One Big Beautiful Bill
The International Monetary Fund (IMF) downgraded global GDP growth forecast to 2.8% and 3.0% for 2025 and 2026, respectively from 3.3%. This revised rate is well below the historical average (2000-2019) global growth rate of 3.7%. Advanced and emerging/developing economies are now projected to expand by 1.4% and 3.7% in 2025 down from 1.9% and 4.2%, respectively. Global inflation is projected to soften to 4.2% and 3.6% for 2025 and 2026, respectively. Trade tariff is projected to curtail global trade volume growth to 1.7% compared to 3.8% in previous projection.
Multilateral cooperation is coming under renewed threat from a second Trump presidency. This could potentially blunt the fruits of globalization leading to increased supply chain fragmentation and structural rise in global inflation. President Trump’s policies on global conflicts, trade, taxes, deficits, and immigration are primed to drive market volatility throughout 2025. However, the anticipated volatility will also provide compelling investment opportunities across all asset classes for shrewd investors.
After having front-loaded rate cuts by a total 100bps for 2024 the FED decided to stand pat at the latest March FOMC meeting. The combination between a resilient U.S. economy and steady labor market allowed the FED to remain patient in normalizing policy. The FED forgoes consecutive rate cuts at each meeting as witnessed during the latter part of 2024. The latest dot-plot suggests a total of 50bps of incoming rate cuts for 2025 but market projects up to 100bps of reductions as trade tariffs threaten demand destruction. The FED sees the U.S. economy expanding 1.7% and 1.8% in 2025and 2026, respectively with stickier core PCE read of 2.8% for 2025.
Market expects no further FED easing at least until September. FED currently in “wait and see” mode as President Trump roll out new and potentially reflationary policies. Core PCE is expected to decrease to 2% only by 2027. Earlier, FED Chair Jerome Powell refuses to acknowledge fiscal policy risks in achieving the FED’s 2% inflation target until impacts are palpable. However, in a marked shift, Powell publicly commented on the economic risks posed by President Trump’s trade policies. The FED paints the current easing cycle as an act of “recalibration” rather than a response to an unexpected downshift in its economic assessment or a response to a significant deterioration in labor market conditions.
The ongoing culling (both planned and implemented) of the federal workforce totals 216k positions thus far with another 75k accepting voluntary buyout offers. This puts more workers into what is already a finely balanced U.S. labor market. The U.S. Federal Government employs 2.4 million workers (excluding U.S. postal service) accounting for 1.9% of the entire U.S. civilian workforce. This could ultimately amount to the biggest job cut in U.S. history. However, Judge Susan Illston has issued preliminary injunction that pauses further reductions in force of the federal government. The Trump administration has appealed this decision.
U.S. leading indicators deteriorated as fears over unemployment and inflation expectations mount. Tariff polices remain in constant flux. The 90-days reciprocal tariff reprieve for all countries which expires July 8th did not provide sufficient reassurance for markets as 25% tariff for autos, steel and baseline 10% remained in place with 30% applied to China down from 145% earlier . Trade tariff would still lop off 1% of U.S. GDP even if all tariffs are immediately reversed.
In the latest meeting, the ECB eased policy further by cutting 25bps across three key interest rate benchmarks. The ECB earlier downgraded GDP growth outlook to 0.9% and 1.2% for 2025 and 2026, respectively. The ECB’s asset purchase program (APP) and pandemic emergency purchase program (PEPP) no longer reinvests principal payments from maturing securities. The ECB is on an aggressive easing pivot to bolster meager economic growth.
BOE Governor Andrew Bailey has signaled an expedited approach to monetary easing and followed through with a 25bps policy rate cut in February and another 25bps cut in May to 4.25%. The BOE halved 2025 GDP growth from 1.5% to 0.75%. The BOE is anticipated to cut at policy interest rate at least one more time in 2025. Headline and core CPI rose 3.5% YoY and 3.8% YoY in April driven by services. The BOE expects inflation to move towards 2% overtime.
