The world is an increasingly fragmented and complex place, but everyone I meet appears to be obsessed with just one person: Donald Trump. All projections about the coming year assume Trump will dictate global economic and market trends.
A single factor is never a solid foundation for forecasting. The world is not unipolar and does not revolve around one personality, not even one as big as Trump’s. Historically, the impact of US presidents on markets has often been surprising, and at times minimal.
Investors were braced for a negative shock when Trump came to power in 2017, but that year turned out to be one of the least volatile for US stocks ever. Trump constantly threatened to undermine China with tariffs and yet, during his first term, the best-performing major market in the world was China, outpacing even the US.
If past is prelude, Trump 2.0 will not play out as most investors expect. Ironically, continuing faith in “American exceptionalism” assumes that under Trump the world will see more of the same trends it saw under Joe Biden: US dominance of the global economy and markets, led by its big-cap tech businesses. But those trends are already very extended and vulnerable to forces larger than the US president-elect. For a variety of reasons, competitive churn could return to global markets in 2025 and lead to seismic shifts.
Return of the contrarians
History shows that the global economy and markets move in cycles, not straight trend lines. Contrarian investing is rooted in these patterns. The hot investment theme of one decade typically gets overcrowded, sowing the seeds of its own demise, and does not stay hot the next. But here we are halfway through the 2020s, and the hot bet of the 2010s — big US tech — is still paying off.
In the past, the list of global top 10 companies by market cap has changed dramatically with each new decade. Now seven of the 10 are holdovers from the 2010s, including Apple, Microsoft and Amazon. The trends of the past 15 years are stretched thin amid the growing manias for America and AI, which are supercharged by excessive US stimulus, the gamification of investing and the rise of algorithmic trading and passive money managers.
Creative destruction has been a defining and indeed necessary feature of capitalism since its roots in the 18th century; either it’s dead, or dormant and poised for a comeback. My bet is on the comeback. That would herald a (belated) return for contrarian investing, starting with a shift away from the US and its top tech companies.
Momentum crashes
Momentum traders are the polar opposite of contrarians, believing that winners and losers of recent months will continue on the same paths in coming months. Last year was a great one for this class: momentum mania swept beyond big US tech to lift stocks in the financial and other sectors as well.
A turning point looms. Since the 1950s, according to Empirical Research Partners, stocks that lead the market for nine months outperform over the next 12 months by 3 per cent on average. Rarely have they outperformed by more than 20 per cent, as they did in 2024. And after a run that strong, momentum stocks underperform by nearly 10 per cent over the next 12 months on average.
Momentum runs tend to reinforce the assumption that good times will roll, pulling in retail investors in the late stages. That’s happening now. American consumers have not been more bullish on US stocks since surveys began tracking this sentiment. Momentum investing looks poised to crash in a way that could hit many investors hard.
Punishing deficits
Under Trump, cuts in taxes and regulations will send the US economy and market to new heights, or so the conventional wisdom goes. Though the pandemic is over, and jobs have recovered, the US deficit is still strikingly high at around 6 per cent of GDP. In fact, adjusted for the low unemployment rate, the US deficit is five times the previous record high for a post-second world war recovery. And Trump’s agenda threatens to push it from extreme to even more so.
The bulls wave off warnings that fiscal recklessness will trigger a crisis, since no obvious calamity has come despite decades of similar warnings. They overlook the fact that, compared with other developed nations, America’s government debt has increased more than two times faster as a share of GDP in this decade and its interest payments on that debt are now three times higher.
Given the amount of new longer-dated US Treasury bonds set to hit the markets in the coming months, 2025 could see the moment when bond vigilantes take notice. In recent years, traders have punished profligate governments from Brazil to the UK and — albeit less aggressively — France. Many observers assume that the US, as the premier economic power, is invulnerable to such attacks, but its increasingly precarious finances could shatter that assumption soon.
Less exceptionalism
Buzz about “American exceptionalism” overlooks the artificial boost the US is getting from state support. Following the pandemic, government spending rose sharply as a share of GDP. More than 20 per cent of new US jobs are now created by government, up from 1 per cent in the 2010s. Public transfers including Social Security account for more than a quarter of residents’ income in more than 50 per cent of US counties — up from just 10 per cent in 2000.
The overstimulated US economy is growing at a pace near 3 per cent, but the fiscal stimulus is set to diminish in 2025 and so is the pace of monetary easing. If the new administration tries to further stimulate the economy, an already elevated inflation rate could surge, forcing the Fed and the bond market to raise interest rates.
In turn, bond market pressure would finally compel spending restraint, hurting economic growth and corporate profits, at least for a while. Interestingly, expectations for US growth are now so bullish, economists see only a 20 per cent probability of recession, down from near 70 per cent a year ago. While there is no visible catalyst for a recession, fading stimulus effects suggest the US economy is likely to slow in 2025 to a rate closer to its long-term potential of about 2 per cent, if not lower. America will look much less exceptional then.
The next stars
Many countries now languish in the shadows — but that is where the next stars are usually found. Recall that a decade ago, investors dismissed much of southern Europe as hopeless, until crisis forced them to reform. The nations formerly dismissed as “Pigs” now include some of the continent’s bright spots, led by Portugal, Greece and Spain. The dark spots — Germany and France — could also find themselves unexpectedly compelled by their weak economies to change for the better.
Today, global investors ignore most of the developing world. Among the large developing economies, fewer than one in two saw faster per capita GDP growth than the US in the last five years. In coming years, however, that share is expected to rise to more than four out of five, with big boosts coming from investment in plants and equipment, and resilient consumer spending.
