In a volatile and eventful three months, UK stock markets still managed to end the quarter higher than the start, with a number of record highs reached in the period.
Global triggers for market moves were significant, and they included US tariffs, Middle East conflict, and commitments to increase defense spending across Europe. There have been a number of domestic factors in the mix too: elevated inflation, the appreciation of the pound against the dollar, a preferential trade deal with the US, and weak economic growth figures.
Here we look at five charts that explain the second quarter’s market moves.
UK Markets Underperform Eurozone and US
The Morningstar UK Index rose 3.4% in the quarter in pounds; this was the index’s best quarter since Q1 2025 when it rose 5.0%. In equivalent currency, this is behind the Morningstar Eurozone Index, which rose 4.7% in euros.
In dollars, the Morningstar US Market Index was up 10.7%, helped by a resurgence in tech stocks in late June, although this figure was flattered by the weakening of the dollar in the period.
Industrial stocks were the biggest contributor to the UK index in the three-month period, followed by financial services. Rolls-Royce RR. was the biggest contributor to the index gains, according to Morningstar Direct data.
UK Banking Stocks Keep Rising
Following a strong 2024, UK banks have maintained their performance in 2025, helping to boost the UK index’s gains. With inflation above target, markets have scaled back expectations of interest rate cuts this year, helping to boost net interest margins.
According to Morningstar Direct data, financial services stocks made the second biggest contribution to the Morningstar UK Index gains in the quarter.
In Q2 Barclays BARC rose 17%, making the third biggest contribution to the gains in the Morningstar UK Index. Year to date, the shares are up nearly 25%. UK-focused banks NatWest NWG and Lloyds Banking Group LLOY were the second and third best performing banking stocks over the period.
UK Interest Rates Are Lower
This quarter, the Bank of England made one interest rate cut, from 4.5% to 4.25%. However, on June 19 the BoE decided to hold rates at current levels.
The BoE remains concerned about sticky inflation in the UK, forecasting annual CPI will rise this year to 3.75%, significantly above the Bank’s 2% inflation target and comparative levels in the eurozone.
Markets expect an interest rate cut in August, although sticky inflation means that this could be postponed until later in the year.
Gilt yields are weaker at the end of Q2 than at the start, which means that bond investors perceive there to be a lower risk in investing in UK debt than they did three months ago. This also reflects lower interest rates, with one cut in May by the Bank of England. As bond yields and prices move in opposite directions, this means that UK bond prices have gone up in the period.
Investors are also less worried about UK government finances than earlier in the year, especially after the Spring Statement at the very end of Q1.
Along with the euro, the pound has been one of the beneficiaries of the weaker dollar in the period. While the trade tariffs announced in April have accelerated this trend, the pound hit a low in early January of $1.22 before rebounding to $1.29 on March 20. Since then the exchange rate has moved again, so a pound buys $1.37, the highest level since late 2021. While this move benefits UK tourists to the US, a stronger currency can limit investment returns, as this article explains.