After the BOJ held policy rate steady at the December meeting, the central bank voted 8-1 to hike policy rate by 25bps to 0.5% in January to a 17-year high. Inflation has persistently hovered above the 2% BOJ’s target. The market is now pricing a full a cycle high of 50bps in total policy tightening for the 2025 calendar year. Regardless, the BOJ has the optionality to moderate the pace of rate hikes should tariff negatively threatens growth and inflation outlook. China’s economy ended 2024 on a stronger-than-expected note, as Q4CY24 GDP expanded by 5.4%YoY followed by stronger than expected 5.4% growth in Q1CY25.
India’s 2024 GDP forecast was downgraded to 6.5% due mainly to the contraction in government spending after a robust 8.2% growth in 2023. India’s benchmark equity index, remains 4% below all-time-high. Concerns regarding earnings growth and consumption prompted foreign investors to turn net sellers and lock-in gains. However, projected rise government spending and tax relief for the next fiscal year stoked optimism.
Global Equity: Markets initially cheered President-elect Trump’s pro-growth policy but sentiment quickly deteriorated after as FED’s easing pivot faced fresh setback from trade tariff and sticky inflation numbers. Market expects the S&P 500 to deliver 11% EPS growth for 2025 largely unchanged from end-CY24 projections. Interestingly, the delta in earnings growth rate between the “Mag-7” cohort and non-Mag 7 names are rapidly narrowing. The Mag-7 companies are expected report earnings growth of 13% in CY25 far lower than 40% in CY24, while the other 493 companies to report earnings growth of 9% for CY25 accelerating from 4% in CY24. The Mag-7 faces prospect of valuation de-rating as growth rate slows subsequently fueling rotation into non-Mag-7 names. Risks to earnings projections from trade tariff are yet to be priced-in. This raises the prospects of EPS downgrades if tariffs are not quickly reversed.
After plummeting 19% from all time-high and quickly rebounding by 16% S&P500 valuations remain relatively stretched with a TTM (trailing-twelve-months) P/E of 24.8x for the. This P/E ratio is still above the 10-year average of 21.8x despite mounting risks from trade tariff. Although the on-again-off-again tariffs could reverse quickly the ensuing damage from observed volatility from could still hit corporate America earnings. Should S&P500 CY25 earnings growth forecast are halved to 6% with valuations retreating back to -1s.d. on 10YR average P/E of 17.8x, the index would face 23% drawdown from current levels. U.S. effective tariff rate is 13%, a level last seen in 1941 during World War II.
President Trump’s “Big Beautiful Bill” to make permanent the individual income and estate tax cuts passed under TCJA in 2017. The bill calls for increased defense and border security spending, no tax on tips and overtime, quadruple the USD10,000 deduction for state and local taxes (SALT), to USD40,000 for incomes up to USD500,000. The bill will cost the U.S. Government USD3.3 trillion in deficit over the next decade and would push the 2034 public debt-to-GDP ratio to 125% up from 100% currently. Current U.S. federal deficit is already running around USD2 trillion annually, over 6% of annual GDP. U.S. fiscal spending in on an unfeasible path. Within the span of past 20 years, public debt-to-GDP ratio has doubled from 61.3% in 2005 to 121.9% in 2024. Federal debt surged from USD8.2 trillion to USD36.2 trillion, a 341% increase. Although the rise in leverage is concerning, near-terms risk remain low as other developed market peers such Japan has breached the 200% public-debt-to-GDP threshold.
Investors are excited about lower M&A scrutiny under a new U.S. President and lower cost of capital both are bullish for small-mid cap companies. Moreover, international revenues accounted for 39% of the Russell 1000 Index (large cap proxy) constituents and half that at 19.9% for the Russell 2000 (small cap proxy). Therefore, tit-for-tat trade tariff would disproportionately affect large caps over small. This has further piqued the interest of investors for small caps. Excluding companies with negative earnings, market expects Russell 2000 Index constituents to grow earnings 10.8% annually during 2024-2026 and with a trailing 18.3x P/E the index is far cheaper than large caps.
NIKKEI225 saw selling pressure following the selloff in U.S. tech names during August and on the back of Japan’s auto sector facing a 25% tariff on exports to the U.S. The index and remains 9% below all-time high. The recent slump in Indian shares has been largely driven by weak Q324 results across key sectors coupled with elevated valuations relative to emerging market peers. Consumer goods companies, hindered by a slowdown in rural consumption, reported earnings below estimates. Indian banks are also dealing with deteriorating asset quality both of which have unnerved investors. The BSE Sensex projected earnings for CY24-CY26 has slowed to 11.9% CAGR relative to 5YR (CY19-CY24) CAGR growth rate of 14.7%.
