Multi-Asset Positioning in a Trump 2.0 Policy Regime

Against this stronger economic backdrop, the US stock market, as measured by the S&P 500, has outperformed non-US equities, or the MSCI EAFE Index, by some 40% from January 1, 2021, through February 24, 2025.

But can this US market exceptionalism continue? We think so, and even though regional growth gaps may narrow, US economic outperformance should continue to fuel superior corporate earnings growth. Compared to Europe, for example, 2025 earnings growth is expected to be around 12.1% for the S&P 500, versus 8.6% for the Stoxx Europe 600 Index.

European equities certainly offer pockets of opportunity, especially given their low relative valuations. Despite their solid start for the year, however, we continue to see risks on the horizon that could challenge their sustained outperformance. The region faces rising geopolitical uncertainty and a trade war that will likely hit European economies harder, while the lack of a tech sector within its equity market makes it more challenging for us to see an engine for growth; technology comprises less than 8% of MSCI Europe Index, compared to over 30% of the MSCI USA Index.

Meanwhile, select emerging markets show promise, but a stronger US dollar, China-related uncertainty and rising US protectionism cloud their outlook somewhat.

Expect Continued Equity Market Broadening

In our view, US equities offer the strongest relative growth potential. But investors need to be selective given rich valuations and high levels of market concentration.

Over the past couple of years, the Magnificent Seven cohort have dominated returns, driven primarily by investor optimism in artificial intelligence and superior earnings growth. But earnings growth is now expected to be more evenly distributed, with the gap between the Mag 7 and the rest of the market on track to narrow over the coming years (Display).

We expect this market broadening to benefit those strategies that have the scope to diversify across different parts of the equity market, such as high-dividend companies (with their higher exposure to energy and financials) and minimum-volatility stocks (where valuations are more palatable).We also see tactical opportunities in US small- and mid-cap stocks. Smaller companies tend to be more domestically focused, so they could benefit disproportionately from the new administration’s agenda, especially when it comes to corporate tax cuts.

Balance Equity Risk with Credit and Duration

We also continue to see the benefit of balancing growth risk across asset classes. While high-yield bond spreads are also expensive, we think credit can complement equity exposure given attractive current all-in yields. Spreads may be tight, but we think this reflects strong fundamentals, with interest coverage and leverage levels still in good shape.

Yield to worst has historically been a good predictor of forward returns. And with current yields at 7.5%, we think high-yield corporates can provide an attractive source of income, especially if investors can focus on higher-quality issuers whose default risk tends to be lower.

The asset class currently offering more reasonable valuations in our view is US Treasuries, or duration (Display). We recognize that the outlook for duration may look less certain in the US compared with other developed markets given relatively stronger growth and potential for inflationary upside. Yet starting yields suggest that the movement in rates remains skewed to the downside. More importantly, this gives the Fed manoeuvrability should the new administration make policy changes that negatively impact growth.

The Big Picture

The new US administration brings with it heightened uncertainty: from tariffs to tax cuts, we think it’s not just the magnitude but the sequencing of policy that will determine the impact on growth, inflation and interest rates.

It’s more certain to us that the US investment landscape will change, and probably quickly. That’s why today, more so than in recent years, we believe that multi-asset investors must stay diversified and flexible in anticipation of rotation sparked by potential policy changes.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

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