A semblance of a goldilocks ahead of Trump’s inauguration

Markets have cheered any good news emerging in 2024 from the economy, corporate earnings and the political environment, although occasionally they were caught by surprise. Looking ahead, they will be driven by earnings momentum, a scenario of slowing US growth, and rebalancing labour markets but not drastically weakening. On the other hand, the Fed getting a bit more hawkish and Trump’s approach to trade along with the international response could create volatility. Outside the US, European growth and policy-making and China’s response to its domestic problems will drive the markets.

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Vincent Mortier

Vincent Mortier

Group CIO

Given the risks that could impact market sentiment—from earnings revisions to weaker growth, stronger than expected inflation, and geopolitics—it’s important to balance the positive view in equities with sufficient hedges.

Vincent Mortier, Group CIO

Stay constructive with appropriate protections

investment

Stay constructive with appropriate protections

The 2025 global outlook is likely to remain benign amid a moderate US economic growth and a recovery in Europe. Falling inflation should support consumption in the region. However, monetary, fiscal and international trade policies could cloud the outlook. For instance, the Fed is now more likely to be cautious on cutting rates and vigilant on inflation. More clarity is also needed on Trump’s trade policies and the European response to them. Until then, we think investors should consider keeping safeguards and other sources of stability but at the same time aim to benefit from market sentiment, areas of attractive valuations and resilience in US economy.

Ambiguous policy environment calls for agility on duration

Donald Trump’s fiscal and foreign trade policies would affect markets’ inflation expectations and yield volatility, particularly on the long end of the curve. This, in turn, is keeping the Fed vigilant on any risks to its own inflation objective. In Europe, EU’s countermeasures to US policies further complicate a situation of growth divergences (for instance, between Germany and Spain) within the region. Hence, we think the ECB’s task is not going to be easy as it will also be worried about growth. But the positive news is that inflation is likely to fall faster than the central bank had anticipated, and this should support real incomes. All this points to maintaining a flexible stance on duration. Beyond that, there are income opportunities to be explored from corporate credit of businesses in Europe, US and emerging markets.

Ambiguous policy environment calls for agility on duration

stacking coins

Valuations chase profits in the long run

a woman looking at the stock exchange market

Valuations chase profits in the long run

The pro-cyclical rally over the past few months in the US and Europe is an extension of a no-recession narrative. For markets, this is a positive scenario, provided corporate profits continue to meet expectations. However, this scenario could also lead to speculation and excesses in some corners, and when it happens, any disappointment on the earnings front could be brutal on valuations. In Europe, falling inflation could boost real incomes and eventually consumption. This is mildly constructive for European equities where most of the bad news seems already priced in. However, we try to balance that with a fundamentals-driven approach, which prioritises balance sheet strength, pricing power and profitability across US, Europe, Japan and emerging markets.

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