Donald Trump, the 47th president-elect of the USA, has been given a strong mandate. He won both the electoral college and popular vote, while his Republican party secured a majority in both chambers of Congress. Although he can’t be US President for a third time, this ‘Red sweep’ provides a solid platform for Trump to implement his policies over the next four years, as he’s less likely to face pushback from Congress on economic proposals.
Taken at face value, Trump’s economic proposals are pro-growth (tax cuts and deregulation) and potentially inflationary (wider fiscal deficits). That said, for now, it’s hard to predict the impact on growth and inflation with any certainty, and it’s not yet obvious what’s realistic and what’s not.
However, overall, this ‘Red sweep’ means that US growth should stay solid. As such, we’ve increased our US growth forecasts to 2.8% in 2024 and 2.3% in 2025, above the market consensus. Meanwhile, the weaker growth momentum in Europe, combined with prospects of trade barriers, led us to revise our growth forecasts for the eurozone down to 0.7% in 2024 and 0.9% in 2025, below consensus.
US equities have risen 4-5% since October, and we expect further upward momentum, given the favourable economic environment. Therefore, we’ve decided to buy more US equities. Given that we already own broad US equities and the significant weighting of Big Tech within the S&P 500, we’ve decided to invest in an S&P 500 equal-weighted index. The equal weighting provides greater relative exposure to sectors such as Financials and Industrials, which we expect to benefit from new policies and regulations, and it reduces reliance on the performance of the tech sector.
To fund this purchase, we’re selling some European equities, bringing our allocation back down to neutral relative to our long-term strategic allocation. European equities have lost around 4% since October and face downside risks, such as higher tariffs. We’ve also taken profit on some of our exposure to European investment grade bonds.
It’s around 60 days until Trump’s inauguration, so it gives the market opportunities to refocus on the December central bank meetings (European Central Bank (ECB) – 12 December; US Federal Reserve (Fed) – 18 December; Bank of England (BoE) – 19 December). Currently, markets expect the ECB to cut rates once again and think that the odds are slightly more than even that the Fed will cut too.
While the ECB rate cut looks widely expected, bond and currency markets might react if the Fed decides to pause or slow its rate-cutting cycle. Since October, US Treasury yields have risen around 0.8%, and the US dollar has gained approximately 6%. For now, we own fewer Treasuries relative to our long-term allocation, which has proven to be a tailwind for performance. Treasuries are certainly more attractive now than they were a month ago, but the fiscal impact has yet to be gauged. We also think that the dollar has appreciated too quickly: economic outperformance could be positive, but wider fiscal deficits could be negative.
The UK’s inflation data (Wednesday) is expected to increase to just above the BoE’s 2% target. This matters, particularly considering the weaker-than-expected economic growth data last week. As such, market consensus currently expects the BoE to keep the Bank rate unchanged at 4.75% in December.
Meanwhile, Germany is set to hold snap elections for the Bundestag on 23 February 2025. This is earlier than the initial timeline of September, following the collapse of Chancellor Olaf Scholz’s three-party coalition last week. Although the market’s reaction was initially positive, the German DAX closed flat last week. Indeed, as most likely the government will change from the current three-party coalition to another grand coalition led by the centre-right CDU/CSU, reducing policy uncertainty, a policy which could turn more growth-friendly.
