U.S. President Donald J. Trump has vowed to "make America great again," and global policymakers, economists, and private and institutional investors alike are contemplating what a Trump 2.0 administration could mean for the U.S. stock market, its valuations, and short-to-medium-term trends.
One important investment lesson is to avoid mixing personal political views with investment decisions. The global capital market is larger than any country or president. To paraphrase renowned British economist and father of the World Bank, John Maynard Keynes, “In the long run, we are all dead, and in the short run, you might get a margin call.”
Key Risks for 2025
For 2025, the main risks to U.S. equities are widely believed to include:
1. Trade Wars and Protectionism: Heightened tensions and policies could disrupt global supply chains, leading to cost increases and market volatility.
2. Inflationary Pressures: Persistent inflation risks eroding consumer purchasing power and corporate profit margins.
3. Elevated Equity Valuations: High valuations leave limited upside potential and increase vulnerability to economic shocks.
4. Policy Uncertainty: A new Trump administration could introduce unpredictable regulatory and fiscal policies.
5. Technological Disruptions: Emerging technologies, particularly from global competitors, could challenge U.S. market dominance.
A globally diversified, long-term investment portfolio with a tilt toward value investing and equity income strategies can mitigate most, if not all, of these risks.
Historical Context and Performance
Since the 2008 global financial crisis and the era of massive central bank quantitative easing, the U.S. stock market—particularly the technology sector—has been the dominant force in global equities. U.S. exceptionalism was evident as U.S. equities consistently outperformed the rest of the world (ROW) by a wide margin.
Pessimism surrounding Trump’s tariff policies and their potential impacts on the global economy may be overstated, particularly within the energy sector. While tariffs could disrupt international supply chains, they may also create near-term volatility in U.S. markets.
Earnings estimates for non-U.S. equities have declined since the election, while U.S. earnings have remained stable. This divergence reflects the relative resilience of the U.S. economy and corporate sector. Nonetheless, the dollar’s strength and its impact on earnings dispersion among U.S. companies remain key concerns.
S&P 500 Projections for 2025
The consensus among Wall Street analysts is for the S&P 500 to reach 6,509, representing a modest 7% gain for the year. Consensus earnings per share (EPS) estimates stand at $266.54, an 11.8% increase year-over-year. However, projections vary widely:
Bullish View: Oppenheimer’s John Stoltzfus has a target of 7,100, valuing the market at a price-to-earnings (P/E) ratio of 25.82x.
Bearish View: BCA’s Peter Berezin forecasts a target of 4,450, with a P/E ratio of 18.54x.
The median target of 6,600 suggests an 8.2% return, while the most optimistic estimates from Wells Fargo indicate a 14% gain. Importantly, no major analyst is forecasting a negative return for 2025.
Despite optimistic projections, U.S. stocks remain overvalued but are far from bubble territory. Fair value for the S&P 500 is estimated at 5,120 based on a long-duration bond analysis, assuming dividends grow at 6.5% annually over the next decade and slow to 5% beyond that.
Lessons from Market Sentiment
Retail investors are more optimistic about higher stock prices in 2025 than ever before. This sentiment has led to overpayment for assets, pushing forward one-year valuations higher. Such psychological exuberance highlights the need for caution, as markets driven by sentiment often correct sharply when fundamentals reassert themselves.
Over the past 15 years, stock market returns have significantly exceeded the long-term average of 8%, with inflation-adjusted returns nearing 12% annually. While these returns have been fuelled by factors like low interest rates and central bank liquidity, they are unlikely to persist indefinitely. Historically, stocks cannot grow faster than the underlying economy over the long term. When valuations deviate significantly from economic fundamentals, eventual corrections follow.
Headwinds for 2025
Optimism about the Trump administration’s ability to boost economic activity, reduce regulations, and cut taxes is evident in surveys like the National Federation of Independent Business (NFIB) optimism index. However, headwinds persist:
- Rising interest rates could narrow market breadth and increase sensitivity to valuations.
- Dollar strength may disproportionately impact companies with high foreign sales exposure, creating earnings volatility.
- Narrowing stock market leadership, particularly in high-growth sectors like technology, signals potential vulnerability.
ESG and Momentum Strategies
High ESG ratings have correlated positively with earnings growth estimates in recent years. Companies like Nvidia, Goldman Sachs, and Morgan Stanley exhibit strong momentum and robust earnings growth potential, bolstered by superior ESG scores. Investors should consider the interplay between ESG performance, momentum metrics, and earnings revisions when building portfolios.
Investment Strategy for 2025
Overweight Domestic-Focused Stocks: Favor U.S. companies with limited foreign exposure to mitigate dollar-related earnings risks.
Diversify Across Sectors: Balance allocations across resilient sectors such as energy and financials while maintaining exposure but not overexpose to high-growth industries like technology.
Focus on Valuations: Prioritize value and equity income strategies to navigate elevated valuations and inflationary pressures.
Monitor Market Sentiment: Be cautious of retail-driven exuberance, which could lead to overvaluations and increased volatility.
Conclusion
As we move into 2025, investors should balance cautious optimism with pragmatic risk management. While U.S. equities have demonstrated resilience, historical patterns suggest that long-term returns will align more closely with economic fundamentals. A disciplined, diversified approach will be critical in navigating the evolving market landscape under Trump 2.0 and beyond.
Rainer Michael Preiss, Partner & Portfolio Strategist at Das Family Office in Singapore
