President Trump has only just started his second term, and he is living up to his promises of disruption. From tariff threats for all the major US trade partners to comprehensive and immediate cuts in Federal spendings, the US President is already reshaping America’s economic policies. This is before the Congress has even started discussing a $4.5 trillion tax cut plan partly financed by $2 trillion of slashed spendings. In the meantime, President Trump is radically shifting the US’s foreign policy, especially their involvement in European and Middle East affairs.

This hyper-activism and radical shift in policies had been announced during the election campaign and was certainly among the main drivers of President Trump’s election. Still, the extent of his shock and awe approach comes as a surprise for many, from country leaders to his own US citizens. Concerns around the potential inflationary impact of tariffs, or of rapid cuts in federal civilian employees appear to have dampened households’ confidence and spendings in the recent weeks. Some signs of slowdown have emerged even if fundamental drivers of growth remain robust (high employment, business investment).

The rest of the world is also adjusting to the new US stance. Europe finally realises that it must take its destiny into its own hands, whether it is from a military and defence perspective or from an economic standpoint. Warning calls for improving Europe’s competitiveness have been multiplying since the Draghi report last year, with European Central Bank President Christine Lagarde and European Commission President Ursula von der Leyen issuing a joint statement in February. German elections have opened the door to more growth-supportive economic policies, even if the prospect of significant fiscal stimulus is constrained by the composition of the new Bundestag. Swiftly building a governing coalition is now of the essence in Germany, as Europe needs leadership from its largest economy if it is to embrace structural economic reforms while facing the external challenges of a new world order. The US, decisively reshaping their economy for sustained higher growth, and China, still in the process of building up on its domestic market, will not wait.

Our asset allocation preferences are based on 5 indicators, including 4 macro and fundamental indicators (leading) and 1 market dynamics (coincident). The weight of the evidence suggests maintaining a constructive view on equities, even if downside risks to the macro outlook and uncertainties around liquidity dynamics warrant a slightly more cautious and balanced approach. Below we review the positive and negative factors for each of them.

Pillar 1: Macro cycle (POSITIVE with more downside risks)

Amid different and sometimes diverging regional dynamics, global economic growth continues to be positive in the first months of the year.

The US economy is losing some momentum as consumer confidence and spendings are softening. Uncertainty around inflation dynamics and on the impact of President Trump’s administration policies (tariffs, public spending cuts…) may affect households’ consumption behaviour, even if underlying drivers of growth (high employment, business investment) remain supportive for growth prospects. In the meantime, China’s and Europe’s dynamics have stabilised after the 2024 slowdown, and the risk of further slowdown has abated.

Inflation remains above central banks’ targets and has proved to be stickier-than-expected across developed economies. External factors (tariffs, energy prices) could still fuel upward price pressures in the months ahead but underlying dynamics, especially wages growth, can be expected to gradually ease.

In this context, developed market (DM) central banks will extend their rate cut cycle, with the pace and magnitude of additional monetary policy easing dependant on growth and inflation developments.

Central banks’ key rates

Dots are market-based expectations for rate levels at the end of 2025

This macroeconomic backdrop of positive global growth and central banks’ rate cuts continues to be supportive for risk assets, even if softer growth dynamic in the US and uncertainties around the inflation outlook have recently raised downside risks to this scenario.

Pillar 2: Liquidity (POSITIVE based on forward-looking factors)

Among the different factors driving global liquidity, some of them remain neutral while others, especially the forward-looking ones on the impact of monetary and fiscal policy, are positive.

The pullback of the US dollar since January has allowed global M2 proxies to pick up after the Q4 slowdown, and Global M2 is growing in line with GDP. Central banks continue to run down their balance sheets in the US and Europe, even if most of the adjustment has already been done. Real interest rates are still moderately positive.

However, easy broad financial conditions, prospects of further rate cuts in 2025 and fiscal policies that will likely be supportive for economic activity in the months ahead point to positive liquidity dynamics in the months ahead.

Liquidity dynamics should therefore remain supportive for financial assets in the near future, provided expected developments in monetary and fiscal policies materialise.

Pillar 3: Earnings (POSITIVE)

Q4 earnings season has been fairly strong. With 77% of S&P 500 companies reporting actual results, 76% of S&P 500 companies have reported a positive EPS surprise and 62% of S&P 500 companies have reported a positive revenue surprise.

For Q4 2024, the blended (year-over-year) earnings growth rate for the S&P 500 is 16.9%. If 16.9% is the actual growth rate for the quarter, it will mark the highest (year-over-year) earnings growth rate reported by the index since Q4 2021.

Earnings are expected to accelerate in 2025 as more sectors are contributing to growth.

The US continues to outpace other regions, but Europe is also improving after a weak low single digit growth in 2024.

Source: Factset

TACTICAL ASSET ALLOCATION (TAA) – 28.2.2025