Deregulation, corporate tax cuts and higher uniform tariffs – incoming US President Donald Trump can pursue these campaign pledges after winning the popular vote and majorities in both chambers of Congress. Such policies can reshape global growth dynamics in the US’s favour. Here we outline a trio of potential economic effects and their implications for financial markets.
1. High-pressure economics
In 2016, then-Federal Reserve Chair Janet Yellen outlined the potential benefits of maintaining a "high-pressure economy" as a way to counteract the Great Financial Crisis. Such an economy operates above its usual capacity in order to keep recession at bay, albeit at the expense of higher inflation. Trump’s policies, combined with the Federal Reserve's commitment to cut interest rates, could apply this concept.
Growth and inflation expectations would initially be affected. First, corporate tax cuts are likely to support higher US growth but also increase the budget deficit. Second, with 10-year inflation expectations 30 basis points higher than in September, the market anticipates price rises over the long term. A key distinction is that while growth is expected to improve in the US, inflation is anticipated to rise globally.
That said, central banks are not expected to recalibrate their intentions to ease monetary policy. The overall economic outlook for 2025 suggests higher growth and inflation, but lower short-term interest rates. What could be the consequences for financial markets?
FIG 1. 2025 GDP growth market consensus (left) and 10-year expected inflation from market measures (right)1
2. Rate moves, fixed-income opportunities
Rates markets have responded immediately to these changes. Following a robust Q3 in terms of fixed-income market performance, duration has started to exhibit signs of weakness, as indicated by our trend indicator (see Figure 2). While the trend signal remains positive for equities, the deterioration in bond market sentiment compels us to question long-duration trades.
The rise in yields can be attributed to two main drivers. First, the expected increase in inflation. Second, the anticipated deterioration in public finances has prompted real rates to rise once more. Figure 2 highlights this painful sequence for fixed income portfolios.
We acknowledge these risks but also recognise the growing opportunity as higher yields, in the context of a steeper yield curve, imply potentially attractive bond performance in the future. Once the US debt ceiling negotiations conclude, a prudent investor could aim to capitalise on eventual market corrections and the potential upside in bond markets.
FIG 2. LOIM Trend signals (1 = bull, -1 = bear, left) and US 10-year yield decomposition (right)2
3. America (equities) first?
The risk-on sentiment following Trump’s win (see Figure 3, left) reflects a growing bullishness for US equities and credit spreads. However, it is challenging to paint equity markets with a broad brush. US equities, both small and large caps, have performed robustly but other regional indices have not kept pace. This casts doubt on the pervasiveness of the so-called ‘Trump bump’ – emerging market equities even experienced a limited decline in after the election (see Figure 3, right).
We see a sequence. Right now, uncertainties surround the destiny of European and emerging market corporate earnings (notably in China), given the expected tariff policy of the upcoming US administration. However, there are still some positive developments. First, the ability of the European Central Bank to accelerate rate cuts in response to growth concerns, thereby lowering the euro and boosting the competitiveness of European industry. Second, the substantial reserves that China retains in its stimulus plan. These factors partly explain the continued overall bullishness in the positioning of our strategies across asset classes (see below).
FIG 3. VIX and CDX HY spreads (left) and rebased performance of equity indices around the US election (right)3
Strategy positioning
The allocation views of investment teams across the asset classes remain balanced, although risk assets and bonds exhibit particularly appealing prospects.
Multi asset. The All Roads team maintains an overall neutral outlook has become marginally more bullish, with its allocation to cyclical risk premia rising to 45% versus 55% to hedging assets.
Fixed income. Anticipating that the rise in yields will soon peak, our Global Fixed Income team sees opportunities to lock-in this value now for 2025. It is positive on investment grade but neutral towards high yield and defensive on emerging market hard-currency bonds. Our Asia Fixed Income team remains overweight duration, India, commodities and high-yield sovereigns.
Convertible bonds. Positions held by our Convertible Bonds team are aligned with so-called ‘Trump trades’ favouring defence, US financials and the artificial intelligence value chain at the expense of European and Chinese exporters, and the value chain for renewables.
Equities. In the World Brands strategy, the team is increasing exposure to US brands, focusing on the technology, financial and digital sectors, as well as small caps in the US. Exposure to defensive sectors in all other regions is being reduced. Our Swiss Equities team favours cyclical sectors like information technology, materials and industrials at the expense of defensive sectors such as consumer staples and healthcare. The Asia Equities team remains overweight consumer discretionary stocks and its constructive view on China is mainly focused on the internet sector. It maintains a slight underweight to India.
