Trump 2.0: US mid-caps set for rally, as Europe & Asia reel

While US equities and the dollar have reacted positively to President-elect Donald Trump’s policy agenda, the gains will likely be at the expense of European and several Asian economies, and may weigh heavy on US growth after 2025, according to analysis from Europe’s largest asset manager Amundi.

The election of Trump – who among a number of controversial fiscal and economic policies has promised to impose substantial tariffs on imported goods – has “brought renewed focus on inflation and its potential ripple effects on global markets”, say Amundi analysts Monica Defend, head of the Amundi Investment Institute and chief strategist, and Vincent Mortier, group CIO.

While these policies will “inevitably reverberate across European assets and emerging markets”, the pair say, their true impact will hinge on several measures and countermeasures enacted by these economies.

Among the expected winners in the short- to medium-term, the Amundi analysts predict, will be US mid-caps, which are expected to benefit from a combination of “positive sentiment stemming from a growth impetus, potential deregulation and favourable tax policies”.

More broadly, Trump’s fiscal agenda, including promised tax cuts and deregulation, could spur growth through 2025, the pair said.

However, these policies may weigh on growth in 2026, with a rising fiscal deficit and national debt “significant concerns [which] could exert additional upward pressure on bond yields”.

As well, risks of re-inflation will emerge. Indeed, efforts by the Federal Reserve to stamp out skyrocketing inflation, which have so far proved fruitful (with aggressive monetary policy tightening dropping from a near four-decade high inflation rate from 9.1% in mid-2022 to 2.7% currently), could be quickly reversed if Trump moves forward with his current policies.

“Policies around immigration control – subsequently, wage pressure – and import tariffs could create upward risks on inflation. Hence, the Fed will become more data dependent and may ease less than currently expected.”

“Tariffs could boost inflation by 0.5pp, but are unlikely to offset tax cuts completely. Sequencing and the timing of tariffs will be key to assessing their economic fallout”.

This, according to the pair, will also have implications for the European Central Bank and other global central banks.

“Balancing fiscal governance rules in the EU with the need to invest in productivity, competitiveness, and defence will be no small feat. Countries like Germany, France, and Italy will need to navigate these competing priorities carefully, especially in the post-election environment.

The pair have advised investors to seek out inflation protection and strategies favouring the steepening of the US yield curve, with ten-year US Treasury yield predicted to fall modestly to 4.30% by Q2 2025.

China, the analysts predict, is also unlikely to react passively to these US policies.

“China realises that negotiating with Trump is difficult. The country will respond proportionately to the US.

“Potential responses include a fiscal boost, export controls of critical minerals and a devaluation [of the Yuan]”.

Here, Amundi cites a preference for Chinese equities over bonds.

For the analysts, a combination of high asset valuations, rising bond yields, and inflation risks pose significant challenges for global risk assets. Consequently, both favour “more attractively priced market segments”.

Opportunities ahead

Beyond a projected short- to medium-term surge in US mid-caps, the analysts remain marginally positive on the UK and Japan.

In the fixed income space, Amundi said it remains “constructive on US and EU duration, raising its curve steepening expectations.

Gold as well “still holds the potential to offer portfolio stability”, while investors “should consider maintaining safeguards on equities and duration, if US inflation surprises on the upside”.

“[We] have tactically downgraded core European duration to neutral, and see political uncertainty persisting in the near term.

“In US credit, we remain tilted towards quality, and in securitised credit, we prefer high-quality AAA-rated debt in commercial real estate. Our stance is unchanged for EU credit.”

Due to high market expectations of US equities, the pair suggests looking beyond overpriced stocks.

“The actual impact on growth would depend on the degree to which Trump’s agenda is implemented.

“Instead of playing this positive sentiment through expensive large caps, we prefer to rely on areas that display better valuations, such as S&P equal weighted, value and quality In Europe, stock picking is likely to gain importance, as weak domestic demand meets uncertainty on international trade.”