Looking ahead to 2025

During his campaign, Trump made no secret of his intention to pursue stricter migration and trade policies. A key point of his future policy is the introduction of new import tariffs. The aim of these import tariffs is twofold. First, by imposing higher tariffs on imported goods, Trump wants to stimulate domestic manufacturing. Additionally, he aims to use the revenue from import tariffs to fund tax cuts.

Much is uncertain about the policies Trump will actually implement. According to some economists, Trump is mainly threatening higher import tariffs to force America’s trade partners into negotiating trade deals that are more favourable for the US. However, we believe that Trump’s tariff threats are more than just a negotiation tactic. Trump and his advisors seem genuinely convinced that higher import tariffs will benefit the US economy. Moreover, as mentioned above, Trump intends to use the revenue from these tariffs to fund part of his planned tax cuts. We therefore believe he is serious about import tariffs.

At the same time, it is too early to say how far Trump will go in this regard. The actual tariff rates could be higher or lower than expected. In our base case scenario, we anticipate a gradual increase in US import tariffs starting in the second quarter of 2025. This could lead to a slowdown in economic growth later that year.

Nevertheless, we remain moderately optimistic about 2025. The underlying economic picture is favourable. While the US economy shows signs of cooling, it still remains strong. A recession isn’t on the radar for the coming quarters, with the US charting a ‘soft landing’ marked by slower growth and lower inflation.

The European economy faces more challenges. Growth in the eurozone is expected to remain below trend levels for the time being. Yet, like the US, Europe is expected to avoid recession, and go on to deliver modest but positive growth.

We expect that economic growth in the coming year will translate into healthy corporate profits, especially in the US. Meanwhile, inflation is declining, allowing central banks to continue lowering interest rates for the time being. Lower interest rates support equity markets. Therefore, we remain positive about equities (slightly overweight).

Our regional positioning can be described as ‘America first.’ We prefer US equities over European ones, as we expect that growth in the US will again be higher than in the eurozone next year. Our view on emerging markets is neutral, partly due to mixed signals from the Chinese economy.

We see significant potential in information technology (IT), a sector that is particularly well-represented in the US equity market. Growth prospects for tech companies are favourable, thanks to long-term trends such as digitalisation and the rise of generative AI. We also see opportunities in the financial sector. The US economy remains relatively strong and consumer spending is holding steady. These are positive factors for financials in the US.

We are also positive about healthcare. This sector is less sensitive to economic developments, which can be beneficial in a setting where growth is not overly robust. Additionally, companies active in healthcare benefit from demographic trends such as aging populations.

Falling interest rates make bonds attractive (slightly overweight). Both the US Federal Reserve (Fed) and the European Central Bank (ECB) began cutting rates in 2024. In the short term, the Fed is likely to continue lowering rates. However, import tariffs will likely lead to higher US inflation. Therefore, the Fed has less leeway to cut rates than the ECB – which is why we prefer European bonds over American ones.

Admittedly, Europe faces some political challenges. In particular, the political crisis in France brings uncertainty. Now that Prime Minister Barnier’s minority cabinet has collapsed, President Macron faces the task of forming a new government. A complicating factor is the French budget deficit, which has now risen to more than 6% of GDP, while EU budget rules allow a maximum deficit of 3%. Given the political uncertainty – and its potential impact on the French economy – risk spreads on French government bonds may remain volatile in the coming months.

Nevertheless, we prefer European bonds, as we expect interest rates in Europe to decline more sharply than in the US. This week, the ECB lowered its policy rate again – and we expect the ECB to cut its policy rate more sharply in 2025 than investors are currently pricing in. We prefer high-quality European bonds, such as government bonds and investment-grade corporate bonds. We are less enthusiastic about riskier bonds, including high yield and emerging market debt. In our view, these bonds are too expensive from a risk perspective.

A new year is around the corner. And a (re)elected president is preparing to enter the White House. Trump 2.0 comes with economic risks. Investors, therefore, would do well to remain alert. But all in all, 2025 offers enough ingredients for a successful investment year.

Would you like to know more about investment opportunities and risks in 2025? Read our Investment Outlook.

Richard de Groot
Chair ABN AMRO Global Investment Committee