BY FERNANDO DE FRUTOS, CFA, PhD | 08 JANUARY 2025
• Political and Geopolitical Uncertainty: The return of Trump to the Oval Office after a four-year hiatus introduces unique policy uncertainty. While comparisons to his first term are inevitable, the starting conditions in 2025—marked by heightened geopolitical tensions, particularly with China and Russia—are fundamentally different. Non-aligned nations will face growing pressure to choose sides, complicating trade and economic stability.
• Macroeconomic Challenges and Market Implications: The U.S. faces a delicate fiscal landscape marked by high deficits and elevated debt levels. Proposed tariffs and tax cuts must be carefully calibrated to avoid fueling inflation or destabilizing financial markets. At the same time, equity markets remain stretched, with elevated valuations heavily reliant on the “Fed put” as a backstop.
• Technological Disruption and Financial Speculation: AI represents a transformative force. In contrast, cryptocurrencies remain speculative. Trump’s policies could potentially open the door for deeper integration with corporate America, especially banks. While promising opportunities exist, unbridled speculation carries heightened risks of systemic contagion.
Every four years, like the leap year cycle, January marks the start of a new presidential term in the United States. These transitions often heighten policy uncertainty, particularly during a transfer of power. Yet 2025 stands out as unique: for the first time in modern history, a former U.S. president is returning to power after a four-year hiatus.
Comparisons to Trump’s first term are inevitable, but the world he inherits is vastly different. Economically, geopolitically, and socially, the starting conditions bear little resemblance to those of 2017. History may not repeat itself, but it often rhymes—and Trump 2.0 arrives with echoes of the past and a renewed determination to settle unfinished business.
Geopolitics: Same Players, New Game
In 2018, the trade war with China shook markets, prompting the Fed to halt interest rate hikes. At the time, China’s geopolitical ambitions were cloaked in a pro-business tone, and leaders like Xi Jinping and Vladimir Putin faced limited pushback from the global community. Crimea’s annexation in 2014 had met muted outrage, and Western democracies seemed reluctant to confront authoritarianism.
Fast forward to today, and the geopolitical landscape has fundamentally shifted. China’s alignment with Russia during the war in Ukraine has deepened divides between Western democracies and authoritarian regimes. Taiwan has become a flashpoint, with the U.S. openly supporting its sovereignty—an unprecedented departure from strategic ambiguity.
Trump’s return to office brings a renewed focus on China, but with even higher stakes. His proposed tariffs, contingent on countries’ alignment with U.S. interests—a concept reminiscent of Treasury Secretary Janet Yellen’s “friendshoring”— could make China a central target. Non-aligned nations like India, which have carefully navigated a path of strategic neutrality, now face growing pressure to choose a side. This geopolitical realignment could disrupt global trade and commodity flows, while also fueling inflation through higher energy prices and supply chain constraints.
Macro: Timing Is Everything
The U.S. economy in 2025 faces a different web of challenges. During Trump’s first term, low interest rates and minimal inflation created a favorable backdrop for tax cuts and pro-growth policies. Today, the fiscal deficit stands at 6.5% of GDP, up from 3% in 2017, while debt levels have climbed to 130% of GDP from 105%. These constraints make sweeping tax cuts, such as Trump’s proposed 15% corporate tax rate, far riskier and less impactful than the Tax Cuts and Jobs Act was at the time.
The Fed also operates under significantly different conditions. While interest rates are declining, they remain higher compared to the near-zero levels of the previous decade, and quantitative tightening is still underway, partially offsetting the effects of rate cuts. Inflationary pressures from tariffs and potential restrictions on immigration pose additional challenges, a stark contrast to the deflationary threats of the past.
In this environment, the timing and sequencing of policies are paramount. Missteps—such as overly aggressive tariffs or poorly calculated tax cuts—could stoke inflation, hamper growth, or destabilize financial markets.
Equity Markets: Elevated Valuations and the Fed Put
Equity markets enter 2025 with stretched valuations following two years of stellar returns. Investors should temper expectations and heed the familiar warning: “Past returns are no guarantee of future performance”. U.S. markets have delivered long-term annual returns averaging 9%, but deviations from the trend can be substantial. While mean reversion is expected, predicting its timing remains notoriously difficult.
In addition to the pro-growth agenda of the new administration, the “Fed put” continues to provide critical support for equities. The Fed’s readiness to ease monetary policy during periods of market stress acts as a powerful backstop, particularly in the face of geopolitical and policy shocks. However, elevated valuations leave little room for error. Any disappointment in corporate earnings or unexpected external shocks could trigger sharp corrections.
AI’s Transversal Potential: Concentrated Benefits, Broader Disruption
Technological revolutions reshape industries, but their impacts vary widely. The first wave of digitalization, driven by personal computers and the Internet, had a broad, transversal effect, improving productivity and reducing costs across nearly all sectors. Its benefits were widely distributed, enhancing efficiency throughout the economy.
AI, however, offers a different kind of transversality—more vertical than horizontal. It not only reduces costs but also drives innovation, improving products and services in ways that fundamentally reshape corporate growth. AI impacts both the top line (revenue growth) and the bottom line (cost savings), making it a uniquely powerful yet uneven force.
The benefits of AI are likely to be more concentrated, with technology-driven and forward-looking companies reaping disproportionate rewards, while others struggle to adapt. Its disruptive potential extends beyond individual firms, potentially reshaping industries and challenging traditional business models.
While AI brings immense opportunity, it also raises the stakes for investors to distinguish between beneficiaries and those at risk of being left behind. As with past industrial revolutions, optimism is warranted—but so is caution, to avoid overconfidence and speculative bubbles.
Blockchain and Cryptocurrencies: A More Questionable Future
Blockchain and cryptocurrencies remain largely speculative, with limited transformative use cases compared to AI. Early promises of decentralization and anonymity have been supplanted by a succession of narratives designed to fuel the “fear of missing out” (FOMO). Trump’s return may boost the sector, not through innovation, but by opening it to broader corporate adoption—especially by banks. Financial institutions, once skeptical, may seek to integrate crypto into their services, issuing digital assets or expanding crypto offerings.
Adding complexity, reports of Trump’s family’s interests in crypto raise questions about whether policy decisions might align with personal stakes. While these factors could drive adoption, deeper integration with traditional finance heightens systemic risks. Crypto bubbles, once isolated, now pose potential contagion threats. For enthusiasts, these developments promise the advent of a new financial order; for skeptics, they underscore the need for vigilance.
Conclusion: A Delicate Balancing Act
The parallels to Trump’s first term are striking, but the risks in 2025 are far greater. Aggressive tariffs could fuel inflation and stifle growth, miscalculated tax cuts might deepen the fiscal deficit, unsettling Treasury markets, and politicizing the Fed or endorsing crypto could undermine the dollar’s status as the world’s reserve currency.
It is tempting to draw direct comparisons between the previous term and the incoming one. Yet the world has changed. Policymakers now face tighter constraints and heightened geopolitical tensions. Like in chess openings, success will hinge on the timing and coordination of decisions, as well as anticipating the retaliatory moves of other players on the global stage. But contrary to the royal game, the global economy is not a zero-sum game. The strategic realignment that the new administration will be pursuing should carefully try to avoid harming other major economic blocs to the point of triggering a recession. For investors, the priority is to prepare for volatility, manage expectations, stick to long-term goals, and stay vigilant in navigating this complex sequel.
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