Disciplined government spending helps explain why credit rating agencies are now more sanguine on developing nations, with upgrades outnumbering downgrades by margins not seen in years, including positive turns on recent basket cases like Argentina and Turkey.
For the most part, global investors have yet to react, but locals have. Domestic equity cultures are propping up markets from Saudi Arabia to South Africa. India is already something of a unicorn — as the one global market star outside the US — but it may not be so unusual by the end of 2025.
Investable China
The bear case is hard to argue against. No country with a shrinking population and a heavy burden of debt has ever been able to grow at even half Beijing’s target rate of 5 per cent. Still, any contrarian has to be curious about a market most global investors now dismiss as “uninvestable”, even though it is the world’s second largest.
Diamonds can be found in this rough, for example by looking for profitable publicly traded companies with high cash flows. There are now about 250 companies in China with a market cap more than $1bn and a free cash flow yield above 10 per cent — roughly 100 more than in the US, and 60 more than in Europe. Yet sentiment is as bearish on China as it is bullish on America.
Compare their leading electric car companies, BYD and Tesla. Both generate similar revenues and offer a similar return on equity, but sales volume is growing twice as fast at BYD, which is rapidly expanding its share of the global market. Yet BYD stock sells at a price-to-earnings ratio of 15, compared with around 120 for Tesla. Its market cap is just over $100bn, Tesla’s is more than $1.2tn. In the coming year, investors may come to see China as investable again, at least in its profitable parts.
AI undercuts Big Tech
Big Tech’s supernormal profits and massive cash flows have been a significant draw for investors. But that advantage is shrinking fast. Taken together, Apple, Microsoft, Google, Meta and Tesla are on pace to invest nearly $280bn in artificial intelligence this year, up from $80bn five years ago. The race to dominate AI is on, and as a result, free cash flow growth for the biggest tech companies recently turned negative.
AI mania may be getting ahead of itself. Fewer than one in 20 workers say they use AI daily. Fewer than one in 10 US companies have incorporated AI into their operations. That does not mean they won’t, just that it is far from clear how this technology will be applied — much less how strictly it will be regulated or which mega firms will make money on it. Remember, few if any established firms emerged as big winners of the internet or shale oil revolutions.
Though it is tough to imagine what could derail Big Tech firms, one answer is overspending on data centres and other AI infrastructure. One of the biggest capital spending booms that America has seen since the second world war may be great for the consumer, but could be the straw that finally breaks the supernormal profits of Big Tech companies and inspires investors to question their lofty valuations.
Trade without America
If Trump’s tariff threats are a negotiating tactic, as his aides say, they are already working to bring other countries to the table — but without the US. After 25 years of talks, last month representatives of 31 nations agreed on plans for the world’s largest trade union, linking the EU with the Mercosur group in Latin America. If ratified, it would cut tariffs by 90 per cent among member states, which account for 25 per cent of global GDP.
Spooked by America’s use of sanctions to cut off rivals from the dollar-based international finance system, many countries are making deals to promote trade with regional neighbours, or without the dollar. India has agreements with 22 countries to conduct trade in rupees; 90 per cent of India-Russia trade is transacted in local currencies. Petro states including Saudi Arabia have cut deals to sell their oil in currencies other than the dollar as well.
In recent years global trade has shifted, and today its biggest channels are within the developing world. Eight of the 10 fastest-growing trade corridors do not include the US, but many of them do have one terminus in China. The more the US threatens tariffs and weaponises the dollar, the harder its erstwhile partners will work to promote trade without America.
Private excess
As a haven for investors fleeing from regulators, the booming private markets for equity and credit are no longer just a niche alternative. Since 2000, the number of public US companies has fallen by nearly half to about 4,000, while the number of private ones nearly quintupled to about 10,000.
Private markets are becoming the first choice for companies trying to raise money. Private lending is growing at twice the pace of bank lending. The volume of capital raised in private markets recently surpassed the volume in public markets worldwide.
Meanwhile, the often-opaque risks are growing. The falling quality of some private credit issuers is showing up in high default rates for their leveraged loans. Others are repackaging certain products for sale in ways that “test the limits” of risk safeguards. A few big firms are considering plans to offer private credit in exchange traded funds open to daily public trading — as if the general public were equipped to weigh the risk of assets that need to report results once a quarter, if at all. The mainstreaming of private markets and the resulting excesses could come under greater scrutiny in 2025.
No magic injection
Americans are exceptional in another way, with an adult obesity rate that at 44 per cent is the highest in the developed world. So it is no surprise that American TV is full of ads for the relatively new class of “GLP-1” weight-loss drugs, suggesting they offer a bright and easy path to weight loss.
Last month came a new study detecting a tiny dip in the US obesity rate. Its authors suggested this unexpected turn may be explained in good part by GLP-1 drugs such as Ozempic, which is likely to generate even more buzz around these wildly popular weight-loss remedies.
However, in the growing body of GLP-1 research, not all the news is so sunny. Once people stop the injections, many of the pounds come back. In suppressing appetite, these treatments can also destroy muscle, paralyse the stomach and impair vision. Rapid fat loss can leave sagging skin in embarrassingly visible places, which is why internet searches for “Ozempic butt” and “Ozempic legs” are mounting steadily.
No doubt, these drugs have some useful benefits, and contrarians are not doctors. They do, however, know that what sounds too good to be true probably is. And as a quick fix for obesity, this could turn out to be just another diet fad.
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