ClockWise: Supportive economics Trumping politics

It’s often said that economics matters more than politics where financial markets are concerned. Heading in 2025, the geopolitical challenges are obvious.

US President-elect Donald Trump is threatening ever more extreme tariffs, governments the world over are struggling with fiscal sustainability and war is rumbling on in Ukraine and across the Middle East. In the background, the macro fundamentals for stock markets are quietly improving. Global growth is picking up and inflation is falling, putting us in the equity-friendly phase of the business cycle. And further stimulus is on the way in the form of central bank interest rate cuts, lower US taxes and a fiscal package to offset the impact of tariffs in China. It’s hard to know how these competing forces will play out, but for now the economics is winning.

In the background, the macro fundamentals for stock markets are quietly improving.

US stocks reacted positively to November’s election result, in part, because investor sentiment became very depressed ahead of the vote but also because investors like the lower tax, lighter regulation backdrop implied by a Trump presidency. Equity markets are also getting support from the fundamentals with the Investment Clock model moving further into disinflationary recovery on the back of stronger US growth reports and central bank rate cuts (Chart 1).

Chart 1: The Investment Clock in equity-friendly recovery

Source: RLAM as at December 2024. Trail shows monthly readings based on global growth and inflation indicators.

The first rate cut from a central bank is a powerful lead indicator for growth as one rate cut usually leads to another. It can take a year or so to impact investment and consumption decisions, so the rate cuts we’re seeing now from the US Federal Reserve, European Central Bank and Bank of England bode well for global growth in 2025 (Chart 2) even if tariffs are increased.

Chart 2: G7 GDP Growth with year-on-year change in G3 average Central Bank rate (inverted)

Source: LSEG Datastream as at 6 December 2024.

Equity markets are expensive, particularly the US, but stronger growth should see upgrades to analyst earnings forecasts (Chart 3).

Chart 3: Global Earnings Revision Ratio with RLAM Global Growth Scorecard indicator

Source: LSEG Datastream as at 6 December 2024.

Stronger profits growth and lower interest rates should help stocks to continue outperforming bonds. And with inflation back under control for now, unexpected economic weakness would be met with further interest rate cuts. Trump’s key policies may well be a drag on growth over the longer term, but we don’t know when they will take effect and what form they will take – and we don’t know how strong the tailwind will be from a global recovery. As macro investors, we’re watching developments closely. Economics is coming once more to the fore but active investors will need to stay alert as the year progresses.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.