The U.S. economy has seen upward growth revisions this year, setting a high standard for continued performance. In contrast, other global economies, particularly Germany and China, have lower expectations, which could lead to a convergence in growth rates if these nations adopt more expansionary fiscal policies.
Germany's upcoming federal election on February 23 is expected to spark discussions on fiscal strategies, while China may increase its fiscal expansion in response to the pressures of a trade war that could stifle growth.
The dynamics between the U.S. and emerging markets have historically shifted dramatically. In 2017, emerging markets outperformed U.S. equities significantly, largely due to China's stimulus measures that invigorated global manufacturing. However, the trade war in 2018 reversed this trend, leading to a period of U.S. exceptionalism. Current estimates suggest that U.S. growth will continue to outpace that of other countries, although there are risks that global growth could converge more rapidly than anticipated.
The economic agenda of the president-elect differs from previous strategies. During his first term, the focus was primarily on boosting nominal GDP growth, with inflation concerns taking a backseat. However, voter dissatisfaction with inflation could influence the new administration's policies. While tax cuts and tariffs remain on the table, there is a growing awareness that excessively raising asset prices or making housing less affordable could lead to voter backlash.
The U.S. stock market's exceptional performance has been largely driven by the technology sector, with a few companies accounting for a significant portion of the market capitalization. This concentration raises concerns about the sustainability of high valuations, especially as earnings surprises in the tech sector have begun to decline. Investors are increasingly wary of the potential for disappointment if these companies fail to monetize their significant capital expenditures in artificial intelligence.
Investment strategies are being adjusted in response to the evolving economic landscape. U.S. equities are expected to benefit from the anticipated pro-growth policies of the incoming administration, with a focus on large-cap, equal-weight, and small-cap indices. The uncertainty surrounding tariffs is likely to limit the ability of non-U.S. equities to outperform, prompting a continued overweight position in U.S. stocks.
The currency market is experiencing notable shifts, with the U.S. dollar expected to maintain strength against both low and high-yield bonds. Factors such as U.S. exceptionalism and rising tariff-related risks are anticipated to support the dollar's position. Conversely, the euro is underweighted, as relative growth and rate differentials suggest a weakening trend that could be exacerbated by tariff implications.
In the commodities space, gold is recognized as an effective diversifier amid fiscal easing, geopolitical risks, and concerns over Federal Reserve credibility. While oil prices are influenced by increasing supply and geopolitical tensions, gold's structural support continues to make it an attractive option for investors seeking stability in uncertain times. The interplay between U.S. growth, international fiscal policies, and sectoral dynamics will be critical in shaping investment strategies and market performance in the coming years.