Trump trades in retreat
After a strong start to the year, US equities have become more volatile in recent weeks and started March some 5% below their peak (in sterling terms). For the first time in quite a while, they have also significantly underperformed other global markets, including the FTSE100, the Dax and Hang Seng. US equities are not the only “Trump trade” that is faring poorly: the dollar and US bond yields, both of which rose after the US election, have likewise retreated from recent highs. What explains the disappointing performance of US stocks, given that President Trump has mostly done what he said he would? The reality is that many investors were expecting him to back away from many of his campaign pledges. It has come as a shock to see tariffs on Mexico and Canada actually implemented, even though they have been on the cards for months. Markets may also be disappointed that the administration appears to be prioritising initiatives with higher economic cost, such as tariffs, rather than those that boost growth, such as tax cuts. The approach may be starting to take a toll on the US economy.
Is the US economy slowing?
Recent economic data has been mixed. Surveys suggest that US consumer confidence has been falling for the past two months, even though real incomes continue to rise. There are now indications that spending may be following sentiment lower. This could reflect a delayed impact of high interest rates, but it is also possible that government policy is making consumers more anxious, with fears of inflation cited as a key concern for 2025. Federal job losses may be another area of concern. While the job cuts announced so far are small in the context of the overall US labour market, Schroders economists suggest there is a risk it could extend to hundreds of thousands of people if contractors are also included. Markets have now started pricing in more interest rate cuts from the Federal Reserve, sending US bond yields sharply lower (and bond prices higher).
Take Trump seriously, not literally?
President Trump was always clear that his administration would look to reshape global economic and defence relationships. The implications of this are now becoming clearer for investors. An additional tariff of 10% on Chinese goods would on its own have been manageable, especially as Chinese exporters have been able to limit the impact of tariffs by routing goods through other countries. This will not be the case for the 25% tariffs on Canada and Mexico. We expect continued uncertainty as companies work out how much of the cost they can pass back to suppliers or on to consumers, and how much they have to bear themselves. The Trump administration’s reimagining of global defence alliances will also have a significant economic cost. Europe’s bond markets have been under pressure as investors start to price in the impact of rearmament on European government finances.
All of the above generates dramatic headlines, and it can be difficult to separate the noise from the substance. The President has a mandate in many areas but still relies on Congress in others, where he has a slim majority in both houses. Many of the executive orders he has signed have been challenged in courts, with some such as the birthright order already blocked. History also shows that public opinion matters to presidents. A change for the worse in the economic backdrop, either through lower growth or rising inflation, may lead to a rethink if his policies are seen to be the cause.
Positioning
While equities have been under pressure in early March, we remain comfortable with our exposure. Fundamentals remain strong, with US companies reporting strong fourth quarter earnings. The continued rise in US incomes, even after adjusting for inflation, is also supportive. Having said this, we trimmed our equity exposure earlier in the year in part due to the high degree of uncertainty around US policy. We have also benefited from our exposure to stock markets outside the US, many of which have started the year strongly after lagging global markets in the previous year. During this recent episode of volatility, our allocation to US treasuries has been performing well. As in 2024, we will take advantage of tactical opportunities in fixed income as interest rate expectations evolve. While we are underweight alternatives overall, we still like gold and some other commodities which can help protect portfolios against both growth and inflation shocks.
