The US stock markets initially soared after Donald Trump's victory in the presidential election in November on hopes of deregulation and tax cuts, although they gave back some of this move again by the end of the year.

Overall, 2024 was another stellar year for US equities. The S&P 500 rose over 25% (and the Nasdaq almost 30%), leaving practically all other developed markets trailing a long way behind.

The US economy has been one of the brightest spots in an otherwise drab global economy, with unemployment low, GDP growth of around 3% and the country's leadership in technology and AI stronger than ever. "American exceptionalism" is on everyone's lips, and as we begin 2025 the question is will it continue?

Much will hang on the economic policies pursued by the incoming President. It is generally assumed that these policies will be some combination of tariffs, tax cuts, deregulation and possibly expulsions of undocumented immigrants, but the scale and timing of any of these is anyone's guess. So far the markets have played a scenario of stronger growth and also slightly higher inflation, which has led to higher stock markets, higher bond yields, and a stronger dollar. But that is just an initial hunch. Things could turn out differently in practice.

To begin this report, we will take a look at the all-important economic policies of President Trump and their possible impact on the economy and markets.

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The possible impact of Trumponomics

• How will tariffs impact on growth and inflation?
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  Donald Trump's signature policy is of course trade tariffs. He has talked about imposing across-the-board tariffs of 10%-20% and punitive tariffs of up to 60% on China and 100% on Mexico (to prevent it being used as a back door into the US).
  
  While the President has fairly extensive powers to impose tariffs unilaterally, the broader the tariffs are, the greater the chance that they could be challenged in the courts, or conceivably by Congress.
  
  There is debate about whether tariffs will be imposed on principle or used as a bargaining chip to force concessions from trade partners. Some have speculated they could even pave the way for a "grand bargain", where, for example, Europe and China agree to increase their imports of US products, and possibly strengthen their currencies, in return for a lowering of US tariffs. Both motivations are probably in play, but President Trump's predilection for a deal is well known.
  
  Most economists believe that tariffs will have a negative impact on economic growth, although the effect could easily be swamped by other policies, such as tax cuts (see below).
  
  Views on the inflationary impact differ widely, however. The consensus is that there will be some upward impact on inflation, particularly in the short term. Others argue that the impact will be limited, or could even be negative, as price increases for goods on which tariffs are imposed will be offset by price falls on other products.
  
  Furthermore, a stronger dollar would tend to offset any inflationary impact of tariffs (President Trump has in the past expressed a preference for a weaker dollar, but so far the markets have ignored this). Hence the jury must be seen as well and truly out over the effect of Trump's tariffs on inflation.
  
  A further wild card for inflation is President Trump's pledge to remove millions of undocumented immigrants. Economists fear that, if enacted, this would lead to labour shortages and rising wages, but it is widely thought that it will be impossible to carry this out on a large scale in practice.
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• Tax cuts and deregulation
  
  The President-elect has pledged to extend the personal tax cuts from his first term, due to expire at the end of 2025, and also cut corporate taxes (particularly for production in the US) and a range of other taxes.
  
  This is clearly good news for US stocks, which explains the jump in share prices following Trump's election victory.
  
  Trump is also believed to be generally in favour of deregulation (particularly in the crypto industry), although it is unclear how friendly he will be to the tech industry, which some Republicans have suggested needs to be reined in. Nonetheless, there is likely to be a focus on deregulating and cutting red tape, which is in principle positive for business and economic growth.
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• Monetary policy
  
  The Federal Reserve cut the federal funds rate for the third time in December, to a range of 4.25%-4.50%, but halved its expected rate cuts for 2025 from 100bp to 50bp and also revised up its inflation forecasts.
  
  This was described by some observers as a "hawkish" rate cut. The Fed appears to be already building in some upward impact on inflation from the new President's policies. The meeting statement also suggested that rates will now be on hold for several months at least.
  
  Of course, the Fed could ultimately cut interest rates by more if inflation behaves better than expected. However, there is the potential for a conflict with President Trump, particularly if the economy weakened and the Fed was perceived to be too slow to cut interest rates, or the President put pressure on the Fed to lower interest rates to weaken the dollar.
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• Impact on the markets
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  As already noted, the "Trump trade" has so far meant rising equities, weaker bonds and a stronger dollar. But it doesn't necessarily have to stay this way.
  
