Donald Trump’s agenda of aggressive trade tariffs and tax cuts is set to dominate markets next year.
The returning US president is expected to be an even more disruptive force in his second term, with repercussions for geopolitics in the Middle East and Ukraine.
His policy plans have prompted a stock rally, but also sparked inflation fears and are already influencing the easing cycle of US interest rates.
Financial pundits give their takes on all the above, plus whether the Magnificent Seven tech stocks can maintain their hegemony, opportunities in US smaller companies, prospects for other major economies, and growing concerns about government debt levels.
We look at how events might unfold in the world’s markets and round up some fund ideas for the year ahead.
Donald Trump returns in January: Incoming US president is expected to be an even more disruptive force in his second term
1. Global outlook: Growth of 3.2% is forecast
The global economy is not in bad shape, according to Evelyn Partners’ head of asset allocation Kate Morrisey.
‘Unemployment in developed economies is close to record lows and output growth is still solid.
‘The Federal Reserve, European Central Bank and Bank of England are lowering interest rates in response to decelerating inflation and to safeguard against risks from relatively high real borrowing costs.
‘Whilst we have seen market expectations of inflation tick up since the US election, the inflation profile remains closer to target than at any other time in the recent past.’
Morrisey also notes the Chinese authorities are trying to reflate their sluggish economy to avoid deflation, with measures including an unprecedented scheme to inject liquidity to support brokers, asset managers and insurers in purchasing stocks.
‘With Western and Eastern policymakers easing monetary policy, we could see global growth accelerate over the next 12 months,’ she says.
Guy Foster, chief strategist at RBC Brewin Dolphin, says: ‘According to the IMF’s World Economic Outlook, 2025 is expected to resemble this year, with the global economy projected to grow by 3.2 per cent.
‘Meanwhile, inflation is expected to edge back to target, which is encouraging. If the economy continues to grow, then we’re more likely to see stocks continue to provide good returns.’
But Foster says the IMF’s economists aren’t infallible and recessions often result from economic shocks such as sharp price increases in essential commodities like oil or gas, or sudden changes in consumer spending behaviour.
‘Tensions in the Middle East mean it would be unwise to rule out an oil price spike. However, the outlook for oil is tepid due to weak demand, partly driven by China’s struggling economy and a potentially stronger supply from the US – remember Trump’s promise to “drill baby drill”?’
Foster also adds: ‘Inflation could still be a headwind for investors. In recent months, there have been signs that inflation is more stubborn in some economies, most notably the US. Lingering inflation has tempered anticipation of interest rate reductions.’
Salman Ahmed, global head of strategic asset allocation at Fidelity International, says: ‘The US soft-landing scenario that we confidently held as our base case for most of 2024 should give way to reflation as we move deeper into 2025.
‘But an economy whose exceptional growth propped up the rest of the world in recent years may also now turn inward and become more protectionist.
‘Other major economies, and in particular Europe and China, will have to navigate a shift in US trade and industrial policy that is likely to weaken their own growth prospects and put downward pressure on domestic inflation as external demand slows.’
He also notes: ‘Rising government debt burdens is the underlying, longer-term trend. We believe public finances are fast reaching their limits and that above-target inflation is likely to become the least costly option.’
Donald Trump: Agenda of aggressive trade tariffs and tax cuts is set to dominate markets
2. The US: Trump views stock market as a barometer of his success
President-elect Donald Trump with his ‘America-first’ ambition could wield considerable power that impacts global trade, interest rates and inflation, suggests Close Brothers Asset Management’s investment expert Tony Whincup.
‘Although the gap between rhetoric and deed will be unpredictable, Trump 2.0 will arguably be unfettered second time around.
‘US exceptionalism and protectionism will have profound consequences for the global economy. More friction may crimp GDP growth and feed inflation forcing the Fed to recalibrate interest rate policy. ‘
Whincup says markets are already pricing in fewer interest rate cuts, and Trump might test the Federal Reserve’s independence – though its chair Jerome Powell has dismissed the idea Trump could legally fire him.
‘That said, Trump’s rather old-fashioned view of the stock market as a barometer of his success has clearly driven indices higher,’ adds Whincup. ‘US Treasury bond yields have risen and the US dollar strengthened since Trump’s re-election.’
Kate Morrisey, head of asset allocation at Evelyn Partners, says the US stock market’s performance has been extraordinary over the past decade, consistently outperforming its global peers.
‘However, this comes at a cost: investors are starting to consider some of the multiples in the market rather demanding with a high percentage of the overall valuation concentrated in a handful of names.’
