In the wake of the US election, investors are contending with significant shifts in the economic landscape, particularly around inflation and interest rates. Debate persists on whether Trump’s policies are inherently inflationary or deflationary. Interestingly, while the Federal Reserve (Fed) continues to cut rates, long-term interest rates are trending higher—a dynamic compounded by leading indicators of inflation edging upwards.
As fixed-income markets question the Fed’s capacity for deeper rate cuts, the central bank is now reassessing its trajectory for monetary policy. This environment has created valuation challenges for equities, particularly as rising long-term rates weigh on stock performance. Providing some relief to markets is the appointment of Scott Bessent as US Treasury Secretary, whose mandate includes stabilising fixed-income volatility and enhancing growth prospects.
For now, the US economy remains resilient, bolstered by fiscal stimulus measures that are expected to provide ongoing support.
China’s economic crossroads
While the US economy shows strength, the outlook for China remains more cautious. Trump’s policies pose significant challenges for China’s external sector, affecting both exports and capital flows. To date, Chinese authorities have deployed measured responses to these external pressures. However, many analysts argue that small-scale stimulus efforts are unlikely to reverse broader economic challenges, including:
- Demographic pressures in the property market
- Weak private sector confidence
- Excessive local government borrowing
- The spectre of capital outflows
Hopes rest on the possibility of larger-scale stimulus, though this may require yuan devaluation to relax monetary constraints—an approach fraught with its own risks. The strength of the US dollar under Trump’s “Make America Great Again” agenda further exacerbates these pressures.
Nevertheless, should the USD weaken, or Chinese economic data exceed expectations, the prevailing pessimism towards China could be tested, offering a potential shift in sentiment.
Australia: A safe haven
Australia is benefiting as a relative safe haven for global investors amidst Chinese economic headwinds. This dynamic is reflected in the demand for Australian banks, which tend to see inflows when Asian markets experience turbulence. Domestically, investors are considering the potential for early rate cuts from the Reserve Bank of Australia (RBA), aligning with the broader trend among global central banks. Such moves could support the economy, mitigate recession risks, and bolster cyclical exposures.
However, inflation concerns remain a key challenge. The low unemployment rate, ongoing fiscal stimulus, and the weakening AUD (boosting import costs) all add complexity to the RBA’s decision-making. With parallels between the Australian and US outlooks, equities are likely to remain sensitive to movements in rates and valuations.
Outlook: Resilience in growth stocks
Conventional wisdom suggests that growth stocks perform best when long-term interest rates decline, as the present value of future earnings increases. Yet, despite rising rates, growth stocks have shown resilience—a trend supported by declining interest rate uncertainty.
Looking ahead, there is limited room for further declines in rate uncertainty. If growth and inflation begin to accelerate again, fixed-income markets may start to factor out the possibility of further rate cuts—or even anticipate rate hikes. As the Federal Reserve’s next moves become less predictable, rising uncertainty around interest rates could place additional pressure on growth stock performance.
The need for diversification
Concentration risk in equity markets is another growing concern. In recent years, a significant proportion of the U.S. equity market’s gains has been driven by a handful of mega-cap technology and growth stocks, often referred to as the ‘Magnificent Seven’. The performance of these companies such as Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG), Meta (NASDAQ: META), Nvidia (NASDAQ: NVDA) and Tesla (NASDAQ: TSLA), disproportionately influences the S&P 500 and Nasdaq. If rates or uncertainty levels rise further, investors may need to reassess their exposure to these dominant names and diversify into less crowded, undervalued areas of the market. Pursuing quality undervalued international growth companies and exposure to market mispricing opportunities will be key to building resilient portfolios in the face of evolving macroeconomic conditions.