The return of Donald Trump to the White House coincides with mounting challenges to US market exceptionalism. A potent combination of rising energy prices, higher interest rates and dollar strength is creating headwinds that could reshape the investment landscape in 2025. While peace initiatives in Ukraine and the Middle East remain possibilities under Trump’s presidency, the immediate focus for investors should be on navigating an increasingly complex economic environment.
The new economic reality: Beyond inflation
The start of 2025 presents a particularly challenging market set-up. US consumer spending faces multiple pressures: mortgage rates above 7%, rising heating and petrol bills and the potential erosion of wealth effects from crypto and equity markets. This combination of factors, alongside record government and corporate debt rollovers expected in 2025, suggests a more cautious outlook is warranted.
The political shifts of 2024 have ushered in policy approaches likely to sustain higher inflation levels. Policies favoured by election winners – whether through fiscal expansion, tariffs or minimum wage increases – point towards continued inflationary pressures. The era of sub-2% inflation appears definitively over.
US-China dynamics: A shifting landscape
A critical but often overlooked development has been the significant widening of the spread between Chinese and US 10-year government bonds since mid-September 2024. This 160 basis point move suggests a potential reallocation of capital, with Chinese investors (and perhaps others) reducing exposure to US treasuries, favouring Chinese government bonds.
Adding to this dynamic is China’s aggressive move into the AI space. The release of DeepSeek signals China’s intent to replicate in AI what it has achieved in other industries: offering equivalent or superior products at lower prices. This development could challenge the narrative that has driven much of the US equity market’s recent gains.
The Trump effect: Policy uncertainty and market adaptation
Trump’s return brings both immediate policy implications and longer-term possibilities:
- Trade policy:
• ‘Escalate to de-escalate’ approach under Treasury Secretary Bessent.
• Potential shift in US-China relations.
• Impact on traditional US allies. - Economic policy:
• Fiscal expansion outlook.
• Energy sector deregulation.
• Currency market interventions. - International relations:
• Changing dynamics with traditional allies.
• More nuanced approach to China and Russia.
• Potential peace initiatives in conflict zones.
Investment implications
The US market’s extraordinary concentration in technology stocks (with a Shiller P/E ratio of 38x) appears increasingly vulnerable. Looking at where some leading portfolio managers are seeking to allocate exposure for 2025, it would confirm our view that we will continue to see diversification away from US markets. We see opportunities in:
- Broader market segments:
• Industrial technology companies.
• Manufacturing renaissance beneficiaries.
• Energy transition players. - International markets:
• Indian economically sensitive sectors.
• German industrial exporters.
• Value markets such as the UK.
Strategic considerations for companies
2025 presents a complex landscape where multiple challenges intersect: persistent inflation, shifting geopolitical alignments and potential technological disruption from China. The combination of rising rates, energy prices and dollar strength suggests a more challenging environment for US assets than markets currently price in.
That being said, we are cognisant that the US can continue to surprise and confound its critics and, since December 2024, we have been advocating a barbell strategy, locking in profits from the strong performance in the US markets and redeploying these to markets that offer value and downside protection.
Of the myriad outcomes for 2025 we see, we assign higher probabilities to sticky inflation and lower probabilities to Chinese technology disruption and the positive impact of peace in Ukraine/the Middle East.
The last decade had forced companies to be more agile in dealing with uncertainty and this gives us scope for optimism.
For businesses seeking to optimise their messaging to markets and attract investor interest, Edison Group recommends prioritising the following key themes:
• capital allocation discipline;
• product USP which affords pricing power;
• balance sheet resilience to weather any shocks;
• supply chain resilience;
• areas of growth, be it geographies or particular product segments; and
• mitigation of any currency risks.
The diversification out of large US stocks into smaller stocks also requires some proactivity in tackling a more diverse pool of capital outside the traditional institutional route to stimulate liquidity, making it more likely that in the event an institution wants to invest, it is not put off by the lack of liquidity.
At Edison Group, we specialise in helping businesses navigate these complexities. By integrating analyst-driven content, targeted digital strategies and investor engagement expertise, we empower companies to stand out in competitive markets, build larger and more informed audiences and ultimately enhance valuations. Whether your focus is on refining messaging, expanding your investor base or enhancing market perception, Edison is your partner in achieving strategic success in 2025 and beyond.