Key
🟢 Positive
🔵 Positive/Neutral
⚪ Neutral
🟠 Negative/Neutral
🔴 Negative
Outlook
| Economics | US growth remains robust despite some loss of momentum. US consumers remain supported by household wealth and wage growth, but confidence has declined.The outlook for Europe and EM is more challenging, but there are some tentative signs of improvement from a low base. Tariffs are a material risk to global growth.Headline inflation is close to target, but core inflation is likely to remain above central bank targets. Risk is to the upside for the UK, Europe and US.Market expectations for interest rates are close to fair for 2025 for the US and UK, although look slightly too low for Europe. |
| Valuations | US mega cap equities remain expensive based on traditional metrics, but fundamentals are strong. Most other regions look fair value vs history, but expensive vs cash and bonds.High concentration of equity indices (alongside high valuations) remains a concern.Earnings estimates remain positive, and companies have been delivering. Revisions have been improving, albeit company guidance is subdued. Earnings strength is expected to broaden out beyond US mega caps this year.Credit spreads – the difference in yields relative to government bonds – remain expensive relative to history. |
| Sentiment | Sentiment towards equities has cooled whilst market breadth has widened beyond US mega caps.The continued strength of US mega-caps over 2024 increased the divergence vs non-US markets, although US stocks have fallen from highs recently.Non-US markets were mostly weak over 2024 but have generally outperformed so far this year despite tariff uncertainty.Volatility (based on US stocks) remains below long-term averages. |
| Risks | A resurgence in inflation, which would warrant continued hawkish central bank policy.Labour market weakness could challenge the developed market growth outlook. Potential spillover effects from slowing growth in China on the global economy.Escalation in geopolitical tensions, e.g. Middle East, Russia/Ukraine, US/China.Mounting levels of government debt, particularly in the US, pose a longer-term risk..US tariffs could pose further challenges to global growth.Political instability. |
Asset Classes
| Asset classes | Current positioning | Current views |
| Equities | 🔵 | Benign growth coupled with falling interest rates should be a positive. Trump’s pro-growth agenda is supportive for US firms, although higher inflation and tariffs are a concern. Earnings remain reasonable for the US and Japan, whilst Europe is showing signs of improvement from a low base. US mega cap valuations are expensive vs history (albeit with strong fundamentals) whilst other regions and US small caps are fair value. Sentiment has cooled and markets are showing signs of broadening. |
| Bonds | ⚪ | Although central banks are cutting interest rates, government bond yields look attractive relative to the last decade. We believe inflation risks are to the upside, but the market is now pricing this in; hence, we have taken some profit on inflation-linked exposure. After a run of strong performance, we also reduced our emerging market debt exposure. Credit spreads look tight (expensive), so we prefer more defensive positioning such as asset backed securities and short duration high-quality credit. |
| Alternatives | 🟠 | Select alternatives continue to offer diversification in a potentially volatile environment, albeit with a higher hurdle given yields available on bonds and cash. We favour assets with the ability to deliver less correlated returns to traditional markets and those which hedge against risk scenarios, such as gold and other commodities. |
| Cash | ⚪ | Although some central banks have started reducing interest rates, they remain attractive relative to recent history. Additionally, cash allows us to take advantage of tactical opportunities in potentially volatile markets. |
Equities
| Asset | Current positioning | Current views |
| Equities | 🔵 | Benign growth coupled with falling interest rates should be a positive. Trump’s pro-growth agenda is supportive for US firms, although higher inflation and tariffs are a concern. Earnings remain reasonable for the US and Japan, whilst Europe is showing signs of improvement from a low base. US mega cap valuations are expensive vs history (albeit with strong fundamentals) whilst other regions and US small caps are fair value. Sentiment has cooled and markets are showing signs of broadening. |
| US | ⚪ | Domestic growth remains robust, despite a slight loss of momentum, whilst corporate tax cuts and deregulation will be beneficial for many firms. Inflation has fallen closer to target, but the imposition of tariffs and deportations poses a risk. Valuations are expensive, but this is concentrated in the mega caps and these companies typically have stronger fundamentals. |
| Europe | 🟠 | The manufacturing picture remains challenging, and tariffs pose a further risk. Political risk remains elevated despite the conclusion of several major elections. However, valuations are reasonable, and earnings have been picking up off a low base. Given the risks, favour targeted exposure rather than broad market. |
| Japan | 🔵 | Japanese earnings are robust, beating expectations and delivering growth, whilst valuations are reasonable. Sharp yen moves have created market volatility, however monetary policy is expected to normalise slowly alongside signs of sustained inflation and wage growth. Corporate governance reforms are accelerating and remain supportive. |
| Asia/ Emerging markets | ⚪ | In China, domestic consumption remains weak and further stimulus measures are likely needed to accelerate growth, but earnings have been improving. Recent tech breakthroughs are also a positive. Tariffs pose a risk, but sentiment is at lows and valuations are cheap. Elsewhere, growth prospects look robust, whilst valuations are reasonable. |
| UK | 🔵 | Business and consumer confidence weakened post-budget but appears to have stabilised. Headline inflation briefly returned to target but is rising again, and energy costs are likely to add further pressure. This may prevent the Bank of England from cutting interest rates much further. However, valuations are cheap, unlike most other developed markets. |
Bonds
| Asset | Current positioning | Current views |
