One man, and what he does next, dominates the thoughts of many investors in 2025. That man is the 47th President of the United States and 2025, for good or ill, is going to be the year of the Donald.
The most likely positive impact of Trump 2.0 is within America, as he would no doubt want. Central to Trump’s objectives are his much-campaigned tax cuts and de-regulation – ideas that are usually music to the ears of business and markets. And both should, in theory, benefit the profitability and competitiveness of US producers.
“This should be positive for US equities, in absolute and in relative terms, as it should be supportive for the US dollar,” says Brendan Mulhern, global strategist at Newton Investment Management. Additionally, Trump has promised to use tariffs to support US producers, which looks like another win for US equities.
On the back of this, Robeco anticipates that US equities will sustain their upward trajectory, with the S&P 500 reflecting extended valuations following a year of strong performance.
Vincenzo Vedda, global chief investment officer at DWS Asset Management, presents a potentially different perspective.
“US equities might be constrained by high valuations and a low-risk premium, despite robust earnings. Large-cap technology stocks could still continue to lead the market, but their substantial index weight may introduce concentration risk,” he says.
In addition, Peter van der Welle, a multi-asset strategist at Robeco, offers a few words of warning. “Market sentiment could shift abruptly as macro-economic narratives evolve, highlighting the importance of diversified and dynamic portfolio management,” he says, offering a nod for investors to take a multi-asset approach.
Inflationary impulse
At the same time, in combination with higher tariffs and restrictions on immigration, higher deficits have the potential to generate an inflationary impulse. “The conditions necessary for a repeat of the inflation rates seen in 2021 and 2022 are not likely to stem from Trump’s policy agenda,” Mulhern says.
The assumption that the imposition of US tariffs will be inflationary is a keystone of many so-called Trump trades, from short treasuries to overweight dollar. But it should not be taken as a given, says Michael Metcalfe, head of macro strategy at State Street Global Markets.
“A recession rather than inflation may be more likely,” Metcalfe says, offering a contrarian approach. The Fed’s modelling is central to his case. “The main takeaway, to borrow a term from 2022, is that the inflation generated by a universal tariff in the Fed’s macro model is transitory.”
In addition, Metcalfe adds that not all tariffs necessarily feed through to the consumer and, therefore, drive inflation. He adds that despite the likelihood of higher costs on goods coming from China, only around 10% of imports into the US come from the country.
However, a re-acceleration of inflation would force a serious rethink of the now-consensus view that continued disinflation will track inflation back to the US’ Federal Reserve’s target and thus allow for an extended easing cycle, Mulhern adds.
“We are not yet at the point at which investors are countenancing interest-rate hikes from the Fed, but it appears very much on the central bank’s agenda to price out the rate cuts that it had previously pencilled in for 2025 at its September summary of economic projections,” Mulhern adds.
Additionally, he says investors would be likely to demand more of a yield pickup over short rates to take on interest-rate risk. “As such, the new administration’s policy agenda, while likely to be positive for nominal growth over the short term, could increase the risk of further increases in interest rates and interest-rate volatility, both of which could have consequences for financial-market and economic volatility,” he says.
In this context, it appears that the bond market is already beginning to reflect the Fed’s inability to ease policy as much as it has indicated it would like to, with government-bond yields moving higher.
Robeco offers caution around high-yield bonds, where spreads are tight, while euro investment-grade credit appears more attractive relative to the US. Looking ahead, Robeco anticipates that shifting macro data, US trade policy and global liquidity conditions will all impact asset-class returns in 2025.
All to grow
Trump’s vision of America First – tariffs, de-regulation, restrictions on immigration and tax cuts – point to a full bag of tricks: higher inflation, higher corporate profits, higher interest rates and probably higher growth.
Philippe Noyard, global head of fixed income at Candriam, sees Trump’s policy proposals as inflationary across the board. “Tariffs will raise prices on goods and strong immigration restrictions will raise prices on services. Taken together, this may lead to an un-anchoring of expectations and attendant re-pricing of terminal-rate expectations,” he says.
Although the effect on growth could be more nuanced, but more likely positive on balance. “The inflationary nature of Trump’s policy aims lead us to take a more prudent stance on US rates, while maintaining our bias for further curve steepening,” Noyard says. “The lack of certainty around the detail of Trump’s policies could put a ceiling on any excessive yield rises in the near term.”
Even Vedda has to concede to the influence of Trump. “Heading into 2025, the investment landscape is characterised by promising conditions offset by significant unpredictability,” he says.
The reconciling forces of normalised growth and easing inflation, combined with expected central-bank rate cuts, offer a favourable environment for various asset classes in his view. However, Vedda says: “The election of Donald Trump to a second, non-consecutive term as US president introduces an element of uncertainty that could affect market dynamics.”
The Fed move
Pimco economist Tiffany Wilding says an interesting question is where the Fed’s target range might be at the end of 2025, particularly considering president-elect Donald Trump’s promise to introduce 25% tariffs on certain goods from Canada and Mexico and increase tariffs on China by 10%.
