Where to spend money on 2025: Will Trump begin a commerce struggle and what subsequent for the Magnificent Seven?

Donald Trump’s agenda of aggressive trade tariffs and tax cuts is set to dominate markets next year.

The returning US president is expected to be an even more disruptive force in his second term, with repercussions for geopolitics in the Middle East and Ukraine.

His policy plans have prompted a stock rally, but also sparked inflation fears and are already influencing the easing cycle of US interest rates.

Financial pundits give their takes on all the above, plus whether the Magnificent Seven tech stocks can maintain their hegemony, opportunities in US smaller companies, prospects for other major economies, and growing concerns about government debt levels.

We look at how events might unfold in the world’s markets and round up some fund ideas for the year ahead.

1. Global outlook: Growth of 3.2% is forecast

The global economy is not in bad shape, according to Evelyn Partners’ head of asset allocation Kate Morrisey.

‘Unemployment in developed economies is close to record lows and output growth is still solid.

‘The Federal Reserve, European Central Bank and Bank of England are lowering interest rates in response to decelerating inflation and to safeguard against risks from relatively high real borrowing costs.

‘Whilst we have seen market expectations of inflation tick up since the US election, the inflation profile remains closer to target than at any other time in the recent past.’

Morrisey also notes the Chinese authorities are trying to reflate their sluggish economy to avoid deflation, with measures including an unprecedented scheme to inject liquidity to support brokers, asset managers and insurers in purchasing stocks.

‘With Western and Eastern policymakers easing monetary policy, we could see global growth accelerate over the next 12 months,’ she says.

Guy Foster, chief strategist at RBC Brewin Dolphin, says: ‘According to the IMF’s World Economic Outlook, 2025 is expected to resemble this year, with the global economy projected to grow by 3.2 per cent.

‘Meanwhile, inflation is expected to edge back to target, which is encouraging. If the economy continues to grow, then we’re more likely to see stocks continue to provide good returns.’

But Foster says the IMF’s economists aren’t infallible and recessions often result from economic shocks such as sharp price increases in essential commodities like oil or gas, or sudden changes in consumer spending behaviour.

‘Tensions in the Middle East mean it would be unwise to rule out an oil price spike. However, the outlook for oil is tepid due to weak demand, partly driven by China’s struggling economy and a potentially stronger supply from the US – remember Trump’s promise to “drill baby drill”?’

Foster also adds: ‘Inflation could still be a headwind for investors. In recent months, there have been signs that inflation is more stubborn in some economies, most notably the US. Lingering inflation has tempered anticipation of interest rate reductions.’

Salman Ahmed, global head of strategic asset allocation at Fidelity International, says: ‘The US soft-landing scenario that we confidently held as our base case for most of 2024 should give way to reflation as we move deeper into 2025.

‘But an economy whose exceptional growth propped up the rest of the world in recent years may also now turn inward and become more protectionist.

‘Other major economies, and in particular Europe and China, will have to navigate a shift in US trade and industrial policy that is likely to weaken their own growth prospects and put downward pressure on domestic inflation as external demand slows.’

He also notes: ‘Rising government debt burdens is the underlying, longer-term trend. We believe public finances are fast reaching their limits and that above-target inflation is likely to become the least costly option.’

2. The US: Trump views stock market as a barometer of his success

President-elect Donald Trump with his ‘America-first’ ambition could wield considerable power that impacts global trade, interest rates and inflation, suggests Close Brothers Asset Management’s investment expert Tony Whincup.

‘Although the gap between rhetoric and deed will be unpredictable, Trump 2.0 will arguably be unfettered second time around.

‘US exceptionalism and protectionism will have profound consequences for the global economy. More friction may crimp GDP growth and feed inflation forcing the Fed to recalibrate interest rate policy. ‘

Whincup says markets are already pricing in fewer interest rate cuts, and Trump might test the Federal Reserve’s independence – though its chair Jerome Powell has dismissed the idea Trump could legally fire him.

‘That said, Trump’s rather old-fashioned view of the stock market as a barometer of his success has clearly driven indices higher,’ adds Whincup. ‘US Treasury bond yields have risen and the US dollar strengthened since Trump’s re-election.’

Kate Morrisey, head of asset allocation at Evelyn Partners, says the US stock market’s performance has been extraordinary over the past decade, consistently outperforming its global peers.

‘However, this comes at a cost: investors are starting to consider some of the multiples in the market rather demanding with a high percentage of the overall valuation concentrated in a handful of names.’

Morrisey nevertheless believes US exceptionalism is likely to continue under the Trump administration – she echoes the observation above that Trump views the US stock market as an important performance barometer, and thinks he will look to implement supportive policies as a result.

