Investment Outlook: Navigating uncertainties in 2025

"In terms of politics generally, we're seeing a wave of populism on both sides of the Atlantic at the moment. How do we make sense of that?"

With these words, Kevin Gardiner, Chief Investment Strategist at Rothschild & Co, opened our latest Investment Outlook event in Zurich. Together with a panel of specialists from Wealth Management Switzerland, they shared insights on the return of a polarising figure to the White House and offered a thorough analysis of current financial trends.

Despite the political uncertainties, 2024 proved to be a year of favourable economic conditions. How will recent developments in the US impact the economy, and what are the implications for 2025 and beyond?

Return of Donald Trump and rising populism

While it may seem as though public opinion has undergone a dramatic shift, the rise of populism can arguably be better understood as a reaction to widespread dissatisfaction with the political establishment, rather than a fundamental change in the way people think. In the United States, this discontent has taken shape in the re-election of Donald Trump. While his approach is often divisive, there’s an important distinction to make in understanding how political shifts affect financial markets.

As Gardiner pointed out: “There’s been a tendency to translate personal opinions onto the situation, interpreting Trump’s re-election through a subjective lens rather than assessing it objectively. We mustn't do that in finance.”

In other words, while Trump's rhetoric may be extreme, the markets are focused on fundamentals—namely profitability and discount rates. As long as these remain stable, the identity of the White House occupant may not significantly impact portfolios. In his view, it's important to take what Trump represents seriously—but not necessarily literally. The real significance lies not in the specifics of his statements, but in their broader meaning.

"Note to self: Take Trump seriously but do not take him literally."

What does Trump mean for the economy and investors?

This distinction is key to understanding the broader economic landscape. Despite the polarizing political environment, a positive scenario under President Trump is still possible, and it could balance out some of the risks associated with his policies. In terms of fiscal and monetary policy, settings are arguably excessively loose. Interest rates are already coming down, and they may decrease further this year, though not dramatically. Simultaneously, large government deficits are widening on both sides of the Atlantic and in China, signalling continued fiscal looseness.

In the US, President Trump's push to raise tariffs and cut taxes will likely result in an even larger budget deficit.  While his rhetoric may sound extreme, his economic team has indicated that many of his measures, particularly those on trade, are often used as negotiating tactics rather than set-in-stone policies. If the tariffs do take effect, they may not be as severe as initially expected, with suppliers potentially absorbing some of the cost and easing the burden on US consumers. If subsequent tax cuts outweigh the impact of tariff revenue, the net effect might be to create more economic momentum, not less.

Nevertheless, predicting Trump's every move is nearly impossible. Given the uncertainty surrounding his future actions, Christoph Wirtz, Equity Analyst for Wealth Management Switzerland, underscored "our focus on companies with strong pricing power and a global presence, as these are better positioned to navigate potential geopolitical risks". Businesses with a proven ability to weather past crises and capitalize on challenging situations are prime investment candidates.

In the context of Trump’s 'America First' agenda, Stefan Gerstner, Investment and Portfolio Advisor for Wealth Management Switzerland, emphasized companies with products deemed indispensable to the US. European and Swiss companies that are globally positioned and have significant exposure to the American market are expected to sustain demand, regardless of future tariffs.

While global recession fears have been prevalent, the US economy has shown resilience, growing faster than usual, and maintaining low unemployment rates. Despite the loose fiscal policies, interest rates are dropping, and profitability remains strong. With healthy financial balances in the private sector, the outlook for growth through 2025 remains positive.

AI and the long-term outlook

Looking ahead, concerns about excessive debt, demographic shifts, and resource depletion are often more complex than they appear. Despite these challenges, growth remains possible, and corporate profitability is expected to stay strong. However, the current investment outlook is neutral, with no strong preference for stocks, bonds, or liquidity. There is a slight preference for liquidity in Swiss currency portfolios due to low yields.

The market faces political and policy risks, particularly around interest rates, as they may not decrease as much as expected. Stock market valuations, especially in the US, are relatively high, with equities rising significantly in the past two years, outpacing earnings growth. This suggests limited short-term upside potential. The rally has been driven by a few large companies, particularly those leading the AI charge.

"There are signs, however, that people are expecting AI to do too much, too soon. Computers are not about to take over the world."

Some US tech companies have been pushing the limits, with increased capital spending and risky financial practices. There are signs of overambition in this sector, as some of these moves may not be sustainable in the long run. Investors should be cautious, as naiveté within the AI space could lead to unrealistic expectations and less favourable market conditions moving forward.

Patrik Eggebrecht, Portfolio Manager for Wealth Management Switzerland, urges for a "certain degree of caution for new investments in this area". Holding positions in high-growth markets like AI makes sense, but these should be carefully sized to avoid excessive exposure. Ultimately, diversification remains crucial, and Switzerland offers interesting opportunities outside of the tech giants.

Given the current landscape, the positive scenario we have been enjoying for the last two years – balanced inflation with no recession – may be coming to an end. Fiscal policies are loosening, interest rates are falling, and inflation risks may rise again. While the U.S. economy has shown growth, interest rate expectations have started to increase, signalling potential challenges for stock markets. With valuations high and profitability not improving at the same pace, the outlook remains cautiously neutral, but we remain positive on the global economy on the long-term.