| Bonds | ⚪ | Although central banks are cutting interest rates, government bond yields look attractive relative to the last decade. We believe inflation risks are to the upside, but the market is now pricing this in; hence, we have taken some profit on inflation-linked exposure. After a run of strong performance, we also reduced our emerging market debt exposure. Credit spreads look tight (expensive), so we prefer more defensive positioning such as asset backed securities and short duration high-quality credit. |
| Government bonds | 🔵 | Yields remain attractive relative to the last decade despite a modest pull-back this year. Market expectations for interest rate cuts are currently close to fair for the UK and US although look slightly excessive for Europe. Uncertainty around US government borrowing and central bank independence poses a risk to longer-dated US bonds. |
| Credit | 🟠 | Absolute yields continue to look attractive, but spreads are less supportive at current levels. We prefer shorter-duration and higher-quality (investment grade) corporate credit, as well as higher quality asset backed securities where we feel relative valuations are attractive given the strength of the consumer. |
| Inflation-linked | 🟠 | Many developed market real yields remain in positive territory; however, market inflation expectations have moved higher. Whilst we expect inflation to exceed central bank targets, this is now priced into bond markets and so we have minimal inflation linked exposure. |
| Emerging markets | ⚪ | Emerging market growth prospects look relatively robust compared to developed markets, although tariffs are a risk. While developed market central banks are cutting interest rates (generally a positive for emerging markets), this is already priced into markets. Given their recent strong run, valuations now look elevated vs history. |
Alternatives and cash
| Asset | Current positioning | Current views |
| Alternatives | 🟠 | Select alternatives continue to offer diversification in a potentially volatile environment, albeit with a higher hurdle given yields available on bonds and cash. We favour assets with the ability to deliver less correlated returns to traditional markets and those which hedge against risk scenarios, such as gold and other commodities. |
| Absolute Return | 🔴 | Select opportunities in equity long/short and trend following strategies given diversification characteristics. However, government bonds are now looking more attractively valued and may provide a better source of portfolio diversification over the medium term. |
| Liquid private real assets | ⚪ | Long-dated revenue streams and income characteristics remain attractive in select parts of the market. We see good opportunities in renewables, infrastructure, specialist property and exposure to private companies. Valuations are more attractive following recent market volatility. Falling rates are supportive for the sector. |
| Commodities | 🔵 | Broad commodities can hedge against further disruption to energy markets, although areas of the asset class are sensitive to slowing economic growth, particularly in China. Increasing demand from infrastructure spend and energy independence goals could support metal prices against a backdrop of tight supply. |
| Gold | 🟢 | Gold should act as a hedge against growth or inflation shocks, as well as a further escalation in geopolitical tensions. Central bank buying is a long-term support, as is weakness in China’s property market, but strong performance over the last year may result in temporary pullbacks. |
Current themes
| Theme | Current view |
| America First | Despite a slight pullback in confidence, the US consumer is in reasonable shape and, with the labour market cooling rather than collapsing, household spending should continue to drive growth. We forecast the US economy will grow by 2.5% in 2025 and 2.7% in 2026, driven in part by Trump’s pledge to cut taxes and regulation. This should support smaller, domestic US firms. However, other policies (notably tariffs and immigration restriction) may add to inflation, which could mean less scope for interest rate cuts. |
| The big are getting bigger: Tech and its ecosystem | We remain positive on technology, given the sector’s strong earnings growth outlook and continued evolution of AI. Valuations for the “Magnificent 7” remain high but are significantly lower than the valuations seen during the dot.com bubble of the late 1990s. Fundamentals are also stronger. Areas such as software and Chinese technology offer more attractive valuations, despite strong growth prospects. A potential shift from AI “enablers” to “adopters” would also support a broadening out in the sector. As such, we favour broad-based global technology exposure. |
| Broadening of market leadership | We are seeing increasing opportunities beyond the “Magnificent 7” within the US market as well as opportunities outside of US. The UK and Japan are good examples, with valuations still attractive in both markets. Low valuations and (in the case of Japan) corporate reform have been driving M&A activity, which is likely to continue. Although the domestic UK growth outlook is challenging, the UK may be somewhat insulated from a potential trade war given the more balanced trade position with the US. |
| An end to easing? | Bond markets will continue to be heavily impacted by the direction of central bank policy in 2025. The key will be to stay nimble as market expectations shift. Market interest rate expectations have moved closer to ours, with two further US interest rate cuts anticipated this year. Given recent market moves, we have taken our maturity exposure closer to neutral. We expect markets to be volatile as growing fiscal deficits come into focus and will capitalise on this by actively managing interest rate risk in our bond allocations. |
| Geopolitical uncertainty & the threat of trade wars | Trump appears increasingly willing to accept potential pain for US consumers (market falls and higher prices). From that perspective, investors cannot assume that threats are purely a negotiating tactic. Our “Aggressive Trump” scenario assumes weaker US growth alongside higher inflation, and a lower growth/lower inflation outcome for the rest of the world. That said, the US economy is stronger now than during Trump’s first term and a stronger dollar together with lower corporate margins may absorb some of the pain. We continue to favour allocations to gold (a typical stagflation hedge) and limited exposure to long-dated US bonds. |
Terms
Spread: the difference in yield between a non-government and government fixed income security.
Duration: approximate percentage change in the price of a bond for a 1% change in yield.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
