1. Since Donald Trump became president of the US, he has enacted tariffs and is implementing economic policies that create uncertainty. What should investors pay attention to?

The market had entered 2025 with a very crowded trade: everyone was positioned on the same three things: US equities (‘US exceptionalism’), a focus on the Magnificent 7 stocks, and a long USD. What is happening in terms of performances YTD is a good reminder that when everyone talks about the same thing, it never happens.

Nowadays, everyone is focused on the tariffs, which make the daily headlines. But what is going on is much bigger than only tariffs. Assessing the world from a ‘balance sheet’ perspective, you will notice: 

• In the US the private sector has a very healthy balance sheet (financial situation). On the other side, the public sector (government) shows a weak picture.
• In the rest of the world both the public and private sectors are okay.
• In China, we have a balance sheet recession. People are saving to pay down debt meaning they spend less money, which results in slower economic growth. In other words, both consumption and investments are depressed. The government, in the meantime, is slowly pivoting to provide support.

2. How has President Trump’s economic agenda changed in his second term?

Trump’s second term is very different from his first term. In his first term, Trump was measuring his success depending on whether the S&P 500 was rising or not. Now in his second term, it is all about “Main Street”, and not anymore about “Wall Street”. The current administration is focused on the following: 

• Rebalancing government spending and reducing the fiscal deficit.
• Addressing record inequality and cost-of-living issues.
• Crucially, lowering long-term rates, which is particularly important for housing affordability.

Therefore, Trump is not focused on the S&P 500 anymore, but on the level of the 10-year US Treasury yield. The goal of lowering long-term interest rates is tied to the intention of making housing more affordable, thereby benefiting a broader segment of the US population. Today, affordability of US housing is worse than at the peak of the last housing bubble in 2008. The median US household has to spend a record 47% of its income to afford the median priced home for sale.

Europe however, is going a different route, as it is pivoting towards increased fiscal stimulus after years of relative fiscal austerity. The prevailing narrative is that the trigger for Europe doing that now is that defence spending is needed in a world where the US is letting it down. However, it is also likely that Europe is simply taking advantage of the current geopolitical events in order to sell the concept that Maastricht’s rules (max 3% deficit, max 60% debt) have to be scrapped.

3. What part do tariffs play in all this?

Tariffs are just a piece of the puzzle. We believe that Trump, or at least his administration, knows that trade wars (tariffs) do NOT work in a multi-polar world. So, why is he slapping indiscriminate tariffs on everyone, allies included? We still believe his main target remains China. But China understands economics as well and can find ways to circumvent targeted tariffs. They can, for example, reinvent supply chains to deliver their goods through other countries such as Mexico. Therefore, by targeting all main trade partners with tariffs, the US administration makes sure they reach their destination.

What the US administration really wants to achieve is a fiscal rebalancing. To provide an image of the size of the problem, consider that in the 2016-2023 period, the cumulative fiscal stimulus in the US has been equivalent to 35% of GDP (vs 10% only in Europe). In our view, the bet that Trump could be taking is that the private sector, being in a good shape, can borrow and start a credit cycle (especially if rates continue going down), to partially compensate the government austerity. In this hypothetical scenario, the economic suffering would be short-term only (2025), but 2026 should see an economic rebound. The timing would be perfect given that 2026 will be the year of mid-term elections.

4. How should I position my portfolio going forward?

The big picture is pretty simple: The US is rebalancing its economy and detoxing from its addiction to fiscal stimulus. At the same time, Europe is doing the opposite as it moves towards stimulating the economy. This explains the equity performance differential YTD and is something that could continue for a while. 2025 risks to be difficult for US equities, so ensuring international diversification is key.