Morrisey nevertheless believes US exceptionalism is likely to continue under the Trump administration – she echoes the observation above that Trump views the US stock market as an important performance barometer, and thinks he will look to implement supportive policies as a result.
‘This includes maintaining or even reducing an already low level of corporate taxation. He is also expected to slash bureaucratic red tape.
‘The main risk to this much advertised stance is that Trump follows through on some of his more extreme commitments from the election campaign including sizeable tariffs on Chinese imports and the deportation of millions of undocumented migrants.
‘Such steps are likely to have a negative impact on growth and would put upward pressure on prices.’
David Page, head of macro research at AXA Investment Managers, says policy uncertainty will replace political uncertainty following the US election.
‘Trump campaigned on policies of fiscal easing and deregulation, which should support growth, but he also campaigned for tighter migration restrictions, trade tariff increases and made several geopolitical statements, which could all have a materially detrimental impact on the growth outlook.
‘Yet for now there is significant uncertainty about the scale of implementation, with the immediate market reaction playing down some of the more growth-restricting policies.’
Page says: ‘Further immigration restrictions and deportations would constitute a supply shock – limiting, or reversing labour supply growth – as would tariffs. Both would reduce US trend growth rates and boost inflation.’
He suggests two other uncertainties that could impair growth. Tax cuts could increase the deficit and drive bond yields higher. And changing policies for Ukraine and the Middle East, and increased economic tensions with China, could topple the current, delicate geopolitical balance.
‘Our forecast is that with US activity enjoying solid momentum for now and a further loosening in financial conditions – in part in response to Trump’s win – the economy should post another solid year in 2025 and we forecast growth of 2.3 per cent,’ he says.
‘However, as we expect the new administration to introduce growth restraining policies soon after inauguration, we expect growth to slow markedly across 2026, to leave annual growth at 1.5 per cent, and annualised second half 2026 growth slower still.’
Magnificent Seven: Top US tech stocks have put in a powerful performance… will it last?
3. Magnificent Seven: Can lofty valuations and earnings continue?
‘Investors seem as bedazzled as ever by the so-called Magnificent Seven of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla,’ says AJ Bell’s investment director Russ Mould.
‘This year’s average 65 per cent gain across the septet leaves them with an aggregate market capitalisation of $18trillion, or 35 per cent of the S&P 500.
‘That powerful performance in turn means the S&P 500 represents 63 per cent of the FTSE All-World’s market valuation, a level that exceeds even the high seen at the peak of the technology, media and telecoms bubble in 2000.’
Mould says an unexpected recession and sustained inflation are possible challenges to the Magnificent Seven, adding: ‘Only a perfect middle path may do to justify their lofty valuations, let alone sustained further upside.’
Kate Morrisey of Evelyn Partners, says: ‘In recent years, strong corporate performance in the US has been led by the so-called Magnificent Seven who delivered very strong annual earnings growth – 30 per cent higher than the rest of the S&P combined – during 2023 and 2024.’
She says earnings are expected to broaden out in 2025, with analysts estimating 18 per cent earnings growth for the Magnificent Seven and 12 per cent for the rest of the S&P 500.
‘While the Mag 7 are still expected to outperform on earnings, the gap is far narrower than in recent years. Might the market move to narrow the stock price performance gap too?’
4. US smaller companies: Trump policies could be positive for earnings
Donald Trump’s impact on the US stock market could be positive for smaller companies, according to Hargreaves Lansdown’s head of platform investments Emma Wall.
‘On the campaign trail, Trump mooted a blanket 20 per cent tariff on all imports into the US.
‘Trade tariffs favour domestic businesses over international conglomerates, and smaller companies are usually more domestically focused, although investing in them carries more risk.
‘Trump has also proposed cuts to cut corporate taxes, which is positive for companies’ earnings – and therefore could be beneficial to stock prices.’
Peter Branner, chief investment officer at Abrdn, says there is a substantial risk that the Trump administration proves much more disruptive than expected, both to the upside and downside in economic and market outcomes.
But he believes that while forthcoming shifts in US policy bring uncertainty, they are likely to disproportionately benefit US firms, and small caps in particular.
‘The deregulation agenda pursued by the Trump administration is likely to see the Federal Trade Commission make mergers and acquisitions activity easier, while relaxing bank capital regulations and granting more energy exploration permits.
‘Corporate tax cuts will tend to benefit smaller companies most, while by contrast tariffs will disproportionately hit internationally exposed firms. ‘
5. Trade war: Trump could strike tariff deals if offered concessions
Significantly higher tariffs are…
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