2025 Multi-Asset Outlook: Brash Disinflationary Pro-Business Policies Meet Inflationary Populism

• While President-Elect Donald Trump’s tariff, immigration, and tax proposals are currently billed as “run hot” policies, with a focus on their inflationary impact, there is also a brash pro-business and pro-supply-side bent to other areas of policy – which means the year ahead is likely to be a tug-of-war between these inflationary populist measures and other disinflationary pro-business supply-led forces.

• In equities, as growth picks up in the latter half of 2025, promising sectors include US large banks and US mid-caps, along with equities in the UK and Taiwan, which are joining core investments in structural growth areas such as productivity enhancements, new energy initiatives, US quality stocks, and the Indian market.

• In fixed income, US credit spreads are (deservedly) tight across the board, but exceptions can still be found in Asia’s high yield bond market (excluding China’s property sector) and to a lesser extent in US mortgage-backed securities. Both maintain typical spreads in an otherwise tight market.

• China’s efforts to reduce dependency on the US dollar by shifting its reserves from US Treasuries to gold, along with the People’s Bank of China’s tactics to stabilize the yuan, are reinforcing gold’s role in international markets. Additionally, as economic ties weaken and geopolitical risks mount, gold is serving an increased role as a strategic hedge.

Just as the Federal Reserve’s front-loading of rate cuts clinched a soft landing for the economy, Donald Trump’s US election win is shifting the narrative to what lies ahead. Trump 2.0 will likely be quite different from Trump 1.0 – when a frustrated newcomer to Washington’s ways often struggled to get things done – with the handoff this time to an experienced ex-president that will be off to a fast start in launching a more focused agenda. While Trump’s proposals are currently billed as “run hot” policies (with a near-exclusive focus on the inflationary impact of tariffs, reversing immigration, and cutting taxes), there is also a brash pro-business and pro-supply-side bent to other areas of policy. The year ahead is likely to be a tug-of-war between these inflationary and disinflationary forces.

One lesson we shouldn’t forget from Trump 1.0 is to “take what he says seriously, but not literally.” On the campaign trail, it seemed that no tax would survive, all imports would be tariffed, and all undocumented immigrants would be deported. A literal interpretation of this would be a highly inflationary supply shock, and thus a game-stopper for markets. Yet that’s only half the story, and a second lesson from Trump 1.0 is that the stock market is President Trump’s North Star, and that he pivots.

The Tax Cuts and Jobs Act (TCJA) expires at the end of 2025. This indicates that tax cuts – or really just extensions of existing cuts – will only come in 2026 by extending rates for individuals set to expire at the end of 2025 with perhaps modest selective reductions in areas like tips. For companies, the TCJA made the rate reduction to 21% permanent. In our view it’s likely that only companies that move some of their overseas content back to the US will see further reductions to tax rates in 2026.

Tariffs in 2025 will likely affect only a narrow set of Chinese goods, such as steel and electric vehicles (EVs), that have been heavily subsidized, thus distorting markets in countries they enter. While these tariffs will be inflationary upfront, they nonetheless are targeted and will be accompanied by efforts to shift domestic content into the US and to implement Phase 1 of the trade deal China agreed to in Trump’s first administration yet never executed.

If these efforts bear fruit, these tariffs will likely be reduced before the next round is rolled out elsewhere. A mantra from the Trump camp is “escalate to de-escalate.” Countries such as Mexico and Vietnam, which today are acting as conduits for rerouting Chinese exports into the US with minimal value added, will also likely be targeted in 2025, with a focus on the eurozone’s trade practices to follow in 2026. By that point, if the eurozone has boosted its defense and joins the US in confronting China’s trade practices, tariffs on the region could also be reduced, or perhaps not implemented.

While tariffs will still be inflationary overall, by stretching them out, narrowing the list, and replacing headline rates with company-specific tariff reductions, their impact is likely to be less than what is being “literally” priced into markets today. And we can’t forget the other side of the ledger: Aggressively rolling back obstacles to domestic energy production, reining in healthcare costs and drug prices (which remain well above global norms), and reversing Biden’s stricter regulatory stance – which some major bank CEOs recently said is raising the animal spirits of their CEO clients and encouraging them to invest and make deals, likely providing another net boost to the supply side. Clampdowns on unfiltered and undocumented immigrants may be partially offset by raising limits on legal filtered immigration, with selection based on skillsets and diversifying countries of origin, which is more in line with the global norm. This isn’t to say that tariffs and immigration rollbacks are not inflationary in isolation – they are – just that they are part of a package whose impact needs to be considered in aggregate.

