US equities delivered strong gains in 2024 but as the dust of the US election settles, the landscape remains riddled with uncertainty. Can stocks continue to ride the artificial intelligence (AI) wave? Can market returns broaden in a potentially weakening economy? What are the implications of shifting trade policies?
Pressure on US consumers
The US consumer remained resilient in 2024, continuing the 2023 trend, outpacing spending growth in Europe and China and driving global economic growth. Excess savings created by fiscal stimulus during Covid-19 were a driving force behind this. However, these pandemic savings have now dried up.
In 2025, we expect consumer spending to be heavily influenced by the job market. While the labour market has cooled, there has not been a meaningful rise in unemployment. There is a prevailing imbalance between labour supply and demand, but under the pressure of monetary tightening, this is aligning as job vacancies become fewer. A further decline in vacancies would have a more pronounced impact on unemployment, in turn affecting consumer spending.
Challenges to broadening market returns
Market concentration intensified in 2024, with the Magnificent Seven stocks contributing nearly half of the entire S&P 500 return this year, largely driven by advancements in AI. They now represent over 30% in the broad benchmark. In order for the market rally to be sustained, returns must expand beyond these handful of companies. And this requires a favourable economic backdrop.
Yet, there is risk to the outlook for consumer spending. Even a soft landing, which most investors consider the base case, still implies below-trend economic growth and an uptick in unemployment.
In that scenario, the current earnings per share (EPS) growth expectations of 13% for S&P 500 companies for 2025 seem aggressive, given that EPS growth has historically averaged 7-8%. In the event of a more severe economic slowdown, earnings expectations could fall significantly, which would likely lessen the rally.
The bottom-up consensus forecast above assumes a significant rise in margins to all-time record levels. The US corporate sector has already benefited from a long-term increase in corporate margins while labour compensation has stagnated. Discontent over this dynamic in part led to Donald Trump’s election victory. Given Trump’s electoral base, it’s reasonable to assume that some of his policies, such as tariffs, would attempt to arrest this trend.
Market concentration has created opportunities in sectors that have been overlooked by momentum-oriented investors, such as consumer staples, healthcare and select industrials. Should a more rational environment set in, we expect high-quality companies with structural growth potential in defensive sectors to benefit.
Uncertainty around Trump’s tariffs
Following a Republican clean sweep, the new Trump administration’s policies evoke both optimism and apprehension among investors.
There is uncertainty around the magnitude and how targeted proposed tariffs would be, making it difficult to assess whether the positive impact from deregulation and tax reform would offset the potential negative implications from tariffs at the macro level.
In the short term, the sequencing matters as well; in Trump’s first term, he started with tax cuts but we cannot assume the same order will be repeated in his second term.
From a bottom-up standpoint, we believe that companies with dominant competitive positions and strong pricing power should be able to navigate a range of scenarios with tariffs.
Shifting dynamics in emerging markets
A more inflationary outlook is anticipated due to tax cuts and higher tariffs under the incoming Trump administration. This suggests more measured interest rate cuts by the US Federal Reserve and major emerging market central banks, creating potential headwinds. However, pockets of opportunity exist, emphasizing the importance of stock selection.
In 2024, China implemented stimulus measures but refrained from substantial stimulus to boost consumption or buy back excess property market inventory. Until Trump’s trade policy is defined, we expect the Chinese government will hold off on further stimulus. Meanwhile, valuations remain supportive in the consumer and internet sectors.
The trend of supply chain diversification away from China is likely to persist under more aggressive Trump tariff policies. We foresee continued benefits for Vietnam and Malaysia, and to a lesser extent, Indonesia.
Despite extended valuations in India’s property and industrial sectors that benefited from infrastructure development policies, some attractively valued businesses can be found in the financial, consumer and healthcare sectors.
In Latin America, Brazil's economy is performing better than expected, with robust export markets and disciplined government fiscal spending, despite higher-than-expected inflation and interest rates. Companies that are experiencing structural consumption growth in e-commerce, fintech and retail drug stores present opportunities.
In Mexico, defensive businesses are poised for growth as the country may face increased scrutiny due to tariff uncertainties and potential trade deal renegotiations (Trump has pledged to renegotiate the US-Mexico-Canada Agreement, known as USMCA).
In an unpredictable landscape, investing in quality companies with predictable earnings growth and trading at attractive valuations will be more important than ever.
Matthew Benkendorf is chief investment officer of Vontobel Quality Growth. The views expressed above should not be taken as investment advice.