‘This includes maintaining or even reducing an already low level of corporate taxation. He is also expected to slash bureaucratic red tape.

‘The main risk to this much advertised stance is that Trump follows through on some of his more extreme commitments from the election campaign including sizeable tariffs on Chinese imports and the deportation of millions of undocumented migrants.

‘Such steps are likely to have a negative impact on growth and would put upward pressure on prices.’

David Page, head of macro research at AXA Investment Managers, says policy uncertainty will replace political uncertainty following the US election.

‘Trump campaigned on policies of fiscal easing and deregulation, which should support growth, but he also campaigned for tighter migration restrictions, trade tariff increases and made several geopolitical statements, which could all have a materially detrimental impact on the growth outlook.

‘Yet for now there is significant uncertainty about the scale of implementation, with the immediate market reaction playing down some of the more growth-restricting policies.’

Page says: ‘Further immigration restrictions and deportations would constitute a supply shock – limiting, or reversing labour supply growth – as would tariffs. Both would reduce US trend growth rates and boost inflation.’

He suggests two other uncertainties that could impair growth. Tax cuts could increase the deficit and drive bond yields higher. And changing policies for Ukraine and the Middle East, and increased economic tensions with China, could topple the current, delicate geopolitical balance.

‘Our forecast is that with US activity enjoying solid momentum for now and a further loosening in financial conditions – in part in response to Trump’s win – the economy should post another solid year in 2025 and we forecast growth of 2.3 per cent,’ he says.

‘However, as we expect the new administration to introduce growth restraining policies soon after inauguration, we expect growth to slow markedly across 2026, to leave annual growth at 1.5 per cent, and annualised second half 2026 growth slower still.’

3. Magnificent Seven: Can lofty valuations and earnings continue?

‘Investors seem as bedazzled as ever by the so-called Magnificent Seven of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla,’ says AJ Bell’s investment director Russ Mould.

‘This year’s average 65 per cent gain across the septet leaves them with an aggregate market capitalisation of $18trillion, or 35 per cent of the S&P 500.

‘That powerful performance in turn means the S&P 500 represents 63 per cent of the FTSE All-World’s market valuation, a level that exceeds even the high seen at the peak of the technology, media and telecoms bubble in 2000.’

Mould says an unexpected recession and sustained inflation are possible challenges to the Magnificent Seven, adding: ‘Only a perfect middle path may do to justify their lofty valuations, let alone sustained further upside.’

Kate Morrisey of Evelyn Partners, says: ‘In recent years, strong corporate performance in the US has been led by the so-called Magnificent Seven who delivered very strong annual earnings growth – 30 per cent higher than the rest of the S&P combined – during 2023 and 2024.’

She says earnings are expected to broaden out in 2025, with analysts estimating 18 per cent earnings growth for the Magnificent Seven and 12 per cent for the rest of the S&P 500.

‘While the Mag 7 are still expected to outperform on earnings, the gap is far narrower than in recent years. Might the market move to narrow the stock price performance gap too?’

4. US smaller companies: Trump policies could be positive for earnings

Donald Trump’s impact on the US stock market could be positive for smaller companies, according to Hargreaves Lansdown’s head of platform investments Emma Wall.

‘On the campaign trail, Trump mooted a blanket 20 per cent tariff on all imports into the US.

‘Trade tariffs favour domestic businesses over international conglomerates, and smaller companies are usually more domestically focused, although investing in them carries more risk.

‘Trump has also proposed cuts to cut corporate taxes, which is positive for companies’ earnings – and therefore could be beneficial to stock prices.’

Peter Branner, chief investment officer at Abrdn, says there is a substantial risk that the Trump administration proves much more disruptive than expected, both to the upside and downside in economic and market outcomes.

But he believes that while forthcoming shifts in US policy bring uncertainty, they are likely to disproportionately benefit US firms, and small caps in particular.

‘The deregulation agenda pursued by the Trump administration is likely to see the Federal Trade Commission make mergers and acquisitions activity easier, while relaxing bank capital regulations and granting more energy exploration permits.

‘Corporate tax cuts will tend to benefit smaller companies most, while by contrast tariffs will disproportionately hit internationally exposed firms. ‘ 

5. Trade war: Trump could strike tariff deals if offered concessions

Significantly higher tariffs are likely to be one of the centrepieces of a second Trump presidency, says Salman Ahmed of Fidelity International.

‘We assume that the much-discussed tariff rates – 60 per cent for China and 20 per cent for the rest of the world – are maximalist rates aimed at negotiations that may take place if the new administration presses ahead with its protectionist goals.

‘The rates that emerge may well be lower, but their impact on an economy that has consistently outperformed expectations over the next year would be substantial.’

