Key Takeaways
- US equities have performed well in the wake of the US election with smaller companies outperforming.
- Fears of recession in the US have receded and steady sustainable growth is in prospect.
- Inflation is ticking down towards the 2% target and US companies continue to perform well.
- A radical policy agenda implemented by relatively inexperienced cabinet nominees could cause issues.
- Tariffs will rise but likely by not as much as has been threatened pre and post the election by President-elect Trump.
- We believe that there is a positive outlook for the US economy and stock market.
It is no exaggeration to say that financial markets and governments across the world have greeted the clean sweep by Republicans in the US elections with some nervousness. Even before he formally takes power, President-elect Donald Trump has threatened 25% tariffs on Mexico and Canada. In addition, he’s nominated some candidates for his cabinet that seem to qualify less on their ability to do the job than their loyalty to him. He has also made it clear that he plans a radical break with the previous administration.
All this sounds negative. Nonetheless, the S&P 500 is up by over 4% since the election and has outperformed most other markets around the world. Smaller US companies have fared even better – the Russell 2000 is up by nearly 8% since 5 November. Quite remarkable.
This week, we look at the outlook for the US economy and stock market over the next four years and weigh up the positives and the negatives.
The starting point is certainly favourable. Fears of recession, which pushed the Federal Reserve (Fed) to cut the funds rate by 50 bps in September have receded and steady sustainable growth is in prospect. Meanwhile inflation has resumed its downward path and most analysts, and Fed officials, expect it to hit the 2% target on a sustainable basis next year. It really does look like a goldilocks scenario. Against this background, US companies continue to report strong earnings and we have recently upgraded the US earnings outlook for 2025.
There are negatives to be sure. The new President’s plan to dismantle what he sees as the ‘deep state’ which hindered his policy objectives in his first term, coupled with cabinet nominees, some of whom combine a lack of experience with a radical agenda, threaten chaos in the Administration. The Budget deficit, at 6% of GDP, is huge given the strength of the economy. With Congress on his side, Trump can implement further tax cuts, which would further boost the deficit. Federal debt is almost 100% of GDP and rising.
This is undoubtedly a negative, especially as fiscal deficits are high and rising in many other countries, contributing to the glut of bond supply. But global demand for bonds is also high given ageing populations and general uncertainty.
We do not expect Trump to go ahead with his threat to impose 25% tariffs on Mexico and Canada, but tariffs will rise under his Presidency. That raises prices and ultimately reduces economic wellbeing. But the overall impact on the US, in our judgement, will be modest: only goods, not services would be affected and there will be many exemptions. We do not expect tariffs on iPhones imported from China. The pain will be mainly felt by the exporting nations. Moreover, domestically focussed US companies would benefit.
The incoming President has a radical agenda and is likely to spring many surprises on the markets in the next four years. But he has inherited a strong economy with many world-beating companies. All in all, we remain very positive about the outlook for the US economy and US equities. The outperformance of both looks set to continue.