China Equity: China faces revised 30% tariff on U.S.-bound exports and placed a 10% tariff on U.S. imports. Earlier, 145%/125% tariff rendered goods trading unfeasible between the two global powers. China exports a massive USD439 billion worth of goods to the U.S. in CY24 accounting for 13.4% of total U.S. goods imports. China’s status as the primary and reliable supplier of everyday goods to the U.S. portend substantial cataclysmic impacts to U.S. consumers ranging from price surges to goods shortage once existing inventory runs out. An easing of tariffs placed on Chinese exports to the U.S. provided much needed relief to markets.
China’s stimulus barrage included a 50bps reduction on average interest rates for existing mortgages, and a reduction of the minimum down payment requirement to 15% on all types of homes. The PBOC also introduced two new tools to boost the capital market. A swap program with a size of USD71 billion would allow funds, insurers and securities brokers easier access to funding to buy stocks. The PBOC said in a statement it will “implement a moderately loose monetary policy to create good monetary and financial environment for promoting sustained economic recovery”, underscoring the need for further monetary support. During May, the PBOC slashed one-year and five-year LPR by another 10bps each after lowering the reserve requirement ratio by 50bps.
The second measure provides up to USD42.5 billion in cheap PBOC loans to commercial banks to help fund other entities' share purchases and share buybacks. A USD1.4 trillion debt swap was launched allowing local governments to exchange high-interest off-balance sheet debts for lower-interest longer-term bonds. China is set to run a 4% budget deficit to GDP in 2025 to shore up consumption larger than a target of 3% for 2024 targeting 5% GDP growth. The increase in the deficit by one percentage translates to an additional expenditure of approximately 1.3 trillion yuan (USD179.4 billion).
After finishing 2024 with mid-teens returns, the first positive reversal for Chinese equities in three years, the Hang Seng Index (HSI) soared 16% YTD dramatically outperforming global peers. Performance was driven by solid Q4 technology sector earnings and progress on AI development. Low market expectations, compelling valuations, accelerating earnings growth and continued fiscal support bolstered returns. After the recent rally, the HSI Index has re-rated to 10.6x P/E slightly below the 10YR average. The HSI earnings growth are penciled in at only early-single for CY25 leaving plenty of room for EPS growth to surprise to the upside. EPS growth for the CSI300 Index was upgraded to 16% for CY25 with a compelling price-to-earnings-to-growth (PEG) ratio of 0.99x.
Alternative Assets: FED’s pivot has initially lifted REIT performance. However, REITs witnessed intense selling pressure from the rise in 10YR U.S. Treasury yield which soared as much as 128bps from 2024’s trough and whipsawed as markets attempt to price-in rising U.S. fiscal deficit and higher inflation. Nevertheless, REITs and infrastructure assets will continue to benefit from larger investors’ allocation as Treasury yields are expected to see pressure across the curve driven by FED’s delayed but ongoing easing pivot. As part of income investing strategies, investors are seeking out income generating assets beyond risk-free instruments to meet desired returns inevitably benefiting interest rate sensitive assets with stable cash flows. The recent sell-offs marked a good entry point for mid-long term investors.
Uncertainty regarding negative economic impacts from President Trump’s tariff policy and inflation resurgence continued to push gold price higher. Geopolitical risks are no longer the main catalyst for gold prices. Crude prices are pressured by weak demand growth coupled with the prospects of supply growth from both OPEC+ and non-OPEC+ producers. OPEC+ reaffirmed its commitment to unwind 2.2 million barrels per day production cut enacted on April 1st, 2025.
For 2025, investment focus should be placed on funds that invest in quality stocks with reasonable valuations, REITs, infrastructure assets and investments that benefit from lower risk premiums such as small-mid-caps and emerging market equities. The front end of U.S. Treasury curve offers tactical investment opportunity from potential curve steeping. U.S. policy interest rates are still anticipated to head lower in response to shifting economic outlook. We recommend clients to invest with a portfolio-based approach through a combination of strategic and tactical asset allocation (SAA and TAA) to better optimize risk-reward and ride out volatility.
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