Investors' Outlook: Blowing the trumpet

Blowing the trumpet

As the clock struck noon on January 20, the US welcomed Donald Trump as its 47th president, kicking off his tenure with a flurry of executive orders. From immigration to energy to federal regulations, Trump wasted no time to prove his intention to rewrite the rulebook – and fast. For investors, one pressing question takes center stage: what will his actions mean for the US economy – and the global order – as 2025 unfolds?

Investors closely watched Trump’s whirlwind start, and of the biggest surprises was the absence of immediate action on tariffs, most notably on China or other trade partners, suggesting future tariffs may be more targeted, such as on electric vehicles (EVs), rather than sweeping measures. Coupled with Trump’s willingness to entertain TikTok’s continued presence in the US, signals a potential olive branch to China. It hints that his tough tariff rhetoric may have been more bark than bite and a negotiating tactic. On the downside, there was a lack of proposals for tax cuts or relief for US families. His expected focus on tightening immigration and border control aligns with his campaign promises, and could reintroduce inflationary pressures.

Still, Trump kicks off his second term with a relatively solid economic foundation. While labor market data has shown some softening, it has continued to come in stronger than expected and steady consumer spending has kept recession fears at bay. Along with stronger inflation data, these factors contributed to the US Federal Reserve’s revision to its dot plot, projecting two rate cuts this year instead of three. The Fed’s go-slow approach also reflects a desire to gauge the impact of Trump’s policies. While markets currently price as few as one cut in 2025, we still believe the Fed will stick to two as real rates are still too high, in our view. Overall, the US economy continues to grow and remains in better shape than many other regions around the world and we don’t foresee inflation being restoked.

That said, investors may face heightened volatility in the short term, as markets typically tend to be weaker in the months following a US presidential election while awaiting clarity on policies. We believe US equities have room for gains, underpinned by the investments flowing into artificial intelligence (AI) infrastructure. Revelations that China also has an AI solution – one that achieves similar results with far lower data usage intensity and is produced at a fraction of the cost – have unsettled the market. The high valuations of certain tech names may now be called into question. Superior economic growth in the US was already expected to drive a rotation into lower-valued names outside the tech sector, which will likely keep US equities overall in favor.

Across the pond, Europe’s largest economy contracted for a second consecutive year in 2024. Germany’s new government, set to be elected in February, will have its work cut out to address the challenges ahead. This Investors’ Outlook delves into Germany’s economic woes, the global selloff in government bonds, and the recent oil price spike.

As the trumpet sounds, the changes ahead in 2025 beckon, and we aim to help guide you through the year.