  Trump's economic policies are something of an economic experiment. Hence their impact is by its nature uncertain, and this is accentuated by the fact that the policies are themselves fluid. Policies could change significantly depending on whether more conservative or more radical forces gain the upper hand in Trump's administration.
  
  Economic or geopolitical surprises are always possible. In a situation of such radical uncertainty, it makes sense to run a cautious investment policy (see "Which asset classes should we consider?" at the end of this report).

USA

Growth solid, signs of a pickup in recent months

There have been signs of some parts of the US economy gaining strength in the last quarter of 2024.

Consumer confidence has been rising since mid-2024, although it remains below average in a historical comparison. This has been reflected in retail sales, which strengthened modestly from growth of 2% yoy in September to 3.8% yoy in November. The ISM manufacturing purchasing managers' index also rose to 49.2 in December, just below the 50 expansion/contraction threshold and the highest level since March.

The US labour market was steady in the fourth quarter, with unemployment remaining unchanged at 4.2%, although this is still above the lows of late 2023. It has cooled a little from the gangbusters conditions that prevailed after the pandemic, when there were far more vacancies than jobseekers.

GDP growth has remained solid, coming in at 3% in Q3 and a similar rate is expected in Q4. These are effectively "goldilocks" conditions - not too hot and not too cold.

Progress on inflation has slowed in recent months, with core CPI inflation remaining unchanged at 3.3% since September. This is what the Federal Reserve was referring to when it said in its latest Federal Open Market Committee (FOMC) statement that inflation "remains somewhat elevated". However, the Fed's preferred measure, Personal Consumption Expenditures (PCE) inflation, is lower at 2.4% in November, while core PCE has edged up only marginally from 2.6% in June to 2.8% in November. All in all, therefore, inflation is still relatively well-behaved, even if it remains a little above target.

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Tech and AI

Fourth quarter rounds off a buoyant 2024

Tech stocks enjoyed a bull run after Trump's election victory up until mid-December, when the perceived "hawkish rate cut" by the Federal Reserve (see above) triggered a market pullback.

In the end Microsoft's share price slipped by 2% in the fourth quarter, while Meta and Apple rose by single-digit percentages and Nvidia by around 10%. Amazon and Alphabet posted increases of around 15%. Tesla was the standout among the Magnificent Seven with a remarkable 54% jump in its share price in the fourth quarter, fuelled by the close relationship between Elon Musk and President Trump.

This is not irrational, since President Trump's policies (e.g. reducing subsidies for electric vehicle manufacture and purchases and raising tariffs on Chinese EVs and batteries) are likely to cement Tesla's dominance of the US EV market still further. Nonetheless, Tesla stock corrected by 15% in the second half of December as some of the initial euphoria faded, leaving the gain for the year at just over 60%.

Operating results by all the tech giants remained strong in Q3, with continued robust sales and profit growth across the board.

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Q3 results for the Tech Titans

