The year ahead: Navigating Trump 2.0

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January 6, 2025

12 MIN READ

SEI recently released its fourth-quarter Economic Outlook. Here is a summary of our key perspectives, focusing on global economic growth, monetary policy, inflation, geopolitics, elections across the globe, and equity markets.

Election-year uncertainty has been replaced by policy uncertainty, but this has not prevented a powerful post-election rally in U.S. equities.
The U.S. economy enters 2025 with decent momentum. We have penciled in inflation-adjusted growth of 2.0%-to-2.5%, versus 1.0%-to-1.5% for Canada, the United Kingdom, and Europe.
Unemployment rates remain rather low in the U.S. and other advanced countries, with the notable exception of Canada. The incoming Trump Administration is determined to stop the flow of migrants across the border and plans an aggressive deportation push. It remains to be seen how aggressive that push will be.
We expect the inflation improvement seen in 2024 to stall out in the United States and the United Kingdom. The imposition of tariffs could place further upward pressure on the U.S. inflation rate in 2025, although the extent and magnitude of any levy is highly uncertain.
Cuts in the federal funds rate in 2025 could be limited to just one-half percentage point, or even less.
Countries and regions with structurally lower inflation and weaker economies should see more aggressive rate reductions than the U.S.
The election of Donald Trump and the Republican victories in the House of Representatives and the Senate guarantee the extension of most of the tax cuts embodied in the Tax Cuts and Jobs Act passed in 2017. Additional tax cuts are likely.
Other countries’ fiscal policies may not be quite as profligate, but they too will likely see worsening deficits over time owing to demographics, rising geopolitical tensions, higher financing costs, and a surge in populist politics.
The geopolitical outlook for 2025 does not appear quite as concerning as it appeared this time last year. Political dissatisfaction with the governing class is rife in many countries, however.
Large-cap U.S. equities seem priced for perfection and do not appear to be discounting the possible downside inherent in the Trump Administration’s economic policies.
There is a strong possibility that bond yields will rise further in 2025 as concerns mount over the deterioration of the U.S. fiscal position and the impact that tariffs and other policy decisions may have on future inflation.
Given Trump’s transactional approach to policy, there is a risk that the Administration will pursue a policy based on maximizing tariffs in the hope of forcing high-surplus nations, especially China, to dramatically alter their trade policies and allow their currencies to appreciate. We expect increased financial-market volatility as a result.

Jim Solloway, Chief Market Strategist and Senior Portfolio Manager, presents our economic outlook, as of the fourth quarter of 2024.

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- Hello, I'm Erin Huber, Client Service Director at SEI. I'm here with Chief Market Strategist and Senior Portfolio Manager, Jim Solloway, who will be presenting our economic outlook, as of the fourth quarter of 2024.

Jim, it seems that in the final months of 2024, election year uncertainty has been replaced with policy uncertainty, as investors wait to see what actions President Trump will take in a second term. The good news is that U.S. equities have been largely unconcerned. So, what are the major policy decisions you are watching for in 2025? And how could they influence the U.S. and global economies?

- Thanks, Erin. It's worth noting that we look at economic fundamentals and do not take bets on how the policies of any one administration will or will not affect markets, in the short term. This being said, it's hard not to consider what shifts may occur, immediately following an election year. The good news is that the U.S. economy still has momentum behind it, going into 2025. The chart on the screen shows the quarter-over-quarter change in real U.S. gross domestic product growth. As of year end, U.S. GDP was advancing at a 3.1% annualized pace and signs do not point to a recession, which you may recall was the popular outlook, this time last year. As for the year ahead, the election of Donald Trump and Republican majorities in both the Senate and the House of Representatives improved the odds that U.S. economic growth will continue to run at a healthy pace of 2% to 2.5%. Tax policy uncertainty has been greatly reduced and there will be no major upheaval in the federal tax code at the end of 2025. The only question is, how much more expansive fiscal policy will be?

- You mentioned tax policy. Expectations are for an extension of President Trump's 2017 Tax Cuts and Jobs Act, which is set to expire at the end of 2025. If that's the case, how do you see that affecting corporations and households, in the year to come?