But Ahmed says US recession only returns as a serious risk if, in the face of an inflation shock, the Federal Reserve pivots to a hiking cycle on interest rates.

‘We expect we will still be in some form of an easing cycle as we enter 2025, at least until the impact of tariffs, any significant changes in immigration, or the fiscal policy expansion becomes clearer.’

AJ Bell’s investment director, Russ Mould, says: ‘Trump talked loudly and carried a big stick on the subject of tariffs during his first term, but he only really wielded the stick at China.

‘Other nations, such as France and Mexico, were spared, albeit only once they offered concessions. We may see the same again this time around given Trump’s propensity to seek a deal.’

Mould goes on: ‘If all of the planned tariffs are imposed, it seems logical to assume this will boost inflation, as the price of imported goods will rise owing to the duties, or the higher cost of domestic production. ‘

‘But the best cure for higher prices is higher prices, as they ultimately curtail demand (or stoke output), and tariffs are seen as a major contributor to the deep global downturn suffered in the 1930s, so the picture may not be so simple.’

Mould suggests watching the dollar, as if Trump’s tariffs succeed in reducing America’s trade deficit that will mean fewer dollars leave America.

‘If they produce America’s first trade surplus since 1975, dollars will actively flow back into the US. That could be a problem, according to [the late Belgian-American economist] Robert Triffin’s theories, because of the dollar’s status as the world’s reserve currency.’

Mould explains: ‘In essence, greenbacks are the grease that oils the global economy and financial markets and without them global liquidity could dry up quickly, with potentially deleterious consequences.’

‘Emerging markets are traditionally very sensitive to the dollar, as many developing nations tend to borrow in bucks, and a strong US currency increases the cost of servicing that debt to the detriment of growth and investment.’

6. Europe: Trouble in France and Germany

Europe is the next source of political risk, says Abrdn’s chief economist Paul Diggle.

‘The German federal elections are likely to occur in the spring and a key electoral issue is the future of the “debt brake”, which limits deficit spending to 0.35 per cent of GDP.

‘We think Germany’s next government will reform the debt brake in some capacity, but the contours of any changes are much less certain and depends on the eventual government’s seat count, and is likely to translate to only modest fiscal expansion.’

Diggle says France’s political and fiscal problems are more acute following the failure of former Prime Minister Michel Barnier to pass a budget with the fiscal consolidation required by the European Commission.

A fresh parliamentary election is possible one year after the previous one, and France’s fiscal position continues to look very challenging, he adds.

Salman Ahmed, of Fidelity International, says: ‘The eurozone economy has been almost stagnant since 2023 and it faces a range of cyclical and structural challenges.’

But he expects a cyclical upswing from falling inflation and lower interest rates, which should help resurrect corporate capital expenditure and consumer confidence in 2025.

‘Stronger real disposable income and easier financing conditions should start releasing elevated excess savings to spur consumption growth.

‘However, potential tariffs from the US are a downside risk, particularly for the auto sector, and the resulting trade uncertainty could reduce growth by up to half a percentage point.’

7. Japan: Growth anticipated after a decline in 2024

Japan appears to have turned a corner on deflation, says Gabriella Dickens, an economist at AXA Investment Managers.

‘The virtuous wage/price spiral has taken hold this year and inflation expectations have risen. Growth should accelerate in 2025, as a fiscal injection and increased higher income tax thresholds bites.

‘However, household spending will remain limited by ongoing consumer caution.’

Dickens reckons the Bank of Japan will hike interest rates twice more by the end 2025 to 0.75 per cent, but then be forced to halt during 2026 as both growth and inflation ease.

Meanwhile, she notes that Japan’s economy is on course to decline by 0.3 per cent over 2024 as a whole, after factory shutdowns in the auto sector over safety sign-off concerns early in the year

‘After a weak start, household spending has started to ramp up, helped by a rebound in real incomes, while strong growth in corporate profits has supported an increase in capital expenditure.’

8. China: Trump threatens blanket 60% tariff on imports

Donald Trump’s return to the White House once again threatens a more hostile external environment for China, says Yingrui Wang, an economist at AXA Investment Managers.

‘We do not anticipate Trump’s proposed 60 per cent blanket tariff on Chinese imports being fully implemented. During his 2016 campaign, despite his calls for a 45 per cent tariff on Chinese goods, only 37 per cent of the claim was ultimately enacted.

‘The resulting decline in China’s exports to the US cut China’s GDP growth by 0.6 percentage points, including the partial offset from currency devaluation – the Chinese yuan depreciated 5.2 per cent against the US dollar.

‘In Trump’s second term, we foresee a similar materialisation rate for the tariff policy relative to his campaign rhetoric.’

