Will we survive Trump 2.025

  The Global Investment Outlook – 2025 – ‘Beyond Big Tech’

2024 proved to be another strong year for shares and risk assets in general. Despite the various political and economic obstacles, most major stock markets finished the year close to an all-time high.

US economic momentum has proven to be remarkably resilient, despite tempering interest rate expectations. With the growth outlook improving over 2024, this helped the S&P 500 to outperform most global equity markets once again.

Technology shares, particularly the ‘Magnificent 7’ group of major US companies, accounted for 67% of S&P 500 returns. The Mag 7 now dwarfs the global investment landscape and presents investors with numerous challenges, but in turn, hopefully opportunities given valuations and earnings prospects elsewhere. The concentration of returns over 2024 and the size of these companies in a global context mean that even a small rotation away from them could have a significant positive impact on other markets.

So, what about 2025?

The OECD expects global economic growth to remain resilient in 2025 and 2026, which should be supportive of risk assets, but it is worried about protectionism and trade, which can be no surprise given Trump’s rhetoric. Markets will have to assess the impact of potential Trump trade tariffs, tax cuts, and immigration policy. All three could have ramifications for the US and global economy and the inflation outlook.

The market has been quick to decide the Trump winners and losers already, with Bitcoin and Elon Musk among the former and China and European manufacturers among the latter. Even before he takes office, Trump 2.0 is using social media to threaten trade tariffs -particularly against China, Canada, Mexico, and the EU. What nobody knows is the degree to which he will impose them, given such threats are typically used as a starting point for negotiations. Those against China seem the most likely. The UK is a more services-driven economy, which should be less exposed, although Elon Musk’s animosity for Sir Keir Starmer is unhelpful.

Trump’s policies – modest tax cuts, deregulation, and more supportive financial conditions, should be good for US businesses in 2025.

However, there are two risks. First, the risk that ongoing large US budget deficits and talk of more stimulus spooks the bond market. It is very noteworthy that the ballooning of the US deficit has occurred during a time of economic growth, when typically, a government should be ‘fixing the roof.’ Higher government bond yields would feed through into higher mortgage and corporate borrowing rates. Much rests on whether the new administration can deliver government spending cuts. The role of Elon Musk in this regard is fascinating and potentially brings to the US government one of the most significant innovators of recent history. Whether his relationship with Donald Trump survives is another matter.

Second, trade tariffs could damage consumer and business confidence. Tariffs could be inflationary, and this may be compounded by a significant reduction in migrant workers, which could re-ignite wage pressures. Having seen the damage that inflation did to the Biden administration, one would imagine that Trump’s ‘bark is worse than his bite.’ Nevertheless, one doesn’t envy the Federal Reserve (Fed) amid all this. Inflationary pressures could force the Fed to pause its interest rate cutting cycle. The Fed spooked markets just ahead of Christmas with more ‘hawkish’ interest rate guidance. Markets currently expect the Fed to cut rates by less in 2025, possibly by 0.5% rather than 1%.     

After an uncertain start, the UK government needs to get back on the front foot to regain the public’s trust and to facilitate the rise in business investment that will be integral to growing the economy. The economy should be stimulated by a rise in government spending in 2025, but will consumers and businesses feel less cautious? While the UK is less exposed to the Trump tariff threat, the Bank of England (BoE) will no doubt be concerned by the inflationary pressures arising from the Budget with many companies looking to mitigate the National Insurance hike via price increases. The BoE has promised a ‘gradual’ approach to interest rate cuts, but given inflation risks, this may now be by less than expected, with 0.75% rather than 1%.

The Eurozone faces the greatest challenge heading into 2025. Economic growth has been fading even before Trump tariffs, with Germany’s manufacturing sector suffering. Can the EU forestall Trump tariffs by buying more US gas and defence equipment? Then there is political turmoil in France and Germany, with the election in the latter in February a key event. Given these factors, the ECB has been cutting interest rates and is expected to continue to do so at a similar pace in 2025. A peace deal in Ukraine would be very welcome news. While European equities are cheaply valued and interest rates are falling, investors will likely await the elections in France and Germany before becoming more constructive on the region.

Markets will be watching how Trump deals with the main geo-political risks – Ukraine, The Middle East and China/Taiwan. He has already called for an end to the ‘madness’ in Ukraine and has called for China to pressure Putin into negotiating. At the same time, he has once again threatened to withdraw NATO support unless European NATO members increase defence spending from 2% to 3% of GDP. This is a big ask for those governments with high borrowing. Turning to the Middle East, Trump is likely to continue to support Israel, but while Iran’s power has been diminished, the region remains volatile. Trump is no doubt hoping that the conflict in Ukraine can be resolved, as the US can then re-pivot resources to Asia, but will he support Taiwan? China has already taken military activity offshore Taiwan to the highest level in 30 years following the recent visit of Taiwan’s president to the US.

Besides tariffs, there has been an ongoing technology trade war between the US and China, with the former restricting sales of AI chips to China and the latter limiting exports of key semiconductor raw materials to the US. This tit-for-tat is unlikely to alter, particularly if Trump rapidly imposes tariffs on Chinese goods.

China’s economy, although growing at around 4.5%, has not been firing on all cylinders due to the property sector debt woes. Given two-thirds of Chinese household wealth is thought to be tied to property, it has been a drag on consumer confidence. China’s stimulus has so far disappointed by making credit both more readily available and cheaper when the underlying problem is too much debt. China’s politburo has called for ‘more proactive fiscal policies and moderately loose monetary policies.’ Markets expect more stimulus, but will China wait and see what Trump does with tariffs?

While the UK focuses on renewables, Trump’s mantra is ‘drill, baby, drill.’ New US Treasury Secretary Steve Bessent has suggested the US should aim to boost oil production by 3 million barrels a day. Cheap and reliable energy for datacentres is vital. The leading US AI tech majors are investing in small modular nuclear reactor (SMR) technology to power their datacentres. Given UK electricity prices are three times those of the US, most of the world’s datacentres are likely to be built in the US. In the UK, Rolls Royce is a leading player in SMRs but Energy Secretary Ed Miliband is dithering!

AI (Artificial Intelligence) was one of the major themes of 2024 which helped propel NASDAQ and US equities to record highs, together with Trump’s election victory. The Magnificent 7 have net cash on their Balance Sheets of $460bn, so it is not difficult to see why the likes of Apple’s corporate bonds have similar yields to many heavily indebted governments.

How tech stocks perform in 2025 could be more important than Trump.

While the Magnificent 7 are geared differently to the AI theme, they make up over one-third of the S&P 500 index and trade at a material premium to the wider index. Can they sustain the earnings momentum? At least the AI theme looks to be flowing into the wider market, even the UK! Some of the strongest performers within the FTSE 100 towards the end of 2024 have been those companies that are using AI to enhance their business offering. The broadening out of stock market performance looks likely to be the key theme for 2025 following the unhealthy dominance of a handful of tech companies, as the benefits of AI start to feed through to the wider economy.

Finally, Trump’s unpredictability means that uncertainty and potential headwinds are high as we enter 2025. Expect the unexpected!

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.