Trump’s policy priorities don’t yet shift outlook

Donald Trump’s second presidency began with a series of executive orders. The new administration’s impact will be felt in global trade, energy, industrial, fiscal and foreign policy, and boost government and investment spending. The Trump White House is profoundly challenging the post-1945 world order, but for now, policy initiatives are largely in line with campaign rhetoric, and as a result, do not change our baseline expectations for the US economy and markets.

The volume of executive orders and pronouncements from President Trump in his first week in office left observers reeling and opposition muted. But to date they are not surprising, and lack many details. That makes it difficult to model their cost, or economic impact. Immigration plans have been more aggressive than expected, with commitments to deport illegal immigrants, rescind citizenship rights for those born on US soil, and military deployments to police the US border with Mexico. While these measures face legal challenges, they also signal quick action to President Trump’s political support base.

Overall, we expect the Trump administration’s agenda of deregulation and lower taxes to extend US economic and financial market exceptionalism. Our base case remains that the US economy is still running above its potential, and should deliver real gross domestic product growth of 2.4% in 2025. With real incomes rising, risks to the US job market look limited, the disinflation trend is in place, and benchmark interest rates are likely to be higher than the rest of the developed world’s as the year progresses.

Still running above potential, the US economy should deliver real GDP growth of 2.4% in 2025

Tariffs and their targets

At the start of the Trump administration, tariffs are still the focus of investors’ attention, and for good reason; along with an immigration policy that could create labour shortages, import duties carry the potential to lift inflation in the US. That would risk undermining consumption, which is for now driving the US economy, while weakening economies selling goods to American shoppers. President Trump has indicated that he is considering 25% tariffs on specific imports from Canada and Mexico, and a blanket 10% on Chinese goods, but added that he would “rather not” impose tariffs on the latter. He went further in an address to the World Economic Forum, offering lower tariffs and taxes for firms making their products in the US, while taking aim at European Union sales taxes.

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The administration has mandated the departments of Commerce, Treasury, US Trade Representative, and Office of Management and Budget to assess the impact of tariffs, with a 1 April deadline. This reinforces our base-case expectation that tariffs will be both phased in, and more moderate than threatened. That will cushion and delay their economic impact, probably into the second half of 2025, or even 2026. Much of the short-term impact depends on how quickly tariffs are applied, and the extent to which US importers have stockpiled goods.

From an inflation point of view, the net result of more aggressive immigration plans, and potentially softer tariffs should be broadly neutral. Cheaper energy would also help to contain inflation. President Trump last week called on oil producers to cut prices in order to undermine the Russian economy, which he said (along with a threat of further sanctions) would bring the Ukraine war to a quicker conclusion. The US administration’s energy plans are, for now, insufficiently concrete to adjust our oil price models, but an energy policy that boosts oil output, combined with broad business deregulation, should prove disinflationary in nature, and the US dollar’s strength will help to limit imported inflation.

Pro-risk, diversified portfolios

With US policies likely to remain uncertain in the near term, some market volatility should persist. Benchmark interest rates have been partly pricing such uncertainty since December 2024, in particular in longer-dated segments of the yield curve.

We expect 10-year US Treasury yields to settle around 4.5% over the next 12 months

The rises in Treasury bond yields in December last year and at the start of 2025 weighed on equity valuations and diminished the stock market’s cushion to withstand any negative surprises. Somewhat lower-than-expected core inflation data for December reassured investors that the disinflation trend is in place, helping to contain bond yields. Despite some near-term risks to US bond yields, a disinflation trend and policy normalisation should help rates lower. We expect 10-year US Treasury yields to settle around 4.5% over the next 12 months, suggesting limited added pressure to equity valuations.

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We keep our preference for corporate bonds, which should provide higher returns than government bonds for comparable maturities. Indeed, US corporate bonds should still benefit from a likely pro-growth US agenda (through deregulation and lower taxes) and relatively stable spreads, while government bonds may still be challenged by the potential for budget deficits and refinancing needs to rise, and so generate more yield volatility. Within government bonds, over the coming months we see the least pressure for bond yields to rise in Germany and the UK. Both countries, we believe, will likely see their central banks lower benchmark interest rates much more than markets currently expect. Germany should retain its fiscal stability, and so maintain its ‘haven’ status among government bonds. As rate cuts filter through, we see global rates fall over a 12-month horizon, and more rapidly in Germany and the UK. In these sovereign bonds, we would progressively increase duration within our preferred 5-to-7-year maturities.

Stock markets will stay focused on the outlook for earnings growth as the main source of returns

More focus on earnings, less on valuations

At the same time, stock market sentiment has rebounded with a solid start to the fourth-quarter earnings season, led by the financial sector. That helps equity markets cope with policy uncertainties and potential rate volatility. With this policy uncertainty eventually fading, similarly to the first Trump administration in 2017 (see chart), stock markets will stay focused on the outlook for earnings growth as the main source of returns. While high initial valuations will limit gains compared to last year, we still expect most equity advances to result from earnings growth in 2025. This should allow for low double-digit returns over 12 months in developed markets. With US tariffs poised to undermine growth elsewhere, in the rest of the world we selectively favour Japanese equities, and South Korea and Taiwan in emerging markets. The recent announcement by Chinese artificial intelligence company DeepSeek that it had developed an AI model at a fraction of its US rivals’ costs, triggered a sell-off in the US information technology sector. Other sectors resisted well, with the S&P 500 index excluding tech stocks posting new highs. This suggests that market concerns are focused on the sustainability of the AI growth model and related infrastructure investments. We believe the initial market reaction was excessive. In our view, the AI technology roadmap still looks promising, with US AI investments likely to increase further.

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Despite the recent consolidation, higher US rates and changing US trade and energy policies will continue to support US dollar strength and we see oil prices under pressure through 2025. Despite this, we also expect gold to perform well over 12 months, even in dollar terms, as central banks continue to buy the precious metal as a haven asset and to diversify their holdings. Nevertheless, gold’s returns are unlikely to be comparable to 2024’s. Considering the uncertainty surrounding tariff policies’ impact on inflation, gold can also act as a useful diversifier if we experience more volatile inflation. This environment also creates an even greater role for alternative assets, which can extend investment opportunities to non-traditional sources of returns for eligible investors’ multi-asset portfolios. Our current portfolio positioning has helped us to navigate the start of 2025 well, and we remain ready to adapt, to take advantage of any significant policy shifts.