“We believe the Fed is likely to continue cutting rates next year, and the debate is how fast or slow it will proceed. Despite some risk of aggressive tariffs, we do not expect the Fed to reverse course and raise rates,” she says.
Standard monetary policy rules suggest that it would take a large inflation shock – usually the type associated with a global supply shock – to prompt the central bank to raise rates again. “And even then, inflation expectations and the labour markets would matter,” Wilding says.
She says many economies – including the US – are now starting to look more normal than they have at any point since the pandemic. “While price levels remain elevated, inflation is running at or very close to central bank targets, labour markets appear back in balance – for example, the ratio of vacancies to unemployed workers is below pre-pandemic levels in the US, and real wealth is essentially back to pre-pandemic trends – all while long-term inflation expectations have remained anchored,” Wilding says.
She also notes that while stronger US economic data could have the Fed considering a pause in December and/or adjusting its projected policy rate path somewhat higher in 2025. “We think the broader trend, and distribution of potential outcomes, is toward lower policy rates.”
Although Wilding also notes: “If the US economy performs worse than we expect and the labour market weakens, the Fed could cut more quickly in an effort to close the gap between current policy and the Taylor-based rules [of setting interest rates].”
Risky assets
Looking back at Donald Trump’s win and the Republican Party taking the Senate and the House of Representatives, it seemed very much to set the cast for the investor outlook.
“Markets quickly reacted exactly as one might have anticipated: risky assets rallied, and among them those with a domestic US focus – small cap equities and high yield bonds – were the biggest outperformers,” Noyard says. “Treasuries sold o and the yield curve bear-steepened, reflecting investor concerns about fiscal indiscipline.”
Rates markets though in much of the developed world reacted in nearly the opposite fashion. If the new Trump administration implements its sweeping tariff agenda, there will be a clear negative impact on growth, Noyard says. “European rates fell and the curve bull-steepened – reflecting expectations about a possibly accelerated trajectory in the European Central Bank’s cutting cycle,” he adds.
A key point of discussion is that it has been widely opined that Trump 2.0 will benefit financial markets, based primarily on historical performance following Trump’s first victory in 2016. Noyard makes some interesting observations about the US investment environment.
“In line with other risk assets, credit spreads have rallied further, especially in the domestically focused high-yield segment,” he says. “While valuations remain at near-historically rich levels, given the clear appetite investors are signalling on US risk assets, we prefer, for the time being, to revert to a neutral view on investment grade and reduce our underweight on higher yield.”
Trump 2.0
However, while this Trump equals a positive market narrative may appear logical, the backdrop is different today for two reasons, Mulhern says.
Firstly, prior to Trump’s 2016 victory, global growth was slowing, evident in the commodity and emerging market bust of 2014-15. Eighteen months of cross-market volatility had ensured that many market participants had de-leveraged, leaving aggregate exposure to risk assets at historically depressed levels.
Secondly, the then Fed chair Janet Yellen had performed a dovish policy pivot in early 2016 which created the space for a broad, simultaneous easing of policy in the US, Europe and China. In turn, 2017 was the first period of synchronised global growth since the 2008 global financial crisis, and stocks soared.
The current environment is therefore somewhat different. “We are several years into an economic cycle and market participants are heavily exposed to risk assets,” Mulhern says. “Additionally, the growth outlook is not what it was in late 2016 following globally co-ordinated easing of monetary and fiscal policy.”
Today, the regional outlook is increasingly divergent, and the imposition of those higher tariffs by the US could mean lower growth elsewhere, particularly in China and Europe.
China will probably respond with further policy announcements, and Europe is likely to ease monetary policy given fiscal constraints. “We expect interest-rate differentials to diverge further as growth outside the US comes under further pressure,” Mulhern says.
European Trump
A Trump presidency will therefore have ramifications throughout Europe.
Michael Nizard, head of the Edmond de Rothschild Asset Management’s multi-asset team, says there is potential negativity within the eurozone, which will be intensified by the Donald Trump factor.
“The pessimism surrounding the eurozone is nothing new, but the economic outlook differential between the USA and Europe has reached a new level following the election of Donald Trump, even before the possible application of tariffs. European morale is at half-mast, reflected in the weakness of the single currency since September 2024,” Nizard says.
The solution is probably not in the hands of the European Central Bank, but in those of European politicians, Nizard says. Which is a worrying scenario for investors in itself.
“Impacted by the growth differential between the two zones, as well as by the interest rate differential which has exceeded 200 basis points over 10 years, the euro is now suffering from political problems in its two economic engines: France and Germany, at a time when Spain, Italy and Portugal are clearly standing out economically,” Nizard says.
On other aspects of European investments, Noyard retains a neutral view on European investment-grade credit. “Spreads have indeed continued to tighten further, but unlike US credit, not quite to near historical lows,” he says.
It is interesting to note, Noyard adds: “That the swap spread of European investment-grade credit remained at, as indeed the swap spread of German government bond yields turned significantly less negative at short tenors and is now positive at the 10 year.”