In essence, we believe Trump 2.0 will simultaneously pursue a pro-business policy agenda to unleash supply-side forces in some sectors that will be disinflationary while simultaneously implementing headline-grabbing populist supply-side restraints in others (including tariffs and immigration crackdowns that are inflationary). If the mix proves otherwise, we anticipate that equity weakness and Trump’s North Star will lead to a quick pivot, rethinking the balance of pro-business and populist policies. All told, we think the intended package may prove less inflationary than what today’s market pricing suggests. Yet that’s still only part of the picture.

After a dearth of investment for a dozen years following the global financial crisis, which dragged down productivity, now investment and thus productivity have picked up again. Even before Trump 2.0, a broad supply-side response had already begun building up in the US. At some point the benefits of AI will join today’s acceleration of productivity. It’s hard to find examples where productivity was high and rising and inflation became problematic. When and where tariffs do restrict competition in the US, with goods backing up overseas that would have come into the US, those displaced goods will create downward pricing pressures overseas. Goods prices in the US reflect a combination of local and global conditions. While inflation in the US has been moving sideways in recent months, and many are giving up on further progress in 2025 based on a literal interpretation of a segment of Trump 2.0’s policies, we’ll take the other side of that coin: that disinflation will more likely gain the upper hand as 2025 unfolds. Of course, this will be the key issue that frames market behavior in 2025. Investors will likely benefit from being flexible and keeping both disinflationary and inflationary odds in their range of possibilities.

We’ve observed significant upward revisions in ‎both US National Income and Product Account-based profits and savings, indicating that the abrupt three-month slowing of US payrolls through August was less threatening than previously understood. The earlier disconnect between stronger growth and weaker income has now been resolved, with weaker private income and household savings revised up toward matching the stronger GDP growth data. This reveals an even more resilient picture for small businesses – which employ half the US workforce – with a firmer profit trajectory than earlier understood, which also points to a more resilient employment backdrop.

Chair Powell’s preemptive pulling forward of rates likely was not necessary, yet finally cleared the long-simmering debate on a soft versus hard landing. The soft landing won, with another source of resilience for the US continuing to be its lead in AI. This means monies around the world that wish to get a jump on AI, and its potential to reshape competitive realities within some businesses, need to source AI from the US. Geographic growth gaps look poised to continue widening, and the US looks ever stronger from a global perspective, which will keep the dollar firm.

We continue to view Trump’s policy mix as tilting up growth in the US as much as it tilts up real rates, providing a boost for US equities and the US dollar, while keeping credit spreads tight. As expected, it has already produced a backup in the US Treasury curve. This and inflation will be the metrics to watch in 2025. If we’re right about inflation edging back down as 2025 progresses, owing to the momentum behind the steady rise in productivity, the Fed’s cuts could continue to bring policy rates below 4%. As we move into 2026, however, the picture could look different: We would expect broader tariffs with some tax reductions and ongoing deportation of undocumented immigrants. It will be important to monitor the progress and momentum of productivity throughout 2025 and the extent to which continued acceleration of productivity looks poised to offset the inflationary elements of Trump 2.0’s policies, even in 2026.

Europe appears to be stuck in a holding pattern, with the aftermath of Germany’s fateful bet on cheap Russian oil still playing out and industries that need cheap energy, like chemicals and even auto plants and parts, still in the process of exiting Germany. The Chinese economy’s rapid deceleration has also been a drag on Europe and many emerging markets that depend on exports to China. Chinese electric vehicles (EVs) are arriving, and German exports of luxury consumer goods to China now need their own retooling. (And in China’s world of common prosperity, luxury brands and conspicuous consumption are out.) While a modest cyclical recovery might finally be taking hold in the eurozone, as evidenced by bank loans finally nudging higher, Germany and the rest of Europe need to reshape their business models – perhaps in the direction highlighted by Mario Draghi’s September 2024 report, “The future of European competitiveness.” This is before Trump 2.0 tariffs hit the eurozone in 2026. The UK may finally see a dividend in having left the eurozone.

Meanwhile, after the world’s second-largest economy was pulled into a nasty slowdown in 2024, China has laid down plans for strong central bank balance sheet expansion to absorb higher fiscal ratcheting while allowing rates to keep drifting down. We’re all still awaiting the contours of China’s upcoming fiscal boost, yet in our view it will aim for a stabilization (not recovery) in China’s real estate and banking systems, local government finances, and low-income households after factoring in Trump 2.0. That includes not only pending tariffs but also China’s potentially losing its ability to circumvent them by rerouting products through countries like Vietnam and Mexico amid intense scrutiny and pressure on those countries under Trump 2.0. Sustainable improvement beyond stabilization will require incentivizing the private sector once again, which would necessitate tough political choices.