- President Trump may push for a lower corporate tax rate. There is speculation that the statutory rate could fall as low as 16%, from the current 21%. It is not clear, though, whether there is enough support in Congress for this change, when the priority is to extend and enhance tax breaks for households and individuals. As for the impact on the U.S.economy, the effect of tax rate cuts on U.S. corporations is part of a larger, more complicated story. One that suggests that many of the secular tailwinds that boosted U.S. manufacturers' profit margins have turned into headwinds. The chart on the screen shows the drivers behind U.S. manufacturers' profit margins since 2000. Lower tax rates provided nearly two fifths of the gain in profit margins.

However, this factor may no longer be in play and may even reverse, in the years ahead, outside the U.S., as governments seek to repair their fiscal positions. This will impact the bottom lines of U.S. firms that do business overseas, since they pay taxes in the countries where their facilities are located. Additionally, financing costs are now on the rise and will become a more negative factor as lower cost debt matures and is refinanced at higher interest rates. The unwinding of global supply chains will also play a role. The wage savings and lower capital intensity outside of the U.S., have accounted for 14% of the increased margin enjoyed by U.S. manufacturers, over the past 24 years. Under a Trump administration, the benefits of globalization could be severely reduced, depending on how aggressively tariffs are implemented.

- There's certainly been a lot of questions and focus on the threat of tariffs on imports from Mexico, Canada, and China. How great a risk do tariffs pose? And what effects could this have on the global economy?

- There's little doubt that tariffs will increase. The question really is about how much? So it is difficult to measure what ripple effect they will have. To say the least, there are many unknowns, when it comes to the new administration's trade policy. Let's take a look at the past, to gain some insight on potential impacts. The chart on the screen tracks the history of tariffs imposed on merchandise imports entering the U.S. If President Trump were to impose across-the-board tariffs on imports at the magnitudes he suggested, we would see a surge in levies, to levels, much like the 1930's, indicated by the spike in the black line. Such a policy would have a devastating impact on U.S. manufacturers of all stripes, as input costs rise and exporters face retaliation. We think this worst-case scenario is unlikely. Rather, we expect a more-targeted approach, which would still be disruptive.

- How disruptive could this be on financial markets?

- Given Trump's transactional approach to trade, there is a danger that the administration will pursue a policy of maximizing tariffs, in the hope of forcing high-surplus nations, especially China, to dramatically alter their trade policies. While even a moderate tariff war could reduce the U.S.trade deficit, it could also hurt the growth prospects of the exporting countries, subject to the tariffs. Such a strategy could lead to a great deal of volatility and tail risk that is not currently reflected in today's equity and bond prices. Given the unpredictable nature of markets, we always suggest that a focus on long-term planning and diversification is the best way to prepare for short-term uncertainty.

- Thanks, Jim. We always appreciate your insights. SEI is focused on the major issues that are of interest to our clients. We incorporate these discussions into our advisory process, as the impact varies, based on each client's goals. For more of SEI's insights, read our latest economic outlook, available on our website.

Glossary

Dividend yield is a financial ratio indicating how much a company pays out to its shareholders in the form of dividends. The dividend yield is calculated by dividing the amount of dividends paid per share over a designated time period by the stock's current price.

GDPNow is the Federal Reserve Bank of Atlanta’s forecasting model for estimating GDP growth. It is designed to provide a “nowcast” (as opposed to a forecast) of GDP growth prior to the official release by the U.S. Bureau of Economic Analysis.

The global financial crisis (GFC) refers to the period of extreme stress in global financial markets and banking systems between mid-2007 and early 2009.

Gross domestic product (GDP) is the total monetary or market value of all the goods and services produced in a country during a certain period.

The Personal-Consumption-Expenditures (PCE) price index measures the prices that consumers pay for goods and services to reveal underlying inflation trends. The core PCE price index, the primary inflation monitor used by the Federal Reserve, excludes volatile food and energy prices.

Policy rates are the interest rates set by central banks, used to influence other interest rates. This includes the Fed’s federal-funds rate in the U.S.

