A new chapter for the Global Economy?

The decisive outcome of the U.S. elections has triggered significant price movements in financial markets, driven by the political measures outlined during the campaign. However, in the medium term, fundamental economic data is likely to play a more critical role in shaping market developments.

This years U.S. elections, often referred to as “the most important election” by many observers, turned out to be less closely contested than polls had suggested. Not only was Donald Trump decisively elected as the 47th President of the United States, but the Republican Party also secured a majority in both chambers of Congress. This clear electoral outcome, avoiding the uncertainty of a contested vote count, led to notable gains in risk assets across the U.S. Additionally, the "Trump Trade," which had begun to take shape even before the election, continued to gain momentum based on campaign promises.

One of the key pledges during the campaign was tax reform, including a reduction in corporate tax rates. Lower taxes are expected to boost corporate profits, attract more investment, and positively impact economic growth. The new administration has also committed to a strategy of deregulation, particularly in the financial and energy sector, which has driven significant stock price gains in these industries.

However, the administration's proposed trade policies present notable risks to growth. Tariffs of 60% on imports from China and 10% on imports from other parts of the world could disrupt global trade, weaken domestic demand in the U.S., and slow economic growth, particularly in China. Furthermore, tariffs would likely lead to higher prices, increasing the risk of rising inflation.

In summary, the planned measures are likely to provide only limited long-term growth impulses, with the structure and implementation of tariffs playing a decisive role. Both campaign promises - tax cuts and trade policies - are inherently inflationary. The rise in interest rates, particularly at the long end of the yield curve, suggests that markets are pricing in the potential inflationary effects of Trump’s policy agenda. However, significant uncertainty remains about whether these measures will be implemented as planned and how they will ultimately impact price developments.

Tax cuts, which would increase the fiscal deficit, are expected to spark debates, even with a Republican majority in Congress. Moreover, the Trump administration is likely aware that a significant portion of its electoral success stems from public dissatisfaction with rising prices. A resurgence of inflation would not align with the administration’s interests. Additionally, higher interest rates and the associated rising debt burden could pose a challenge for the new government.

As Trump’s tax and trade policies are unlikely to take effect until the second half of 2025 or early 2026, medium-term market developments are more likely to be driven by economic fundamentals. In this context, we consider a soft landing for the U.S. economy to be a probable scenario, which would give central banks room to lower interest rates further.

Given current high valuations and ambitious earnings expectations for 2025, we maintain a neutral stance on equities. In light of the subdued outlook for the consumer staples sector this earnings season, we are reducing our overweight in the sector to a neutral position. In fixed income, we continue to avoid credit risk, as risk premiums have fallen to record lows following the U.S. elections.