs at 10%) has softened the blow of protectionist policies Why the FTSE 100 index could rise further after a fresh record high^[2]. Still, a broader shift in U.S. trade strategy could disrupt global supply chains and erode investor confidence in the FTSE 100.

Conclusion: A Tenuous Equilibrium

The FTSE 100's outperformance in early 2025 was underpinned by attractive valuations and a flight to quality amid U.S. economic turbulence. However, the index now faces a delicate balancing act. While its earnings growth and undervaluation provide a foundation for moderate gains, the sustainability of these gains depends on navigating U.S. trade policy risks and divergent global growth trajectories. For investors, the path forward requires a nuanced approach: capitalizing on the FTSE 100's relative value while hedging against the volatility of a world increasingly shaped by protectionism and divergent monetary policies.