What can we expect in 2025?

We’ll start with the US, as it will have notable impacts on all global markets. The intent and potential delivery of the key policy initiatives from the incoming Republican administration will have both short-term and long-term implications on the US and the broader global dynamic. Policy changes are likely to be prioritised over the next two years while the Republicans have the majority in the Senate and the House, which may change at the November 2026 mid-term elections.

Key US policy initiatives

Deregulation

Relaxing the capital requirements, particularly for the larger banks in the US, has already provided a significant boost to their share prices as it now allows the banks to lend excess capital or to repay it to shareholders. In any case, it provides larger lending institutions more options and greater potential profitability in the short term. However, it poses more risk in the longer term if they take on too much leverage and/or poorer credit quality of their underlying borrowers.

Ultimately, it will provide more accessible funds to corporates and individuals and make it easier to do business so will be a short-term market tailwind. To some extent, this benefit has already been reflected in US banks, with the S&P Banking Index up more than 11% in price terms since the election at the time of writing. Not only will financial companies benefit from the deregulation push, but also other industries will benefit from removing hurdles on key development areas such as autonomous vehicles.

Tariffs

This policy initiative is certainly getting the most headlines as it potentially takes the US back to the 1930s where tariffs were at similar levels to what has been outlined. This policy is favoured by Donald Trump as it threatens other countries to ‘play ball’ on other things.

For example, the 25% potential tariff on Mexico and Canada, which would plunge those economies into recession, aims to provide an incentive for those countries to do more to hinder the drug trade happening across their borders instead of leaving it to the US to battle. It prompted Canadian Prime Minister Justin Trudeau to hop on a plane and fly to Florida to have a chat with the president-elect.

Ultimately, tariffs will increase – and the US will use these as a weapon – but also a revenue source to continue the 2017 tax cuts for an extended time. The chart below from Oxford Economics looks at the effective US tariff rate under the different scenarios that have been highlighted. The current market expectation is for an effective rate of around 8% in the short term, but this could change quite dramatically.

Source: Oxford Economics

This will impact the US consumer in terms of the cost of the imported components that will largely focus on intermediate capital goods rather than final consumer goods, but the cost of US-produced products will still rise. As a result, this policy initiative is inflationary and the Federal Reserve will need to keep rates slightly higher than neutral, at least in the short term, so it can see the broader impacts.

On a longer-term basis, the tariff policy is likely to isolate the US on the global stage and the clarity of the intent will resonate in the political corridors of adversaries across the world. We are likely to see even greater co-operation across emerging economies that will side with Chinese influence to diversify away from dependence on the US economy.

In other words, this policy initiative will hasten the bi-polar global dynamic by strengthening the resolve of the emerging-economy alliance, whilst weakening the Western alliance as the broader policy frameworks diverge, particularly between Europe and the US.

This is occurring on multiple fronts from climate change, banking regulation, defence, and trade. As a result, Asia will become a stronger economic hub even though it will suffer short-term headwinds from the US tariffs policy.

Immigration

The sudden deportation of illegal immigrants is likely to create a supply shock to the US labour force. The incoming immigrants have been absorbed into the US workforce over the last few years, which has eased some of the tight labour conditions and has allowed the unemployment rate to slowly creep higher to something more sustainable.

In the short term, this is likely to have one of the biggest influences on US inflation and growth prospects in 2025.

Even though these undocumented workers are likely to work in lower-income industries such as hospitality and agriculture, their removal will create a void and force those industries to find other, more expensive solutions. This will ultimately push costs onto the consumer again. The deterrent for future immigration is also going to create a squeeze on broader employment going forward, particularly if the domestic growth incentives continue to accelerate.

China’s stimulus policies

In the next year, we are likely to see a significant shift in policy measures from the National People’s Congress in China to provide stimulus to the economy. The difference this time around is that the focus will be on the domestic consumer. In the past, stimulatory programs have focused on expanding credit to build infrastructure and housing.

Following a severe property correction, the Chinese consumer is disenchanted, with falling house prices, weak equity prices, and deteriorating economic conditions. The central bank and Ministry of Finance have already enacted multiple easing measure during 2024, but these were quite targeted to provide support for improvements in the housing market and give help to specific industries that benefit the technology sector in the country.

