Navigating the Trump 2.0 economy

Despite headwinds from higher interest rates, inflation and a contentious presidential election, 2024 delivered strong US equity performance. A resilient consumer, strong corporate earnings and a wave of technological innovation and investment drove stronger-than-expected economic growth. Franklin Equity Group’s Jason Vaillancourt and Portfolio Manager Grant Bowers reflect on what they see ahead for US stock investors.

Key takeaways:

• The US economy and consumer remain healthy as we move into 2025.
• With the new administration, we anticipate deregulation across industries, lower-taxes and a pro-business agenda, which could be tailwinds for US equities.
• We continue to closely monitor potential inflationary pressures, shifts in monetary policy, employment data and geopolitical risks.
• The technological investments made over the last decade are building blocks for what we believe will be the golden age of growth and innovation. Cloud computing, semiconductors, data centers, mobile and generative AI models are the foundations on which the next wave of incredible discoveries will be built.

Jason Vaillancourt: As we head into 2025, what’s your outlook for the US economy?

Grant Bowers: The US economy remains healthy, anchored by a financially sound consumer, strong employment, improving inflation and stable to declining interest rates.

A strong employment market has supported a resilient US consumer, with increased spending levels and healthy household balance sheets. Looking ahead to 2025, we believe the probability of a recession is low, with most industries generating positive revenue earnings growth while inflation remains in check. Current consensus estimates for next year’s gross domestic product growth range between 2% and 3%, which we see as achievable.¹ This growth rate should provide a positive economic backdrop, with upside potential that could be accelerated by additional Federal Reserve (Fed) interest-rate cuts, lower taxes and robust corporate earnings.

While valuations remain higher on a historical basis, we view the risk/reward of current price levels as balanced, and we expect corporate earnings growth—rather than investors’ willingness to pay higher multiples—to fuel higher stock returns in 2025.  In the coming quarters, we believe investors should focus on quality and earnings visibility, along with areas of secular growth in the economy.

Of course, shifts in fiscal policy, heightened concern around debt levels and major tax changes could all spark volatility. But given our positive outlook for long-term growth, we would view these types of short-term market swings opportunistically.  

Jason Vaillancourt:  Many US advantages, including a spirit of innovation and entrepreneurship, a robust financing ecosystem to support it, and strong protections for intellectual property, are not changed by elections. That said, how does the election of Donald Trump impact your market outlook? 

Grant Bowers: While Trump was a controversial candidate by many measures, we think the key pillars of his platform could be positive for the US economy and the US equity market:

• The new administration is expected to bring lower taxes, broad deregulation, and a pro-business agenda
• A focus on reshoring and increased US manufacturing could spur domestic investment and add American jobs
• Deregulation/reduced bureaucracy could bolster the energy sector and help maintain our position as a net energy exporter (lower utility costs could be a competitive advantage in manufacturing) 

Collectively, we think these factors should be positive for US economic growth. 

The new administration’s policies are not without risks that could shift our positive view. If Trump implements the additional 10% tariff Chinese imports, as well as 25% tariffs on all goods from Mexico and Canada, we could see an uptick in inflation, reversal of monetary policy and ultimately higher interest rates. Tighter immigration policies and government efficiency efforts could impact the labor market, tempering economic growth.  However, I think investors may be wise to wait and see how this rhetoric ultimately translates into economic policy. 

Jason Vaillancourt: We’ve talked extensively about how concentrated the US market has been over the past few years.  I think the policy mix of a lighter regulatory touch and corporate tax cuts could be a good recipe for finally unlocking value in smaller and mid-cap stocks—would you agree? 

Grant Bowers: Absolutely. I think the rotation we have seen since the Fed’s initial interest-rate cut in September could signal broader market participation. The Magnificent Seven² are highly profitable, incredible businesses with strong competitive positions. As investors, the outperformance of such a narrow group of mega-cap companies has created an opportunity for active managers who are able to look beyond the benchmarks. We see 2025 as a year where market breadth will expand and small-, mid- and large-cap companies will take the spotlight.

We see several catalysts to this broadening theme:

• Modest inflation allows the Fed to continue cutting rates in 2025
• Trump’s “America First” domestic policy agenda and reshoring trends, which could be positive for smaller and midsized US companies
• A shift into a more mature phase of the economic cycle
• Reduced regulation and policy shifts could help spur innovation, bolster mergers and acquisitions and initial public offering activity