The dynamics of the American economy and its policy directions have become a focal point for many investors and analystsAs we move toward 2025, the outlook for the U.Seconomy appears to be more optimistic than previously anticipated, primarily driven by sustained consumer spending that is likely to fuel further economic growthHowever, the landscape could quickly shift if the new government puts its promised policies into practice, such as adopting protectionist measures, deporting undocumented immigrants, and raising tariffsSuch moves may increase the risk of stagflation—a situation where inflation rises and economic growth stagnates.

In the lead-up to potential policy confirmations by the newly elected administration, the U.Sdollar may experience noticeable fluctuationsThe anticipated inflation outlook, however, is projected to strengthen the dollar, with the dollar index inching closer to a two-year high

Advertisements

For investors, this is a time for caution, as valuations of American stocks are nearing highs not seen for several years, causing nervousness among those who believe that market valuations are excessively highFor them, targeting mid-cap companies represents a more direct and potentially lower-cost method of tapping into the American economy.

According to the economic research team at Schroders, the projected GDP growth rate for the United States stands at 2.5% for 2025, with a slight increase to 2.7% in 2026. This sustained growth trajectory suggests that inflation will remain elevated, higher than previous forecastsIt is expected that the Federal Reserve will cut interest rates once in 2025 and subsequently raise them in 2026, illustrating the delicate balancing act faced by policymakers in navigating economic growth and inflation.

For investors, gauging the likelihood of any specific policy implementation presents a formidable challenge

Advertisements

This uncertainty is likely to persist until there is greater clarity on the direction of policiesDavid Rees, a seasoned emerging markets economist, pointed out that financial markets may react to any announcement related to policy changes throughout 2025, even if those policies are never fully realizedThis could lead to increased volatility across various asset classes.

Trade policies will undoubtedly exert a significant influence on the value of the dollarRees notes that the imposition of tariffs would bolster the dollar as it would, to some extent, counterbalance the impact of tariffs on trade and economic activityFurthermore, we foresee that the differential in interest rates will also lend support, indicating that a strong dollar might persist for some time.

Indeed, the fiscal outlook will be a key driver of bond market movements as investors assess the potential implications of U.S

Advertisements

policies on inflation and interest ratesRecently, there have been notable shifts in the fixed-income market driven by these considerations.

According to fixed income strategist James Bilson, the bond market has seen a yield increase due to robust U.Seconomic growth, recent favorable inflation data, and expectations that the new government will pursue further reflationary policiesThe current bond market reflects expectations that the Federal Reserve will cut rates once or twice in 2025 by 25 basis points each time, contrasting with earlier forecasts in September 2024 that anticipated more than four rate cuts.

As with their broad interest in economic activities, bond market investors will keep a close eye on policy developments concerning trade and immigration.

From a corporate credit perspective, Lisa Hornby, Head of U.SFixed Income, adds that risk assets are transitioning from a costly starting point

• Bond ETFs Double in Size on Cost Cuts, New Investments
• Prospects for Federal Reserve Rate Cuts in 2025
• Capital Reflows into the CSI 300 ETF
• How AI Drives Inclusive Economic Growth?
• Growing Sino-French Economic and Trade Ties

The spread on corporate credit—essentially the premium over U.STreasury yields—stands at its highest level in decadesNonetheless, the driving force behind the narrowing credit spreads stems from substantial demand for attractive overall yieldWith yields remaining elevated, it is challenging to foresee a direction that would reverse the trend in credit spreads.

Can the exceptionalism of the U.Sstock market continue?

The United States maintains a dominant position in the global equity market, reaching historical highsBy the end of 2024, the MSCI U.Sindex comprised 74% of the MSCI World Index and 67% of the MSCI All Countries World Index.

Moreover, excluding the dot-com bubble's peak, U.Sstocks are approaching the highest valuation levels seen in the last 143 yearsRegardless of the policy directions taken by the new U.Sgovernment, the sustainability of this valuation remains in question.

The concern surrounding high U.S

stock valuations is not a new phenomenon, as highlighted by Duncan Lamont, Head of Strategy ResearchWhile the elevated valuation of U.Sequities and their substantial share of the global market are noteworthy, there are several inherent advantages to U.SstocksThese include soaring productivity levels relative to other regions, robust economic momentum, and strong purchasing power of corporationsFavorable demographic trends also play a role, although any shift away from progressive immigration policies could potentially undermine this advantage.

For investors apprehensive about high valuations, one avenue for exploration involves seeking opportunities within smaller companies, as mid-cap businesses generally have lower valuations compared to larger corporations.

Bob Kaynor, Head of U.SSmall Cap Stocks, suggests that the United States benefits from a robust labor market and policies potentially designed to stimulate domestic growth