Market expectations for the US economy continue to be “too pessimistic”, with a consumer market in “good shape” and labour market cooling, according to Schroders senior US economist George Brown in the firm’s Jan 20 note.
With Trump’s second term coming into play today, Schroders Investment Insights’ team consider the current state of play of the US economy and markets, and what they’re watching most closely.
Most notably, the asset manager notes that the US economy is resilient, as it did not materialise in the anticipated recession in 2024. US gross domestic product (GDP) numbers for Q32024 were revised up, and Q42024 looks to have been pretty solid in terms of growth, they say.
The team expects Trump might implement protectionist policies, but are skeptical that they will include a universal baseline tariff. The team forecasts a GDP growth of 2.5% for 2025, accelerating to 2.7% in 2026.
However, should Trump implement his stated policy agenda in full, the implications for the US economy might be weaker trade, pause in investment decisions and a general shock to confidence which would be likely to “tip most economies around the world towards recession and lead to significant interest rate cuts”.
“In other words, while the US’s growth outlook is also diminished under an aggressive Trump scenario, slower growth would be accompanied by more, rather than less, inflation,” the analysts say.
An aggressive Trump may try to deliver large fiscal stimulus, but stronger demand would quickly run into a deteriorating supply side of the economy. GDP growth would probably slump in the first instance due to huge disruption, before receiving some boost from stimulus measures heading into 2026, they add.
Meanwhile, policy on trade will also have significant influence on the dollar, which has been experiencing strength at the end of 2024.
Schroders’ senior emerging markets economist David Rees says that any imposition of tariffs would tend to be supportive of the dollar because it would go some way towards equalising out the impact of tariffs on trade and activity.
See also: Trump plans to enact 25% tariffs on Mexico, Canada by Feb 1
He also expects support from interest rate differentials to re-emerge, so a stronger dollar is likely to remain for a while longer.
Bonds and equities
The firm says that heading into the second Trump administration, bond markets have been repricing higher in yield due to a combination of strong growth, stickier recent inflation prints and expectations for further reflationary policy under a new government.
Bonds now price between one and two 25-basis points (bps) Fed cuts for 2025, having priced more than four as recently as September, they say.
At present, the US budget deficit is “large”, and with demographic headwinds, projections are for deficits and debt to be on an explosive path. This will be a problem for bond markets, they note, and one that market pricing is “clearly responding to” with term premium rising sharply.
Schroders focuses next on US equities — at record levels, they note that US equities are close to their most expensive in the past 143 years. At the end of 2024, the MSCI US index made up 74% of the MSCI World Index, and 67% of the MSCI All-Country World index, according to LSEGDataStream, MSCI and Schroders.
“Regardless of the incoming administration policies, there are question marks over whether these evaluations can be sustained,” Schroders notes.
For investors concerned about high US valuations, one option is to pay more attention to small- and mid-cap companies that are more cheaply valued than large caps, they say.
“The US benefits from a strong labour market and likely policies from the next Trump administration that support domestic growth,” says Bob Kaynor, head of US small & midcap equities at Schroders.
“Small- and mid-cap companies are much more likely to have customer bases that are either exclusively or predominantly in the US. For that reason, small- and mid-cap stocks can provide investors with more direct exposure to the US economy. Given how expensive large caps are today, small- and mid-cap stocks also provide a less costly way to gain that exposure,” he ends.
