Schroders: As uncertainties related to tariffs are eliminated, the U.S. economy may be expected to regain growth momentum

According to the Zhitong Finance APP, Schroders stated that after years of steady growth, the U.S. economy is showing signs of fatigue, with personal consumption flat in the first five months of 2025 and an increasing number of people facing difficulties in the job market. The economic slowdown may be a temporary phenomenon, and as uncertainties related to tariffs are resolved, the U.S. economy may regain growth momentum. Additionally, with only 14 months remaining until the midterm elections in 2026, it is expected that the U.S. government will actively prevent excessive economic slowdown. The growth of U.S. Gross Domestic Product (GDP) in the next 6 to 12 months remains controversial, but it is becoming increasingly clear that Trump's policies may include rising inflation, a steeper yield curve, and a downward trend in the dollar. The proposal to "Make America Great Again" comes at a cost.

Schroders noted that observing the U.S. breakeven inflation rate, the market currently does not expect inflation to significantly escalate during Trump's second term, with the 10-year breakeven inflation rate currently at 2.3%. At the beginning of the pandemic, the market viewed COVID-19 as a deflationary event. However, as inflation unexpectedly rose, financial markets quickly adjusted expectations, with the breakeven inflation rate rising from 1.1% to 2.8%.

Most of Schroders' asset allocation in its income strategy is based on its views on the long-term impact of Trump's policies.

First, Schroders has a lower position in the long end of the U.S. yield curve, preferring high-quality short-duration bonds and some high-yield local currency bonds from emerging markets.

Second, Schroders continues to maintain a large but diversified short position in the dollar. Although there is a consensus in the market that valuation and structural factors will lead to further declines in the dollar, especially if Trump successfully lobbies for the next Federal Reserve chair.

Third, Schroders is optimistic about assets that directly benefit from inflation, such as gold mining stocks, while also capturing the commodity renaissance theme.

As for the impact of Trump's policies on the overall U.S. stock market, it is more subtle, and therefore Schroders believes that the investment opportunities within it are also unique:

Banking Regulation Easing: The U.S. banking sector is expected to benefit from the government's easing of regulatory policies, including reducing regulatory burdens, adjusting capital requirements, and implementing a more lenient attitude from regulatory agencies, bringing positive momentum to the banking sector.

Tech Dominance: The development and application of artificial intelligence (AI) continue to drive profit growth for major U.S. tech companies. Investors should not overlook this sector. Notably, technology and finance are the sectors with the most upward revisions in profit forecasts from 2025 to date.

Schroders believes that these major global growth themes, especially when combined with a flexible and adaptable asset allocation strategy, can provide investors with opportunities for both income and capital appreciation.

In Europe, macroeconomic drivers continue to provide robust support for the overall economy and stock market. There have been opinions in the market that Germany's systemic rigidity may hinder its effective utilization of the pledged €900 billion fiscal expenditure. In this regard, recent news has improved. The German Vice Chancellor stated that the average time for issuing building project permits is expected to be significantly reduced from five years to just two months.

Schroders stated that although European stock markets have given back some of their relative gains compared to U.S. stocks since the beginning of 2025, when measured in dollars, their performance is notably different, with the MSCI Europe Index (in dollars) still outperforming the S&P 500 by 17% Since 2020, the forecasted earnings per share trends for the industrial sectors in the U.S. and Europe have been similar, but in the past six months, European earnings have significantly increased, while the U.S. industrial sector has not seen significant changes.

In 2025, Europe is expected to perform strongly in U.S. dollars. Schroders continues to be optimistic about the European market, especially the industrial sector and mid-cap stocks. Strategically increasing exposure to alternative sources of income, such as emerging market bonds, convertible bonds, securitized credit products, and insurance-linked securities (ILS), can help enhance the overall performance of the investment portfolio