The "Trump Trade" is Running Out of Steam in the Run-Up to the Inauguration and the "Tech/AI" Euphoria is Waning but Not Abating

Despite being heralded by the statistics, the rally at the end of December, commonly known as the "Santa Rally", failed to materialise. Most equity markets corrected in December, with the MSCI World down -2.7% and the MSCI Emerging Markets down -0.3%. However, there was considerable dispersion both geographically and by sector. The S&P500 fell by -2.5%, but the Russell 2000, which represents US small caps, fell by -8.4%, while the Nasdaq posted a positive performance of +0.5%. Reflecting this sectoral dispersion, the S&P500 index fell by -6.4% in December. Over 2024, the performance gap with the capitalisation index was 12.4%, the widest since the dot-com bubble.

For once, US equities underperformed European equities in December, with the Stoxx Europe 600 index down slightly by -0.5% in local currencies. This did not prevent Europe from posting its biggest underperformance relative to the United States since 1974. That said, this picture is somewhat skewed by the weight of artificial intelligence in the US indices. In fact, in 2024, almost half of the S&P 500's performance was generated by just five companies (Nvidia, Apple, Amazon, Alphabet, Broadcom), which added $6,000 billion to the value of the market, equivalent to the total size of the British and German stock markets!

While only 25% of S&P500 companies outperformed their index in 2023, we could expect a broader contribution to the index's performance and a gradual convergence of the pace of growth in profits from the technology sector towards the rest of the sectors. After a rebalancing in the first half of 2024, the leaders who made 2023 so successful regained the lead once again, and last year saw only a meagre 27% of S&P500 stocks outperform the index. It is hard for active managers to beat this index, which remains highly concentrated on a few stocks, with 28% in just five companies (Alphabet, Amazon, Apple, Microsoft and NVIDIA), a record since 1965, when the five leading stocks were quite different: AT&T, Exxon Mobil, IBM, Texaco and General Motors.

Bond markets were not to be outdone, delivering a negative performance in December in both Europe and the United States, despite further rate cuts by the Fed and the ECB. Both the Fed's speech and the recent solid economic publications, together with the next US administration's programme suggesting that inflation would remain higher for longer, pushed bond yields close to their annual highs in the United States. The Fed and investors are now expecting the Fed Funds rate to be close to 3.9% at the end of 2025, compared with 3.4% anticipated for this maturity last September. Against this backdrop, the US yield curve steepened sharply, with the yield on the US 10-year rising by 60 bps from 4.17% to 4.75%. The result is its worst performance in recent Fed rate-cutting cycles.

In Europe, the rise in yields was more limited, with the yield on the 10-year German Bund at 2.57% compared with 2.09% at the end of November. It is true that the ECB, unlike the Fed, has confirmed four rate cuts in 2025, cuts made possible by an environment of much lower growth and inflation than in the United States.

Meanwhile, for the first time in its history, China's 10- and 30-year debt rates have fallen below Japan’s respective rates. After 6 quarters of deflation, the Chinese economy is heading for Japanese-style stagnation. While investors remain sceptical about the future of the economy, it seems that the government is determined to halt the deflationary process at all costs, and is likely to announce new stimulus plans, if the measures of last September prove insufficient. Consumption is likely to be the main focus of future stimulus measures, given the expected US protectionist pressures on Chinese industrial exports. The Chinese consumer could therefore be the surprise of 2025.

Corporate bond spreads are still extremely low, and companies took full advantage of this in 2024, with a record of almost $8,000 billion in corporate debt issued globally, over 30% more than in 2022 and 2023.

Solid economic data and the Fed's new inflation and growth forecasts for 2025 and 2026 weighed on the markets and prompted a more cautious approach.

It is also interesting to note that, after a fairly good start, the Trump trade has also run out of steam in recent weeks. Sectors favoured by the Republican's economic programme have lost ground, whereas they had reacted well in anticipation of his election and after the announcement of his victory.

Are Donald Trump's promises inspiring less confidence among investors? Have the future President's changing statements on foreign and economic policy since his election raised doubts about the real measures that will be taken? Have the sometimes-risky appointments to head certain departments eroded the credibility of his programme?

The reasons for this rapid loss of momentum in Health, Energy, Real Estate and Financial sectors are perhaps more basic. Investors probably want to be able to separate the communication from the facts, and thus wait for the measures put in place once he takes office. Against this backdrop of erratic communications, they have gone back to what made the markets so successful over the last two years, fuelling biases in favour of large caps and technology. In the face of uncertainty, investors have favoured passive management over strong anticipation of future trends in certain sectors, as we saw following Trump’s election in 2016 or Biden in 2020. When we analyse the December inflows into US Equities, we can observe that they are mainly directed towards the tech sector rather than sectors that could be favoured by Donald Trump's economic programme. We believe that this situation could be reversed after the inauguration on the 20th January and the announcement of his first concrete measures.

For the time being, euphoria has given way to a more pragmatic and cautious approach at the start of the year, and the return of volatility expected in 2025 has come sooner than expected.

Nicolas Bickel | Group Head of Investment Private Banking