How investments may fare during Trump 2.0 and Fed easing

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - U.S. investors are preparing for a swathe of changes in 2025, from tariffs and deregulation to tax policy, that will ripple through markets as President-elect Donald Trump returns to the White House, putting the focus on whether the U.S. economy can continue to outperform.

The changing of the guard in Washington has big implications for how stocks, bonds and currencies fare in the new year and may require investors to rejig portfolios.

Forecasts call for another buoyant year for stocks, the dollar to maintain its recent strength over the coming months and Treasury yields to march higher.

Here is a chart-based overview of key market themes and segments that investors are closely monitoring:

US Exceptionalism

Investors largely expect U.S. economic exceptionalism to persist in the new year, as robust consumer spending and a resilient labor market put U.S. growth on a firmer footing than that of many of its developed market peers.

The U.S. economy is expected to find further support from any potential tax reform, including a reduction in the corporate tax rate. Such tax cuts - which would need to pass Congress - could support company earnings and sentiment on stocks.

In contrast, although the euro-zone economy grew faster than anticipated in the third quarter, its outlook remains weak due to potential large tariffs from the Trump administration, escalating trade tensions with China and low consumer confidence.

"We do expect U.S. growth to outperform the rest of the world in 2025, on the back of potentially favorable monetary and fiscal policy," said Sonu Varghese, global macro strategist at Carson Group.

The Fed

Front and center for investors in 2025 is how rapidly or deeply the U.S. Federal Reserve can cut rates. The Fed cut rates in December, continuing reductions after a period of aggressive rate hikes, but indicated it would slow the pace of further cuts.

Stocks have been buoyed by expectations of easier monetary policy. But with benchmark Treasury yields rising sharply after the Fed meeting, the rate outlook threatens to undermine the momentum for stocks.

King Dollar

Dollar bears have taken a battering this year and most FX market strategists forecast continued strength for the greenback.

Many of the factors that powered a 7% gain for the currency against a basket of peers this year, including relatively robust U.S. economic growth and rising Treasury yields, are expected to continue supporting the dollar.

Trump's tariffs and protectionist trade policies are also likely to bolster the buck.