With growth gaps poised to widen further, we continue to favor a modest overweight in equities (particularly financials and mid-caps, which are not expensive) and the US dollar, underweights in fixed income, and a continued strategic position in gold in recognition of high geopolitical risks.

Equities: With growth and productivity likely to rise, expect broader participation in the upside.

Policy rate cuts in the US and globally (even if pared back in the former) should boost wealth effects for upper-end consumers and provide rate relief to low-end consumers and small businesses who borrow on a floating-rate basis. With animal spirits being released by Trump 2.0’s pro-business policies, the year ahead could even benefit from a (net) supply-driven backdrop (despite experiencing select populist supply shocks from tariffs and immigration). A vibrant investment period should continue to support and strengthen today’s new rising productivity trend, with supply chains still relocating, a continuance of climate urgency (this time led by companies), and rising defense spending around the world – topped off by the need to invest in AI now to avoid falling behind. Helping to keep inflation at bay are rising productivity teamed with potential disruptions in healthcare pricing via the appointment of Robert F. Kennedy Jr. as secretary of health and human services (intended to shake up this sector, with prices well above world norms), a step-up in domestic drilling, and the favorable impact on business confidence from line-of-sight regulations being rolled back in 2025 and targeted taxes being reduced in 2026. These pro-business aspects of the package will spend 2025 and beyond battling with the inflationary populist elements of Trump 2.0. We need to focus on the entire ledger.

We see room for more companies and industries in the US to participate on the upside. Soft cyclical and moderately economically sensitive areas may start showing better financial results and market performance. As growth picks up in the latter half of 2025, promising sectors include US large banks and US mid-caps, along with equities in the UK and Taiwan, which are joining core investments in structural growth areas such as productivity enhancements, new energy initiatives, US quality stocks, and the Indian market. Our allocations to productivity and financials aim to benefit from a stronger investment period that leads to faster private-sector debt growth as well as a steeper yield curve. While we expect some volatility around this baseline, we believe economic fundamentals, and not US political changes, will be the more dominant drivers.

Fixed income: MBS and Asia high yield still look attractive amid broadly tight credit spreads.

While we had favored an underweight to duration in the lead-up to the election, we continue to expect a gradual decline in US inflation to resume at some point in 2025. Previously persistent shelter inflation is easing, and while core services inflation is currently sticky, the ECI delivered good news, especially when viewed as a leading indicator of trends in US service-based inflation. A reduction in undocumented immigration would likely put a dent in this favorable ECI trend, although it could be offset by rising productivity and a potential rise in legal immigration. At some point in 2025, after most presidential appointments have been made, the focus will likely shift to the package of policy. At that point we will need to acknowledge the possibility that disinflation will recommence, and be ready to pivot to an overweight to duration once again.

Supply-led growth environments should be nurtured, not stomped out. Should productivity and AI use cases come through, they would lend support to the Fed continuing with a steady yet moderate pace of cuts, supporting markets and economies through 2025. If run-hot policies predominate under Trump in the US, the US rate structure nonetheless will continue to be priced based on global conditions. While China is attempting to put a floor on further deceleration, conditions in China and Europe over the next few years will likely remain cool, and somewhat cooler still if broad-based tariff policies come into play. This could partially offset hotter conditions in the US with respect to the US Treasury curve.

US credit spreads are (deservedly) tight across the board. However, exceptions can still be found in Asia’s high yield bond market (excluding China’s property sector) and to a lesser extent in US mortgage-backed securities. Both maintain typical spreads in an otherwise tight market. Additionally, the likelihood of banks holding deposits could improve following further rate cuts, which would take the technical pressure off MBS.

Alternatives: Amid rising geopolitical risks, gold is viewed as a safe haven.

China’s efforts to reduce its dependency on the US dollar by shifting its reserves from US Treasuries to gold, along with the People’s Bank of China’s tactics to stabilize the yuan, are reinforcing gold’s role in international markets. China aims to export more subsidized goods like electric vehicles and solar panels to Global South countries. Market-based economies that initially opened their markets to China – expecting mutual market access and fewer subsidies from both sides, given their tendency to distort other economies – will continue to revisit those policies now that China is increasing state-led investments with subsidies. Additionally, rising geopolitical tensions, fuelled by Putin’s ambitions for post-Soviet territorial expansion, direct conflicts between Iran and Israel, and strengthening ties among North Korea, Venezuela, Iran, Russia, and China, are exacerbating global uncertainties. As economic ties continue to weaken and geopolitical risks mount, gold is serving an increased role as a strategic hedge.