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Multi-Asset Blog

Multi-Asset Positioning in a Trump 2.0 Policy Regime

26 February 2025
4 min read

With major US policy change unfolding, flexibility across and within asset classes will be critical.

The Trump administration is into its first 100 days, with substantial policy shifts either underway or expected.

While we believe that the US economic backdrop remains solid, we recognize that the new government brings with it continued uncertainty around the scale and timing of policy changes. On the one hand, tariffs and immigration measures could dampen growth or stoke inflation. On the other, potential tax cuts and deregulation would likely be a tailwind for corporate America.

US Exceptionalism Has Lifted Equities. Can it Persist?

Superior labor productivity and higher real wage growth have supported a US consumer that continues to spend on goods and services at a faster rate than consumers in other developed markets. This has ultimately led to a post-pandemic US economy that has diverged from the rest of the world (Display).

US Growth Leads Developed Markets, Thanks to a Strong Consumer
US GDP has outpaced the eurozone and Japan since 2014 through 2024.

Historical analysis does not guarantee future results.
Trend defined as the GDP growth rate between 2014 and 2019
As of December 31, 2024
Source: Haver Analytics and AllianceBernstein (AB)

Against this stronger economic backdrop, the US stock market, as measured by the S&P 500, has outperformed non-US equities, or the MSCI EAFE Index, by some 40% from January 1, 2021, through February 24, 2025.

But can this US market exceptionalism continue? We think so, and even though regional growth gaps may narrow, US economic outperformance should continue to fuel superior corporate earnings growth. Compared to Europe, for example, 2025 earnings growth is expected to be around 12.1% for the S&P 500, versus 8.6% for the Stoxx Europe 600 Index.

European equities certainly offer pockets of opportunity, especially given their low relative valuations. Despite their solid start for the year, however, we continue to see risks on the horizon that could challenge their sustained outperformance. The region faces rising geopolitical uncertainty and a trade war that will likely hit European economies harder, while the lack of a tech sector within its equity market makes it more challenging for us to see an engine for growth; technology comprises less than 8% of MSCI Europe Index, compared to over 30% of the MSCI USA Index.

Meanwhile, select emerging markets show promise, but a stronger US dollar, China-related uncertainty and rising US protectionism cloud their outlook somewhat. 

Expect Continued Equity Market Broadening

In our view, US equities offer the strongest relative growth potential. But investors need to be selective given rich valuations and high levels of market concentration.

Over the past couple of years, the Magnificent Seven cohort have dominated returns, driven primarily by investor optimism in artificial intelligence and superior earnings growth. But earnings growth is now expected to be more evenly distributed, with the gap between the Mag 7 and the rest of the market on track to narrow over the coming years (Display).

Earnings Growth Expected to Broaden Beyond the Magnificent Seven
The gap should significantly narrow in 2025 and beyond, sharply contrasting 2023 and 2024.

Historical analysis does not guarantee future results.
E = Expected. Mag Seven represented by Bloomberg Magnificent Seven Total Return Index (equal weight), US Large Cap ex Mag Seven represented by Bloomberg US Large Cap ex Magnificent Seven Total Return Index
As of February 13, 2025
Source: Haver Analytics and AB

We expect this market broadening to benefit those strategies that have the scope to diversify across different parts of the equity market, such as high-dividend companies (with their higher exposure to energy and financials) and minimum-volatility stocks (where valuations are more palatable).

We also see tactical opportunities in US small- and mid-cap stocks. Smaller companies tend to be more domestically focused, so they could benefit disproportionately from the new administration’s agenda, especially when it comes to corporate tax cuts. 

Balance Equity Risk with Credit and Duration

We also continue to see the benefit of balancing growth risk across asset classes. While high-yield bond spreads are also expensive, we think credit can complement equity exposure given attractive current all-in yields. Spreads may be tight, but we think this reflects strong fundamentals, with interest coverage and leverage levels still in good shape.

Yield to worst has historically been a good predictor of forward returns. And with current yields at 7.5%, we think high-yield corporates can provide an attractive source of income, especially if investors can focus on higher-quality issuers whose default risk tends to be lower.

The asset class currently offering more reasonable valuations in our view is US Treasuries, or duration (Display). We recognize that the outlook for duration may look less certain in the US compared with other developed markets given relatively stronger growth and potential for inflationary upside. Yet starting yields suggest that the movement in rates remains skewed to the downside. More importantly, this gives the Fed manoeuvrability should the new administration make policy changes that negatively impact growth.

Treasuries Remain Cheap Relative to Other US Assets
Treasuries rank in the 4th cheapest quartile, well above equities and high-yield and investment grade bonds, based on 10 year averages.

Historical analysis does not guarantee future results.
*Relative to 10-year history; 1 = cheapest
bps: basis points; OAS: Option-Adjusted Spread. US equities represented by the S&P 500, US high yield by the Bloomberg US Corporate high yield Index, US investment grade by the Bloomberg US Aggregate Corporate Index.
As of January 31, 2025
Source: Bloomberg and AB

The Big Picture

The new US administration brings with it heightened uncertainty: from tariffs to tax cuts, we think it’s not just the magnitude but the sequencing of policy that will determine the impact on growth, inflation and interest rates.

It’s more certain to us that the US investment landscape will change, and probably quickly. That’s why today, more so than in recent years, we believe that multi-asset investors must stay diversified and flexible in anticipation of rotation sparked by potential policy changes.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

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