Three things to watch in 2025: Trump Policies, AI Reset and King Dollar

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The Trump administration has a two-year runway to implement their policy priorities before the mid-term elections in 2027. They are likely to move fast and break things, focusing on tax cuts, deregulation, trade, and immigration. Beyond politics, the year ahead is likely to witness an AI investment reset. This should not be feared as it could unleash the next wave of innovation as hyperscalers give way to startups in creating new applications utilizing AI chips. Investors expecting the US dollar to remain King in 2025 may find it a year of two halves as near-term strength gives way to weakness.

Trump Policies

The US equity market will continue to cheer the proposed cut in corporate taxes from 21% to 15%. Optimism is rooted in research indicating each percentage point cut in corporate tax increases S&P500 earnings per share by 1%[1]. Looking further ahead, deregulation may have an even greater impact on corporate earnings given its potential to unlock productivity gains and in turn earnings growth.

Deregulation is a clear priority for the new administration. With its mantra “drill baby drill” they are likely pushing on an open door in the energy sector. Small tech is a priority for big private equity, but given the success of big tech in creating shareholder returns over the past two years, an anti-competitive crackdown on big tech appears less likely.

Trade and immigration policies are intertwined, with President Trump likely to take a transactional stance on his tariff proposals. Canada, Mexico, and Europe are on notice for what they have to do to reduce the potential increase in tariffs, China is likely to find it more challenging to avoid Trump tariffs.

The new US border czar, Tom Homan, has indicated a deportation target of 2.8 million migrants, made up of those accused of or committed crimes, as well as whose asylum bids were denied. This compares to 2 million migrants[2] deported in President Trump’s first term. Its a stretch target, but not impossible.

As the scale of deportations outlined by Homan is above President Trump’s first term, but below President Obama’s, who deported an average of 2.5 million a year[3], the impact on the labour market and growth is imprecise. Of more importance is the economic backdrop against which the deportations take place.

AI Reset

Arthur C Clarke’s view that “Humans overestimate what we can do in the near future and grossly underestimate what can be done in the distant future” is prescient in relation to AI.

Investor focus since the launch of Chat GPT by Open AI in November 2022 has largely been on the monetisation potential from platforms. This has ranged from answer engines looking to usurp search engines to use cases for large AI videos and language models.

In a sign of the disappointment likely to come in the near future, the CEO of Advantest, a chip testing company, highlighted his expectation that any slowdown by hyperscalers in the build out of data centers would hit the industry hard, but AI Powered smartphones could cushion the slowdown. As the battle between Edge and Cloud based processing for AI smartphones has yet to be won[4], betting on this segment to rescue the industry in the near term is a stretch.

A more likely outcome is an AI investment reset in 2025. Given elevated valuations amongst trillion dollar tech companies, this could result in a significant correction in their share prices. However, a drop in AI chip demand would be swiftly taken up by startups who have struggled to access AI chips, limiting the downturn in investment.

While there is no shortage of individuals highlighting the potential of AI applications, the identity of the real winners in the distant future remains opaque. Defense and healthcare top many investor lists, reinforced by Space X and Amazon investments in these industries. Nevertheless, having a long as opposed to short list of future winners is prudent as we are likely under-estimating the potential applications of the technology

King Dollar

The US dollar’s status as a counter cyclical currency is likely to find continued support in the first half of 2025 given the absence of a meaningful recovery in China and euro area growth. US real bond yields and capital flows, which more than doubled in the year thru October 2025 to USD1.1tn[5], also signal support for the greenback.

US dollar strength has continued negative implications for emerging market equities and local currency bonds. These assets tend to underperform during periods of strength in the greenback, weak global trade and high real US bond yields.

While investors cite increased tariffs as a risk to the greenback, President Trump’s desire to impose tariffs is known to the market and has not detracted from capital flows into the US since the election. The negative impact of tariffs on the US dollar may be overstated given the greenback is a counter cyclical currency and any weakness in the US economy is likely to result in US dollar strength as opposed to weakness.

President Trump is known to favor a weak US dollar, indicating that tariffs are likely to be a negotiating tool as he pursues his transactional form of engagement with trading partners. China and the euro area may not be in favor of their currencies appreciating against the greenback. However, they may view this as the lesser evil compared to tariffs and agree to engineer a weaker currency versus the US dollar.

The Trump administration has a two-year runway to implement their policy priorities. Corporate tax cuts will support the S&P500 market in the near term, despite the risk of an AI investment reset. The US dollar is likely to remain King in early 2025, but President Trump’s preference for a weaker greenback and his transactional approach to trade and tariffs imply its strength may not be sustained.

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[1] Goldman Sachs: Trumps tax cuts could boost S&P 500 earnings by 20% over 2 years. February 8, 2024.

[2] Source: Politifact - factchecks Jan 2, 2024

[3] Source: Politifact - factchecks Jan 2, 2024

[4] Source: What Edge AI means for smartphones Morgan Stanley, February 2024

[5] Source: US Department of the Treasury