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Podcast: Across the Pond: President-elect Trump has threatened to impose higher tariffs on European carmakers, Chinese competition is intensifying, and demand for autos in Europe is flagging. But it鈥檚 not all bad news for investors. Featured is Rolf Ganter, Head, CIO Equities Europe. Click here to listen.

What happened?|
Donald Trump has been sworn in as the 47th President of the United States. In a wide-ranging inaugural address, President Trump made pledges on issues ranging from free speech to ownership of the Panama Canal. From an economic perspective, the agenda he laid out was in line with campaign promises, with pledges to bring down inflation, boost energy production, and levy tariffs on imports.

The president announced and signed a flurry of executive orders and other actions, some rescinding Biden-era actions and others focused on campaign pledges around environmental policy, energy, immigration and the border, and government efficiency. Trump ordered the US government to withdraw from both the Paris climate accord and the World Health Organization.

Trump's most tangible trade-related actions came in the form of a broad memorandum directing federal agencies to investigate persistent trade deficits and address unfair trade and currency policies by other countries, reporting back by 1 April. The memo singled out China鈥檚 compliance with the 2020 trade deal and the US-Mexico-Canada Agreement (USMCA), which is set for review in 2026. It also cemented a US withdrawal from a global minimum tax deal, and framed any 鈥渢op-up鈥� tax imposed by other nations as retaliatory.

US equity and bond markets were closed on Monday for the Martin Luther King Jr. Day public holiday. S&P 500 futures rose and the US dollar fell on the initial relief that President Trump had not issued executive orders imposing tariffs on his first day in office. However, this trade partially unwound after Trump later told reporters he would likely impose 25% tariffs on all Canadian and Mexican imports on 1 February.

What do we expect?
|President Trump鈥檚 policy agenda鈥攊f enacted in its entirety鈥攚ould have significant macroeconomic repercussions. However, financial and political constraints are likely to mean that enacted policy risks falling short of campaign pledges in some instances. There is also the consideration that the president may 鈥渆scalate to deescalate,鈥� with some of his proposals likely to prove to be negotiating tactics.

For example, the president declared a national emergency at the southern border and stated that the process of returning undocumented migrants would begin immediately. However, funding is currently not available for such a program, and reducing the labor supply through deportation could contribute to higher inflation.

President Trump also pledged to increase oil production and fill the Strategic Petroleum Reserve (SPR). But the level of oil production is largely controlled by private companies, and there is currently no clear sign of changes in capital spending or drilling activity because of the election. Filling the SPR, meanwhile, would require additional funding from Congress and there are physical constraints on how quickly it can be filled.

Where the president enjoys more leeway is in the use of executive orders to impose tariffs on imports. The use of a memorandum proposing scrutiny of current practices rather than the immediate imposition of fresh tariffs has partially reassured markets in the short term. However, his later comments on Canada and Mexico tariffs served to remind markets of the two-way volatility that can accompany Trump's policy pronouncements. Trump also delayed a ban on social media platform TikTok, but linked an amenable resolution to TikTok's US ownership with potential tariffs on China. We believe it is premature to assume that eventual new taxes on imports will be limited in size or scope.

In our base case, we expect the effective tariff rate on China to rise to 25-30% (from 10% currently). We also expect measures to protect technological interests, rules limiting transshipment, and tariffs on EU autos and pharmaceuticals. Possible retaliations by China could include reciprocal tariffs, weakening the Chinese yuan, and restricting critical mineral exports.

A risk case would include some combination of the imposition of universal tariffs on all US imports, particularly high tariffs on China (e.g., 60%), and/or meaningful and sustained tariffs on the US鈥檚 neighbors鈥擬exico and Canada.

How do we invest?
Our base case for the US economy is for 鈥済rowth despite tariffs.鈥� While we will be closely monitoring for risks, we do not believe that the tariff measures outlined in our base case would be sufficient to derail US growth. Nor do we believe that such tariffs would preclude inflation continuing to fall from current levels, enabling the Federal Reserve to cut rates by 50bps later this year.

Tariff risks, US fiscal policy concerns, and shifting expectations around inflation and Fed policy are likely to keep equity markets volatile in the near term. But we believe it is most likely that a combination of resilient US economic activity, solid earnings growth, lower borrowing costs, and the potential for greater capital markets activity will lead stocks higher over the balance of 2025. In our base case, we see the S&P 500 reaching 6,600 by December, compared to 5,996 as of 17 January.

Meanwhile, long-end rates have moved higher since the US election owing to a repricing of Fed rate-cutting expectations and fiscal concerns. Yields have come off their peak in recent days, but we believe they still offer an attractive entry point to lock in yields. We favor high-quality segments, particularly government and investment grade bonds. In our base case, we expect the 10-year Treasury yield to fall to 4% in 2025.

In currencies, elevated investor positioning and the dollar鈥檚 high valuation mean that we still see potential for dollar weakness over the balance of 2025. However, robust US economic data and ongoing uncertainty around the extent and nature of tariffs appear likely to keep the currency strong in the near term. In our base case, we forecast EURUSD at 1.02 in June and 1.06 in December, compared to 1.035 at the time of writing.