- Analysts are beginning to downgrade US forecasts, given economic uncertainty, whilst Europe is seeing upgrades
- US valuations are in the 98th percentile of expensiveness since 19201
- Walmart’s earnings last week reported an expected slowdown in profit growth2
It’s now been a little over a month since Trump’s second inauguration and with the President making as many headlines as he is, we thought it prudent to provide an update on our global outlook in a Trump world.
Kim Darroch, the former British Ambassador to the United States, accurately described Trump this week as a ruthless businessman. It is this ruthlessness and unpredictability that is creating instability and uncertainty both in foreign and domestic markets. Where we could only find articles about US exceptionalism, resilient earnings and a robust labour market a few weeks ago, a google search of ‘the US economy’ now yields ‘economists are starting to worry about a serious Trump recession’.
A Nobel Peace Prize
It is Trump’s final term as President, and he appears desperate to leave a legacy. The 2009 Nobel Peace Prize was awarded to Obama when he was President, and we believe this is a clear objective for an envious Trump, in which he is making progress. He was instrumental in achieving a ceasefire deal between Israel and Palestine and now has his sights set on Russia-Ukraine with a mission of delivering peace there too. Zelensky is in Washington this week to work on a deal that will undoubtedly include American access to rare earth minerals in Ukraine. This will not only benefit the US but should also help ensure that any peace deal is upheld given a US presence in the region. A resolution in Ukraine will be good for markets as it should begin to lower energy costs in Europe and the US and also brings stability to the region.
The impact of tariffs on the US
We’ve written a lot already about tariffs, but they are the source of a lot of recessionary fears in the US, which is ironic given that Trump is adamant that tariffs will not be a cost to the US and the brunt of it will be borne by foreign governments and companies. Tariffs will result in rising inflation, and we’ve actually seen long-term inflation expectations in last week’s Michigan survey tick up to around 3.5%. This means interest rates will remain higher, dampening consumer spending and, again, we’ve already begun to see this happen with consumer confidence in the US taking a hit and Walmart’s earnings last week reporting an expected slowdown in profit growth.
It’s not all bad though, as tariffs and Trump’s protectionist mandate mean that there will be more domestic manufacturing in the US, creating jobs, and will be a significant boost to smaller companies. Meanwhile smaller companies are also likely to benefit from deregulation and tax cuts.
Tariffs outside of the US
Following on from last week’s note, so far tariffs have been more of a negotiation tool. Tariffs on Mexico and Canada still haven’t materialised, although we expect they will in some form, and what happened to the 60% tariff on all Chinese goods that was promised during Trump’s campaign? It’s a similar story to the peace deals, in that Trump loves a deal. Tariff threats have been a way of getting exactly what he wants, and it’s working.
Even if they are imposed, we’ve mentioned before that less than 3% of China’s GDP are exports to the US. China has been reducing its exports to the US since the first trade war with Trump back in 2018, all the while it has been growing its share of global exports. Europe has been threatened with tariffs as well this year, but the stock market is up over 10% in 2025, whilst the US stock market is flat on the year. Investor sentiment is surging in Europe as companies are seeing earnings upgrades, inflation cooling, and there is increasing political stability. The UK has also been exempted from tariffs with Starmer also meeting Trump this week to negotiate a new trade deal.
Source: JP Morgan, 2025
Bowmore Portfolios
There is a mismatch between the red-hot valuations the US is running on (in the 98th percentile of expensiveness since 1920) and the uncertainty in the region. For this reason, we have been looking at bringing protection into the portfolios, capping our potential return on US Equities but limiting the impact of a market correction.
Having said that, a recession in the US is not our base case, whilst the economy may slow down as a result of higher inflation and interest rates, innovation continues to drive earnings growth. We retain our slight underweight to the US but also keep an overweight to small-caps where we do see opportunity. We continue to remain globally diversified and don’t think the impact of tariffs on China, Europe or the UK warrant their deeply discounted valuations relative to the US.
Source: JP Morgan, 2025
Source: LSEG Datastream as at 27/02/2025
Other Sources: 1Wall Street Journal, Stocks have a big, expensive problem, 24 February 2025. 2CNBC, Walmart shares drop as retailer says profit growth will slow, 20 February 2025.