Fundamentals here, he adds, remain healthy and in the near term, although the growth outlook has certainly not improved, and he doesn’t see foreseeable risks that would warrant a substantial correction.
European high yield followed a similar trajectory, with spreads narrowing by some 25 basis points. “This is undoubtedly tight, but again, given okay fundamentals and the overall quality level of the asset class, we retain a neutral position,” Noyard says.
Difficult task
In the UK, there is still the lingering spectre of the Autumn Budget hanging over it, with the market giving a thumbs down to what the Labour chancellor unveiled. The Bank of England (BoE) has also published new growth forecasts, which see growth increasing by 0.75% and also see inflation returning to target around a year later than previously predicted.
“The Budget unveiled by Labour chancellor Rachel Reeves in October [2024] could also make the Bank of England’s task more difficult,” Noyard says. “We therefore now see a slow- down in the pace of BoE cuts compared to our previous expectation and temper the level of our conviction.”
Noyard says he remains convinced that the UK economy will have difficulty supporting the terminal rates as currently priced by the market, like the eurozone, as both are faced with similar structural weakness and low growth.
“However, we acknowledge that so far, the market has not come around to this view, and indeed post-election, we observed gilt trading directionally similar to euro rates – that is, rallying even as treasury yields rose – but not to the same extent,” he says.
Global expansion
Vedda paints a positive picture that DWS economic projections suggest continued global expansion, steering clear of recessionary threats in major economies with expectations that US growth of 2% in 2025, the eurozone growing at 0.9%.
For 2026, DWS expects US growth of 2.2% and 1% for the eurozone. “This reasonably positive backdrop seems supportive of equity markets, with high single-digit returns expected globally,” Vedda says.
In bond markets, he expects the yield curve to steepen further as central banks continue to cut rates, with the Federal funds rate reaching 3.75% to 4% and the European Central Bank’s deposit rate at 2% by the end of 2025. “We continue to favour investment grade corporate bonds on the back of stable economic conditions, although we don’t expect spreads to tighten further,” he says.
Interestingly, DWS thinks alternative assets, particularly residential real estate, will benefit from strong fundamentals despite fairly stable long-term interest rates.
In addition, Vedda says gold, while it might not repeat its 2024 rally, could post respectable gains, adding some portfolio diversification and potentially acting as a hedge against a number of potential economic threats.
Those threats include on-going geopolitical tensions, US debt concerns and an unpredictable political climate. “We expect many of Trump’s tax and spending promises made on the campaign trail will probably need to be scaled back to reflect the political, fiscal and economic realities,” Vedda says.
“In light of these factors, a globally diversified investment strategy across regions, asset classes and styles might mitigate individual risks and provide opportunities as they arise,” Vedda says. “Strategic vigilance and a balanced approach seem essential to navigate the complexities of 2025, allowing investors to position themselves to take advantage of market swings while being prepared for volatility.”
Bigger trends
Regardless of Trump, short-term political decisions and geopolitical uncertainties, it will be essential for investors in 2025 to remain attentive to the major structural trends impacting the global economy, says Candriam chief investment officer Nicolas Forest, offering a different take on the outlook.
“We are thinking, of course, of the aging population, which is accelerating and is largely the result of advances in longevity,” he says. “This demographic challenge calls for increased investment in infrastructure, medical research and innovative technologies. It also calls for structural reforms to better control its impact on public finances.”
In addition, he cites that the effects of climate change continue to be felt on every continent, something investors should not lose sight of. “While the revival of fossil fuel production could temporarily exert downward pressure on prices, reducing the competitiveness of renewable energies and slowing green investment, the decarbonisation process is set to continue, even if progress is likely to occur at different speeds in different regions,” he says.
And Forest also cites technological innovation remaining a key driver. “The artificial intelligence revolution, still in its infancy, promises to profoundly transform our societies. It will play a key role in improving the quality of life of aging populations and in accelerating the energy transition,” he says.
In a similar way, Jay Jacobs, US head of thematic and active equity ETFs at Blackrock, says investors should keep an eye on the big topics.
“We believe artificial intelligence and geo-politics will remain key themes for 2025, yet there are significant shifts in the underlying policies, demographics and tech developments that will drive them forward,” he says. “Investors should consider what exposure they have to these themes and how they may position their portfolios for these structural trends.”
And offering a succinct investment outlook, without even including the Donald, Michael Lok, group chief investment officer at UBP, says: “Amid fragmented growth, prudent strategies focusing on resilient sectors, active risk management and opportunities in Asia and green transformation are key to navigating 2025 successfully.”
In contrast, putting Trump at the centre of what happens next, Eric Vanraes, head of fixed income at Eric Sturdza Investments, says: “The end of 2024 looks like the calm before the storm. When the storm blows, we will already need to know what to do, because we won’t have much time to think.”
2025, therefore, is likely to be the year of the Donald. And investors need to be ready.
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