The policy prospects announced more recently look to provide “more proactive” fiscal policy support and embrace a “moderately loose” monetary policy stance in 2025. This implies more interest rate cuts, action to stabilise property and stock markets, and a ramp up of “extraordinary counter-cyclical policy adjustments” to boost domestic growth. This suggests it is going to use a multitude of tools at its disposal to turn domestic confidence around. The impending US tariffs are only going to increase their resolve to insulate the Chinese economy.

From a market perspective, having a significant stimulus program in the world’s second-largest economy is more important than the impending tariffs, which have rocked the domestic equity market in the short term. Chinese growth is good for the rest of the world, even if diplomatic relationships will be strained, as it will create a degree of demand from commodities to luxury goods.

However, more recent press articles, typically linked to reliable sources, have indicated that the focus for Chinese officials will move away from hitting specific growth targets, such as gross domestic product growth of 5%, and move to other targeted areas of growth to help the economy transition from an industrial output/export economy to a more self-sustaining domestic economy like the US.

Will Europe be left out in the cold?

Europe, more broadly, will be faced with a higher defence bill to support NATO and plans have already been drawn up. This will put pressure on already strained budget positions and put more pressure on the individual political arenas, as we are already seeing in France and Germany.

From a bottom-up perspective, industrial giants such as Volkswagen are struggling with labour disputes in Germany, as factories are destined to close as profitability is under immense pressure and German factories are too expensive to run. The prospects in 2025 for Europe are mixed as valuations for good quality companies are low, but the top-down economic prospects are muted. As a result, the European Central Bank will have to do much of the heavy lifting to stimulate the economy as fiscal policy goes in circles.

Where does that leave the UK?

The UK sits between the US and Europe in terms of policy and positioning. The relationship with the US was good in the first Trump presidency and, if tensions grow between Europe and US, then Prime Minister Keir Starmer will find himself caught in the middle. He has already been asked which side he will take. He replied by saying that it was not necessary to take sides – and the UK can work effectively with both regions. The budget has struggled to maintain the positive momentum on announcement, and more questions are coming through on the impact on different sectors, as well as the increase of National Insurance acting as a tax on employment.

The growth payoffs are not expected to provide a dividend on the spending initiatives for another few years. It is therefore likely that the UK’s 2025 economic prospects fares better than Europe but not as good as the US. Equity market valuations in the UK look cheap even after adjusting for sector differences, and that is also reflected in the number of takeovers we are seeing and companies looking to make their primary listings elsewhere.

Conclusions

We are in for a bumpy ride as the geopolitical ‘tit-for-tat’ scenario intensifies over 2025. The pro-US growth strategies will be inflationary, as it is hard to have stronger growth outcomes, restrict supply chains and reduce regulatory and fiscal restrictions and assume it won’t be inflationary.

The Federal Reserve will be in a difficult position – both politically and economically – resulting in the month-by-month policy decisions reflecting what the data is saying and where the balance of risks lie both with inflation relative to target and with running full employment. Both factors will create confusion at the moment. I know there are lots of strategy meetings happening to work through the different scenarios as companies assess the potential impacts, both positive and negative.

As a result, from a company and therefore equity-market outlook perspective, we think that the growth prospects will be helpful for the broader market and hence see a greater breadth of returns rather than just in the mega-cap technology names. These are likely to still do well in that environment but are heavily susceptible to any negative shock, so we recommend caution.

For the rest of the world, we anticipate headwinds, but these markets will represent better buying opportunities at the right time as they will be more susceptible to upside surprises. We need to be fluid and flexible in this environment.

This volatility will also be reflected in the bond markets, particularly if Trump is too aggressive on the policy issues. A sharply higher bond yield could derail his growth plans, no matter what the Federal Reserve does, as higher market rates will translate to higher mortgage rates. Currencies will also be a major factor in 2025 returns, as more volatility with trade barriers and geopolitical tension will see greater speculation contrary to the relative calm we have seen over more recent times.

It is difficult to position portfolios for one scenario over another, so there will be a need to be more reactive in 2025 rather than proactive. A degree of preparedness in relation to portfolio positioning, so that moves can be made quickly, is warranted and can serve to mitigate some of the short-term risks, but also capture the opportunities in the short and longer terms.