April 22, 2025 | News
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The following blog is based on commentary dated April 8, 2025.
Policy uncertainty weighed heavily on global markets in the first quarter of 2025, triggering a sharp rotation from momentum and growth equities into value equities—fueled in part by concerns about global growth and the emergence of DeepSeek.
In addition, markets that had long been out of favor saw a resurgence, while last year’s leaders, particularly the United States, stumbled.
As we reflect on the first few months of 2025, our global equity team believes these shifts have sparked broader questions about the durability of U.S. exceptionalism and whether we’re witnessing a deeper transformation in the global order. Read more for key insights from our global equity team.
Earlier this year, we argued that the proposed tariffs and trade policies of the Trump administration could backfire, resulting in an “own goal” that could undermine the U.S. growth advantage and reverse the more recent cyclical element of U.S. exceptionalism.
We didn’t expect things to unfold so quickly or dramatically.
As discussed, the United States’ post-pandemic growth differential compared with the rest of the world has been the primary driver of its cyclical advantage. But the proposed tariffs, if maintained at these higher levels, could begin to challenge this growth differential, likely pressuring U.S. inflation, lowering growth visibility, and reducing corporate confidence, which could lead to less economic activity.
Further, the confusing rational and chaotic implementation of these proposals by the Trump administration have called into question the outlook for the long-term direction of globalization and the near-term economic growth outlook. These potential risks have led to the repricing of stocks, bonds, and currencies.
Based on these assumptions, we now expect gross domestic product (GDP) growth in the United States to be roughly 2% lower over a two-year horizon.
However, we believe it is too early to fully price in a recession as the Trump administration will likely offset some of the tariff impact via tax cuts and financial deregulation. Any potential rollbacks of capital and regulatory requirements for regional banks could spur credit growth, provide a boost to corporate earnings, and support consumer spending, but these policies have yet to be articulated fully.
We believe it is too early to fully price in a recession.
Abroad, threats from the U.S. government have catalyzed some positive action within Europe, with signs the economic malaise may be lifting. This is evidenced by Germany relaxing its fiscal conservatism, which includes amendments to long-standing debt policies to enable higher defense spending, as well as facilitating the creation of a €500 billion infrastructure fund.
Undeniably, if kept at current proposed levels, U.S. tariffs will likely pose a challenge for Europe, especially for exporters.
The upside, however, is that this threat could present an opportunity for Europe to pivot toward domestic-driven growth. Proposed fiscal stimulus and credit cycle expansion, coupled with the revitalization of Europe’s military-industrial complex, could serve as a key driver of technological innovation. And together, these would be critical steps toward establishing deeper liquidity and maturity in euro-denominated financial markets, which could result in a structural tailwind for sustained European growth.
Overall, we expect the growth differential between Europe and the United States to narrow considerably over the next 12 to 18 months, with European economic momentum accelerating just as U.S. growth stabilizes or potentially slows.
China is likely to bear the brunt of any material change to trade policy. While the tariffs will be non-negligible, China is also increasingly proving its ability to produce more domestically, moving up the value chain in response to isolationism.
In addition, China’s reliance on U.S. trade has significantly decreased, as its exports to the U.S. have more than halved in the last six years.
Further, the DeepSeek moment for China was akin to Open AI’s Chat GPT moment of 2022, as it immediately brought attention to a step change in compute capabilities. And at the very least, it served as further evidence that China was closing the technological innovation gap to the United States.
As we’ve discussed previously, China’s threat to U.S. tech dominance is not to be dismissed, as it has been gaining ground for well over a decade, further challenging the United States’ technological strength, which is a foundation of its exceptionalism.
China is likely to bear the brunt of any material change to trade policy.
Both cyclical and structural changes to U.S. exceptionalism are now on the table, being priced at a greater-than-zero probability of weakening. For example, one of the key pillars of U.S. exceptionalism is strong institutions. And while it has not yet directly come under fire, we believe it could be impacted, as the Trump administration has questioned the legitimacy of numerous agencies and the authorities that have governed them. It remains unclear if these views are well-founded or misguided, but the challenge alone has caused some market stress.
So, we can only speculate about the ultimate motivations of the Trump administration and the future policy changes that may be proposed or even implemented.
We do believe, however, that the systems we’ve relied on for decades are facing greater disruption than at any time in recent memory. Global trade, corporate leadership, economic outcomes, and market reactions are all likely to diverge more than previously expected, even immediately following the 2024 U.S. presidential election.
Overall, we believe the "Liberation Day" tariff policy introduces stagflation risk in the United States, accelerates global trade rebalancing, and reduces leverage of the U.S. dollar.
We also believe the second quarter of 2025 will be shaped by unfolding negotiations, enforcement capacity, and fiscal and monetary responses. It is unlikely that the market will stabilize or risk assets (such as growth equities) will outperform until we see progress on any or all of these matters.
Given these changes, in addition to a higher level of uncertainty, where do we expect to find growth and market leadership? Two themes that currently resonate with us are the development of infrastructure and the shift to increased domestic manufacturing.
Two themes that currently resonate with us are the development of infrastructure and the shift to increased domestic manufacturing.
Infrastructure development is a global phenomenon, with Europe and Japan (not to mention the United States), having under-invested for decades in both digital and physical infrastructure; examples of potential development areas include compute and digital, energy, defense, and transportation. We believe investing in such infrastructure is a geo-strategic imperative as much as it is a growth imperative.
And as we’ve already started to see in China, we believe manufacturing will begin pivoting closer to each respective demand center. This will likely be true for Europe as well.
For allocators and global investors alike, we believe there is a strong case to be made for international or non-U.S. equities, as the gap in economic growth and corporate profits is expected to narrow, supported by attractive valuations.
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