The performance of the markets in 2025 will be strongly influenced by Trump’s policies and his economic and foreign policy choices. According to the Strategy Unit of Pictet Asset Management There are various hypotheses, each with different implications on global growth and, in turn, on the performance of the American and global markets.
“Good” Trump vs. “Bad” Trump
Since his election, investors have widely priced a “good” Trump. In other words, they focused on the positive elements of his political promises, such as tax reduction and deregulationunderestimating the risk of a full implementation of a 60% tariff on Chinese imports, a 20% tariff on imports from the rest of the world, and draconian anti-immigration policies. Noteworthy, however, would be: economic damage caused in the United States and abroad by a Trump “bad“, committed to the full implementation in his first year of office of all negative policies for the market, including i duties. According to Congressional Budget Office estimates, the United States has a public debt equal to 100% of GDPwhich would rise to 143% in 10 years if Trump’s policies were fully implemented. The deficit US is growing from an already high 6% to 9% of GDP: one of the highest in the world. These data are unsustainable and could impact market sentiment.
Probability of recession
There chance that Trump unleashes a recession is, according to Pictet AM estimates, by 15%with an additional probability of 25% that his fiscal program and deficit expansion kickstart one inflationary shockwith additional volatility resulting from a trade warif Trump’s tariffs were to trigger one. However, the aspects explain, “our baseline scenario, which we estimate 40% probableis that Trump only partially implements his policies“.
In this case, tax cuts balance tariffs, allowing the economy to continue growing at trend while inflation continues to approach target, leaving the Fed some room for maneuver to further ease policy towards a neutral rate. In the best possible scenario, which we estimate is likely to be 20%, i tax cuts Trumpians and increased productivity, thanks to deregulation and innovation technological, allow the economy to grow well above trend, while inflation falls below 2%, allowing the Fed to remain dovish. This would reinforce the generally positive trend of the global economy and the orientation of global central banks towards easing.
Global outlook for 2025
Given the importance of the United States for global growth and the weakness of Europe and China, Strategy Unit experts predict a stable global growth of around 2.8% in 2025 (roughly its trend rate) in the hypothesis of our basic scenario referring to Trump’s policies. Inflation will continue to fallalthough developed market central banks are unlikely to reach the 2% target this year.
There are signs of hope for China and Europewhich should at least stabilize, if not even start to recover, with prospects for a better second half of the year than the first. More generally, risk assets are likely to receive support from further gradual monetary easing by central banks in response to improvements in inflation. A disappointment could come from Fedwith cuts lower than those hoped for by the market: we expect a Fed Funds rate of 4.25% by the end of 2025, marginally higher than market estimates. But this, they say, could be offset by relatively larger cuts by the European Central Bank. All of this would spur credit demand and money creation: an increase in liquidity that should support what are otherwise rich asset valuations. That said, it is important to consider the two big secondary risks, which the market is currently underestimating: a global trade war and a rise in bond yields (10-year US Treasuries above 5%).
The possibility of derailment
A derailment of the geopolitical situation in 2025 it is still possibleHowever, “we believe that conditions will improve rather than worsen. Even without Trump, there seems to be a longing for some sort of peace agreement in Ukrainewhere both countries show signs of attrition. Furthermore, we believe the risk of a Chinese attempt to bring Taiwan back into its orbit is overstated. The Middle Eastern crisis is less significant than in pastalso because the United States is now a net exporter of oil.
However, it is a multipolar world with many forces at play. And while the risks appear greater for emerging markets, we believe they offer value under our headline scenario. It could prove to be crucial China’s response to potential tariffs. While China’s economy continues to struggle, we believe recent fiscal and monetary support measures will stabilize conditions. Nor should Trump’s tariffs necessarily prove disastrous, also because China has a large local market, and therefore the internal capacity to compensate for a decline in trade. But it also has fiscal and monetary room for maneuver to revive its economy. In Europeinflation is falling thanks to the spike in wages, but the major economies are weakwith theGermany in recession for the second consecutive year and a general election due in February. This will leave the European Central Bank with room for maneuver to cut rates, perhaps even below the neutrality threshold. Finally, for the United Kingdom we foresee a scenario of stagflation: It has energy and defense sectors, a modest trade deficit with the US and, yet, British trade is heavily oriented towards services, which will not be affected by Trump’s tariffs.”