Price/earnings (P/E) ratio is calculated by dividing the current market price of a stock by the earnings per share. Price/earnings multiples often are used to compare companies in the same industry, or to assess the historical performance of an individual company.

Index definitions

Consumer-Price Indexes (CPI) measure changes in the price level of a weighted-average market basket of consumer goods and services purchased by households. A consumer price index is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. The core CPI excludes volatile food and energy prices.

The MSCI Emerging Markets is a free float-adjusted (i.e., including only shares that are available for public trading) market capitalization-weighted index that tracks the performance of emerging-market equities.

The MSCI Emerging + Frontier Markets Index captures large-cap and mid-cap representation across 24 emerging markets countries and 28 frontier markets countries. The index includes 1,469 constituents, comprising about 85% of the free float-adjusted market capitalization in each country.

The MSCI USA Index tracks the performance of the large- and mid-cap segments of the U.S. equity market. The index’s 624 constituents comprise approximately 85% of the free float-adjusted (i.e., including only shares that are available for public trading) market capitalization in the U.S.

The MSCI World tracks the performance of the large- and mid-cap segments of equity markets across 23 developed-market countries. The index’s 1,517 constituents comprise approximately 85% of the free float-adjusted (i.e., including only shares that are available for public trading) market capitalization in each country.

The MSCI World ex USA Index tracks the performance of the large- and mid-cap segments of equity markets across 22 of 23 developed- market countries--excluding the U.S. The index’s 887 constituents comprise approximately 85% of the free float-adjusted (i.e., including only shares that are available for public trading) market capitalization in each country.

The Russell 1000 Index tracks the performance of 1000 of the largest U.S. equity securities based on market capitalization. The index is a subset of the Russell 3000 Index, which comprises the 3,000 largest U.S. companies, and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership.

The Russell 2000 Index tracks the performance of the small-cap segment of the U S. equity market. The index is a subset of the Russell 3000 Index, which comprises the 3,000 largest U.S. companies, and includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

The S&P 500 Index is a market-weighted index that tracks the performance of the 500 largest publicly traded U.S. companies and is considered representative of the broad U.S. stock market. The price return (the S&P 500 price index) excludes dividends and other payouts that would be included in the total return.

The S&P Global Composite PMI Output Index, a weighted average of the Manufacturing Output Index and the Services Business Activity Index, tracks business trends across both manufacturing and service sectors.

Important information

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Positioning and holdings are subject to change. All information as of the date indicated. There are risks involved with investing, including possible loss of principal. This information should not be relied upon by the reader as research or investment advice, (unless you have otherwise separately entered into a written agreement with SEI for the provision of investment advice) nor should it be construed as a recommendation to purchase or sell a security. The reader should consult with their financial professional for more information.

Statements that are not factual in nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its affiliates assumes any responsibility for the accuracy or completeness of such information and such information has not been independently verified by SEI.

There are risks involved with investing, including loss of principal. The value of an investment and any income from it can go down as well as up. Investors may get back less than the original amount invested. Returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Investment may not be suitable for everyone.

Index returns are for illustrative purposes only and do not represent actual investment performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results.

This material is not directed to any persons where (by reason of that person's nationality, residence or otherwise) the publication or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not rely on this information in any respect whatsoever.

The information contained herein is for general and educational information purposes only and is not intended to constitute legal, tax, accounting, securities, research or investment advice regarding the strategies or any security in particular, nor an opinion regarding the appropriateness of any investment. This information should not be construed as a recommendation to purchase or sell a security, derivative or futures contract. You should not act or rely on the information contained herein without obtaining specific legal, tax, accounting and investment advice from an investment professional.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction. Our outlook contains forward-looking statements that are judgments based upon our current assumptions, beliefs, and expectations. If any of the factors underlying our current assumptions, beliefs or expectations change, our statements as to potential future events or outcomes may be incorrect. We undertake no obligation to update our forward-looking statements.

Information in the U.S. is provided by SEI Investments Management Corporation (SIMC), a wholly owned subsidiary of SEI Investments Company (SEI).

Information in Canada is provided by SEI Investments Canada Company, a wholly owned subsidiary of SEI Investments Company (SEI), and the Manager of the SEI Funds in Canada.