• Apple's share price rose 5% in Q4, continuing its steady advance, and was up 31% in 2024, keeping its position as the largest company in the world by market cap (after briefly ceding it to Nvidia). Sales rose 6% year-on-year in Q3 and earnings per share excluding one-time charges rose 12%. Apple has launched its AI-powered Apple Intelligence suite of features and is hoping it will drive an upgrade cycle over the next few years as consumers splash out on a new iPhone to gain access to the AI functionality. iPhone sales remain Apple's biggest revenue source.
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• Nvidia's share price rose 10% in Q4 and 173% in 2024. Sales and earnings more or less doubled year-on-year in Q3 and climbed 16% and 17% respectively on the quarter. However, probably inevitably, there was a modest slowdown in the blistering pace of growth compared with previous quarters, which may have prompted some profit-taking in the stock. So far Nvidia's lead in AI chips is unassailable and the company described demand for its existing Hopper chip and forthcoming Blackwell model as "incredible", commenting that AI "is transforming every industry, company and country".
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• Tesla stock soared by a remarkable 54% in the fourth quarter, seemingly powered by the close relationship that Elon Musk has formed with President-elect Donald Trump, giving him the unofficial title of "first buddy". Investors obviously expect Musk's influence to benefit his businesses. However, Tesla's share price fell in the first half of the year, so the increase of 63% in 2024 was behind Meta's 66% and Nvidia's 173%. Alongside this, the Q3 results were almost a sideshow, but performance was solid with revenues rising 8% year-on-year and earning per share by 17%
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• Alphabet enjoyed a strong fourth quarter, with its share price climbing by 14%, contributing to a 36% increase for the year. Q3 results were ahead of expectations, with revenue growing 15% and earnings over 30% compared with the previous year, helped by a particularly strong performance from its cloud division. Google is still fighting a number of lawsuits over allegations of anti-competitive behaviour. A judge branded it a monopolist in online search in August and is currently considering remedies. Its trial over an alleged illegal monopoly in advertising technology is still ongoing. So far investors seem fairly relaxed about the impact of these cases.
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• Meta had a quiet Q4 after a strong performance earlier in the year. The share price edged up 2% for a 66% gain in 2024. Q3 results were solid, with revenue up 19% year-on-year and EPS climbing 37%. Advertising performance remained strong and the company believes its heavy investment in AI is improving user engagement and monetisation.
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• Microsoft posted revenue growth of 16% in Q3, while profits rose 20%. This performance was led by its Azure cloud services, which are benefiting from growing AI usage. The share price slipped by 2% in the fourth quarter for a 13% gain in 2024.
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• Amazon stock rose 18% in Q4 after good quarterly results and 44% in 2024. Revenues climbed 11% in Q3 and net income was up over 50% compared with 2023. Amazon continues to increase efficiency in its retail operations and growth in its Amazon Web Services (AWS) cloud division remained strong.

Europe

Rate cuts should boost economic growth, Germany still lagging

The European Central Bank (ECB) continued its steady reductions in interest rates in the last three months of the year, cutting the deposit rate from 3.5% to 3.0%. This has come in response to soft economic data and inflation converging with the ECB's target.

However, Consumer Price Index (CPI) inflation ticked up to 2.4% in December, with core CPI at 2.8%. Although this data was seen as slightly disappointing, inflation is below the levels in the UK and US. The ECB has so far indicated that it is confident that inflation will continue to fall and expects to continue cutting interest rates next year. This puts it slightly out of step with the Fed and Bank of England, which have struck a more hawkish note lately, and has been one of the reasons for the weakness of the euro.

While economic growth remains sluggish in the euro area, there have been signs that the economy is stabilising in recent months. GDP growth actually picked up to 0.4% quarter-on-quarter in Q3 and was up 0.9% year-on-year.

The composite PMI (purchasing Managers Index) also rose to 49.6 in December, just below the growth threshold. The services sector continues to grow but the manufacturing sector is contracting. Manufacturing is clearly being dragged down by the travails of the German economy, which is suffering from a combination of cyclical and structural weaknesses. There are worries about the effect of US tariffs on the German car industry, which is known to be in President Trump's sights.

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UK

Economy stalls amid loss of confidence in the government

Recent UK economic data has been uniformly disappointing. GDP growth slowed to a mere 0.1% quarter-on-quarter in Q3, and Q4 is not likely to be any better. Retail sales rose just 0.5% year-on-year in November. The manufacturing PMI has fallen into recessionary territory, although the services PMI picked up in December 2024 and is just over 50, at 51.3.

This is not good news for a government that came into office six months ago with a mission to boost growth. A large part of the blame must lie with the government's decision to prioritise tax rises in its first budget and impose these almost exclusively on businesses, which has led to a predictable slump in business confidence and hiring intentions.

In spite of this gloomy growth picture, progress on inflation has been slower than hoped. Core CPI has fluctuated around 3.5% since the middle of the year. But services inflation and wage growth – viewed by the Bank of England as indicators of domestic inflation pressures – remain over 5%. This restricted the Bank of England to just a single rate cut of 25bp during the fourth quarter.

The UK's relatively high interest rates have been reflected in a generally strong sterling exchange rate, which has been a headwind for the UK stock market.
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Asia

Doubts about Chinese stimulus

After the announcement of a large economic stimulus package at the end of September, which led to a jump in the battered Chinese stock market, further details released since then have been regarded as disappointing by investors.

