The markets have had an exciting start to 2025, dominated by Donald Trump’s inauguration as US president.
The Trump factor was discussed even as we went into the US elections in November, and dominated discussion through December and the first weeks of this year.
The dollar appreciated between September and the inauguration this month. US treasury yields also reset higher. Financial conditions tightened for all assets except US equities and credit. The S&P 500 reached another record high, and US exceptionalism was on full display.
I am wary of US equities going into 2025, and fret about what a correction there would mean for asset prices globally. They are the bellwether of global risk appetite, and a wobble here would be felt everywhere.
US equity valuations are sky high. Other than during the pandemic period of turbocharged monetary and fiscal policy easing in 2020, the last time US equities were this expensive was just before the dot.com bubble bursting in early 2000.
The recent announcement that Chinese developers could have come up with an AI application that leapfrogs Silicon Valley’s efforts — and are giving it away for free — created a wobble in the markets this week. DeepSeek could undermine the investment case for US tech companies, which would topple the S&P 500.
The top nine shares by market capitalisation in the S&P 500 are in tech. Together these companies account for more than a third of the index’s market capitalisation.
Potential profits from AI have been a large part of the investment rationale for these companies and turbocharged the 66% rise in the S&P 500 from October 2022. If the investment case for tech were undermined, a painful derating would follow.
Outside the DeepSeek concern, the story for US growth is replete with risks. There are notable risks coming from a hawkish administration and an unpredictable policy environment.
Higher tariffs and lower immigration will be inflationary if implemented with any force, and inflation would constrain interest rate easing by the Federal Reserve and be a drag on growth.
On the fiscal front, the administration could lower taxes but also threatens to cut government spending. No-one knows where these calculations will land. So far tariff threats have been targeted at countries that pose modest risk to the US economy and the administration is flip-flopping on China, which would be more systemic.
It is not clear how many immigrants will be deported and how many people will choose not to enter the US.
Markets have so far decided to give the US administration the benefit of the doubt. People are betting not every illegal immigrant can be deported, that tariffs are a negotiating tool and will not be implemented, that sanity will prevail.
The prominent presence of business tycoons around the president has convinced some that corporate profitability will be preserved. Even then, policy risk has increased markedly in the US, which could itself constrain animal spirits over time.
For local policymakers, the dearth of strength across trading partners excluding the US is a concern. Chinese growth remains disappointing and the policy response is too measured to overcome the deflationary malaise plaguing our biggest export destination. Europe is also suffering weakness in its manufacturing sector.
Industrial commodity prices continue to languish, reflective of a world that lacks vitality. There is scope for local growth to catch up with the globe, but global growth is treading water right now. The risk of a slower US increases the risk that the world could slip into recession.
The year 2025 could be a perilous one for SA and local assets, not because of anything we brew locally but because of what happens offshore. Much of the discussion last year was about local factors, but this year will be driven far more by what happens externally.
SA assets did exceptionally well last year, but this year might be one of caution. My advice would be for investors to tread carefully.
• Lijane is global markets strategist at Standard Bank CIB.
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