Shannon Saccocia, chief investment officer – private wealth at Neuberger Berman – shares her latest thinking with us on Trump’s initial economic moves, how markets have responded so far, and how that’s affecting asset allocation decisions.
This year is one in which easing inflation, lower policy rates and a more pro-business political environment have the potential to support above-trend US growth (subject to an abnormally wide dispersion of risk) is anticipated. The key risks? Political and fiscal.
At the same time, President Donald Trump was being sworn into office. Soon afterwards, he signed 26 executive orders. That is a record for the first day of a new president. Was it enough to convey his administration’s direction and priorities, and resolve some of the uncertainties in our outlook?
No big surprises on economic policy
Despite a few curveballs—renaming mountains, “restoring biological truth,” rescinding birthright citizenship – there were no big surprises on economic policy.
Backpedalling on renewables and talking up fossil fuels had been largely priced in. Stripping back regulatory agencies – and the federal government in general- had also been a fair bet, and while the language on border security and immigration was aggressive, it was not a major departure from the campaign messaging. President Trump’s remarks to Davos delegates on Thursday dialled up the rhetoric on lower rates, lower energy prices and lower corporation taxes for foreign companies that choose to manufacture in, rather than sell to, the US.
On balance, that policy mix is likely to support strong domestic growth, a boost to the real earnings of lower-income consumers and smaller companies, and a broadening of US equity market performance beyond mega-cap technology.
Since the start of the year, the market has swung more decisively behind this outlook. The S&P 500 Equal Weighted index has edged ahead of the market capitalisation-weighted version. The Russell 1000 Value Index has sustained a lead over the Growth index. The cyclical Energy and Industrial sectors are leading the pack in the S&P 500, several percentage points ahead of Information Technology.
The crowd of tech titans around Trump and the announcement of the $500bn ‘Stargate’ AI infrastructure initiative might give investors pause, but mega-cap tech companies will be doing the capex on AI while the productivity benefits ultimately flow to the broader economy.
Lack of day one tariffs
What was notable about the stream of executive orders was the lack of anything big on trade and tariffs beyond assigning an ’America First policy directive’ to the office of Secretary of State. Again, this appears to have been the central scenario of most investors.
The latest Bank of America Merrill Lynch Global Fund Manager Survey came out the day after the inauguration; headlined ’Make Europe Great Again,’ it revealed the second largest jump in allocation to European equities in the past 25 years.
Year to date, Japanese equities have lagged in anticipation of last week’s rate hike from the Bank of Japan, and China’s market has been volatile, buffeted by domestic headwinds and mixed signals from President Trump on whether and how it might be targeted with tariffs. However, Europe’s STOXX 600 has reached a record high and gone toe-to-toe with the S&P 500.
For sure, last week was not a great flowering of multilateralism. Executive orders aside, on inauguration day, President Trump told the press that a 10% tariff on China’s goods and a 25% tariff on Canada and Mexico were still on the table, and that Europe was “going to be in for tariffs,” too. That hit Chinese equities, the Mexican peso and the Canadian dollar, and behind the strength in the STOXX 600 was a lot of volatility in exposed sectors such as Automobiles & Parts. A few days later, a softer line on China in the Davos remarks pushed Chinese equities back up.
Amid the rhetorical back and forth, the market’s main takeaway appears to have been the lack of Day One tariffs. That reinforced the notion that the rhetoric is about leverage for future negotiation rather than settled policy. The result was not only buoyancy in European equities, but also a pullback in the overvalued US dollar, oversold US Treasury yields and overheated inflation swaps.
A lot can go wrong
While we are relatively confident about the broadening of equity market performance within the US, we have been more cautious about extending the thesis outside the US.
Should the Trump administration take its time to reach reasonable settlements with its trading partners, it becomes more likely that cyclically oriented markets like Japan and Europe benefit from a US-led cyclical upturn. Trump’s first day, and the market trends since the start of the year, may be tipping the balance in favour of that outlook. The Middle East ceasefire also helps, as would movement toward ending hostilities in Ukraine.
Then again, it may be that the US exceptionalism trades were simply overstretched coming into 2025. And a lot can go wrong with the more optimistic scenarios: Those big, blanket tariffs might come into force on 1 February, as threatened; one or two errant data points could revive US inflation fears; Republican party splits in Congress could derail government appointments or the administration’s tax policies.
Overall, it remains too early to definitively resolve the uncertainties at the heart of our outlook. Nonetheless, we retain our confidence in smaller and more cyclical US stocks over mega-cap tech, and for investors who have not already done so, we think it may be time to ease some allocation into non-US markets.