Salman Ahmed, of Fidelity International, says: ‘China’s quest for a slower but more sustainable model of growth focused on domestic consumption and higher-end manufacturing is advancing, but not without bumps in the road.

‘The policy pivot by the politburo in late 2024 signals a decisive move to resolve the issues that have depressed domestic demand, namely the property sector, local government debt, a lacklustre equity market, and poor consumer confidence.’

He says one big question is whether the levels of growth China needs can be delivered if the US burdens companies’ biggest sales market with heavy tariffs.

The manufacturing sector is steadily upgrading, providing support for overall growth, but domestic consumption has not yet picked up significantly, according to Ahmed.

And he adds: ‘If additional US tariffs are imposed, past experience also tells us that Chinese companies are likely to prove agile in response, softening the impact on corporate earnings.’

9. Bonds: US and UK yields remain attractive

‘We’re bullish on bonds – although investors should manage their expectations on rate cuts,’ says Emma Wall, head of platform investments at Hargreaves Lansdown.

‘This is a higher for longer era. Both the Federal Reserve central bank in the US and the Bank of England in the UK have warned that cuts will be slow to come and cautiously applied.

‘Inflation is after all not conquered yet, and a number of incoming US President Donald Trump’s policies are likely to be inflationary too.’

But Wall says that with the 10-year gilt and US Treasury yields both above 4 per cent, bonds are still as attractive as earlier in 2024.

‘Taking a long-term view, yields could fall to below 4 per cent in future. By looking at bonds now, there is potential for capital gains in the future, as well as being rewarded with inflation-beating income in the near term, and the potential to diversify portfolios.’

Kate Morrisey, head of asset allocation at Evelyn Partners, says: ‘Over the next five years, we expect to see more concern amongst investors about government debt levels.

‘Government borrowing spiked during the pandemic as policymakers sought to offset the negative economic impact of rolling lockdowns.

‘In some respects, this was manageable as expenditure could be financed at record low interest rates. However, the environment has changed.’

Morrisey says the cost of servicing this debt pile has increased sharply and while she expects rate cuts over the next year a return to record low rates seems unlikely.

She adds that governments are also facing having to spend more due to several ‘structural megatrends’ – ageing societies with ballooning spending on healthcare and pensions, higher defence spending, and an expensive energy transition and infrastructure rebuild.

‘Scott Bessant, the incoming US Treasury secretary, has stated that he wants to reduce the US budget deficit to 3 per cent by 2028, the last year of Trump’s second term.

‘But given the deficit is expected to top 6 per cent in 2024 that looks a tall order. With the US debt ceiling requiring an extension in 2025, investors might expect to see more volatility in government bond yields.’

Fund picks for 2025

Victoria Hasler, head of fund research at Hargreaves Lansdown, offers the following ideas for the year ahead.

Invesco Tactical Bond (Ongoing charge: 0.70 per cent)

Most western central banks are now in a rate cutting cycle, but bond yields remain higher than they have been for some time so there is still value in bonds at these levels, says Hasler.

The market expects further cuts in 2025. Inflation is at or close to target in many markets. In an uncertain environment, however, look at high-quality bonds or, better still, choose an active manager who can manage interest rate and credit risk for you.

The Invesco Tactical Bond fund can invest in all types of bonds, with few constraints. The managers aim to shelter the fund when they see tough times ahead and seek strong returns as more opportunities become available.

Artemis US Smaller Companies (Ongoing charge: 0.87 per cent)

While tariffs are seldom a good thing for growth overall, they could potentially be good for US smaller companies, says Hasler.

Trade tariffs favour domestic businesses over international conglomerates, and smaller companies are usually more domestically focused.

Combine this with a more supportive monetary policy stance and this year could be a good time to invest in domestic-facing US corporates.

The Artemis US Smaller Companies fund seeks out smaller companies with good potential for their share price to grow relative to the risk of the business.

The manager considers how the US economy is performing to identify sectors that are benefiting from trends, as well as the areas that are finding things tough.

Troy Trojan (Ongoing charge: 0.88 per cent)

Geopolitical tensions remain high and the outlook for markets is far from certain. Central Banks continue to add to their gold reserves, and even though gold has had a great run, it could still be a useful diversifier.

The managers of the Troy Trojan fund manage to take advantage of the attributes of gold without putting all their eggs in one basket.

Rather than trying to shoot the lights out, the fund aims to grow investors’ money steadily over the long run, while limiting losses when markets fall.

The fund is focused around four ‘pillars’: large, established companies; bonds, including US index-linked bonds; gold-related investments, including physical gold; and cash, which provides protection when markets stumble, and a chance to invest quickly when opportunities arise.