China still appears to be shying away from a fiscal stimulus package, which many economists believe is needed to revive flagging consumer demand and generally improve “animal spirits” in the Chinese economy. Many observers believe the Chinese authorities are biding their time until they see exactly what tariffs President Trump is going to impose. If swingeing US tariffs had a serious impact on Chinese exports, the authorities might be prepared to pull out a fiscal bazooka at that point.

The country continues to flirt with deflation, with inflation at just 0.2% in November. China's low inflation and comparatively weak growth has of course been a boon for the disinflation process in the West, by helping to keep commodity and oil prices down and lowering goods inflation generally.

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How have the markets performed?

Interest rate outlook

The Fed and ECB cut rates twice by 50bp in Q4 and the Bank of England trimmed by 25bp. The Bank of Japan (BOJ), which is moving in the opposite direction, stood pat at a policy rate of 0.25%.

Although it had been expected to raise interest rates again in December, the uncertain political situation in Japan, following the loss of the Liberal Democratic Party's majority in the parliamentary elections in October, led to political pressure to delay any rate hike until 2025. At the December BOJ meeting, the governor indicated that he would like to see further evidence of rising wages next spring before raising interest rates again. But it does look like it is only a matter of time before the BOJ takes its next tentative step towards policy normalisation.

Expectations of further US rate cuts were revised down, as President Trump's economic policies are widely expected to boost growth and possibly also inflation. The futures market is now only pricing in a further 50bp of rate cuts in 2025. At its last FOMC meeting of the year, the Federal Reserve also revised up its forecasts for interest rates and is now also forecasting 50bp of rate cuts next year, in line with the futures markets.

The ECB has been more doveish and indicated that it expects to continue cutting rates next year. Inflation is within reach of the central bank target at 2.4% in December and the weakness of the eurozone economy has increased the downside risks for inflation.

The Bank of England has also said that it expects to cut rates gradually but has so far moved the least of any of the western central banks. Its hand has been stayed by an uptick in inflation in recent months from 1.7% in September to 2.6% in November and by strong services inflation and wage growth, which reflect uncomfortably strong domestic inflationary pressures, in spite of the weakness of the UK economy. Nonetheless, the futures market is implying around 50-75 bp of Bank of England rate cuts in the course of 2025.

The following table charts the progress of the four key central bank rates since September 2022 until 31 December 2024.

As President Trump prepares to take office, the uncertainties over the economic and market picture in 2025 are unusually high. While the consensus is that Trump's policies will boost growth in the US and lead to higher inflation, a whole range of scenarios with upside or downside surprises on economic variables and geopolitics are all distinctly possible. How countries respond to US tariffs will also be critical.

At the same time, it is important not to lose sight of the underlying state of the global economy, which is the baseline for what will unfold in 2025. Clearly the US economy is robust and the global economy is growing at a respectable pace, with some pockets of weakness but few major economies in outright recession. Inflation is still trending down and central banks are still cutting interest rates. This is a positive environment for equities.

Equity valuations in the US are very high and it is unlikely we will see another year of 25% returns. Surprises are possible. Bonds have suffered in the Trump trade but would benefit if inflation is weaker than expected.

Geopolitics could be important too - a rapid end to the conflicts in the Middle East and Ukraine, as promised by President Trump, could push down oil and commodity prices and would benefit European stocks in particular.

In this environment it makes sense to remain cautious and maintain an even more diversified portfolio than usual.

While betting against American exceptionalism has not been a profitable trade in recent years, spreading bets more widely, and keeping a solid allocation to safer assets, such as fixed income and cash is advisable in current circumstances.

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Conclusion

Keeping a well-diversified portfolio is the name of the game until we see how the chips fall in the second Trump presidency. Even if there is a whole fan chart of possible economic and market outcomes, it is important to remember that the basic economic backdrop is positive, albeit still too lopsided towards the US, which is why American exceptionalism is still going largely unchallenged.

Ironically, if Trump's America First policies make the rest of the world realise that they have to take more responsibility for their own growth, this could help to rebalance the world economy. Such an optimistic scenario is certainly possible, even if less positive scenarios (such as a trade war or rising inflation) cannot be ignored either.

The next few months could be a bumpy ride at times, but there are plenty of grounds for remaining cautiously optimistic.
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Mark Estcourt

CEO

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