These are worrying times. Geopolitically, a new world war seems imminent. The challenges in Europe are so significant that the valuation of European stocks has halved compared to the American markets.
In a month, a new president will take office in the United States who, at best, will bring unpredictable chaos. The chances of meeting the targets of the Paris Agreement are rapidly diminishing. Inflation could rise again at any moment, while we have already been waiting three years for a recession. The stock market is so narrow that fewer than ten stocks account for a significant portion of the returns. Yet, there is room for greater optimism, making 2025 another potentially strong year for the stock market.
In recent years, governments have played an increasingly larger role in the economy. Initially, this was to address the consequences of the Great Financial Crisis and later to tackle the COVID-19 pandemic. Since then, citizens and businesses have come to rely on unconditional government support in times of financial discomfort.
When demand falters, the government steps in to compensate. This environment has facilitated a soft economic landing. Inflation has normalised without a recession—a unique occurrence highly valued by financial markets. However, this has also brought the free market under pressure.
Free trade
At just the right moment, Keynesian policies are being replaced by supply-side economics, a throwback to the 1980s. While lower taxes and deregulation have long been components of Trump’s policy agenda, measures such as controlling government spending, implementing solid monetary policies, and promoting free trade seem less evident under his leadership.
The first two goals may be achieved through the nomination of Scott Bessent as the prospective Treasury Secretary. Bessent is advocating for a “3-3-3” policy: 3 percent economic growth, a budget deficit capped at 3 percent, and an additional daily production of 3 million barrels of oil (or its equivalent). Trump is intent on keeping inflation low, mindful that his predecessor lost the election largely due to high inflation.
Free trade is the ultimate goal of Trump’s trade policy. Import tariffs are intended solely to coerce specific countries into making deals. In Trump’s view, the United States epitomises free trade, whereas the European Union and China erect various barriers. China has benefited for too long from the favourable conditions granted during its accession to the World Trade Organization in 2001. Meanwhile, Europe’s complex trade mechanisms mean that Brexit continues to have repercussions in the UK. Free trade is advantageous for the United States.
Within 24 hours
Since Trump’s election victory, multiple parties involved in the war in Ukraine have discussed peace negotiations. Trump has promised his voters that he will secure a peace agreement within 24 hours. American politicians perform poorly with voters, particularly mothers, when their children are lost in wars that portray the U.S. as the world’s policeman. Moreover, the neoconservative wars in Iraq and Afghanistan were far from successful. Trump seeks to end this war, echoing conclusions drawn by Henry Kissinger at the war’s outset.
The conflict in Ukraine has become increasingly international, involving soldiers from North Korea and drones from Iran. This means Trump must also seize opportunities to resolve conflicts in the Middle East and Asia. In the Middle East, Trump has adopted a hard-line stance with unconditional support for Israel. The primary disruptor in the region is Iran’s regime, which continues to fund groups like Hamas, Hezbollah, and the Houthi rebels. However, Israel’s successful actions against Hezbollah and the consequent collapse of the Syrian regime have significantly weakened Iran. Domestically, Iran lacks sufficient natural gas to power its energy plants. Growing discontent among the Iranian population makes the prospect of a successful uprising increasingly likely. This paves the way for expanding the Abraham Accords and addressing the Palestinian issue.
This combination of peace in the Middle East and Ukraine creates pressure for greater consensus in Asia, which seems relatively achievable due to China’s economic pragmatism. Potentially, Trump could broker peace in three geopolitical hotspots. Such collective achievements would also form a strong foundation for a better climate agreement.
Three strong stock market years
The potential of artificial intelligence (AI) continues to be underestimated. Its impact surpasses that of the iPhone, the internet, or the PC, and its implementation is progressing even faster than expected. The current era is comparable to the productivity booms of the “Roaring Twenties” or the “Dot-Com Nineties”. Today’s concerns about stock market valuations are reminiscent of Alan Greenspan’s “irrational exuberance” speech in December 1996, which followed two strong market years. However, the current situation is more akin to “rational exuberance,” paving the way for another three strong years.
AI’s impact on productivity growth is immense. It also accelerates advancements in adjacent fields, such as nuclear energy and quantum computing. Innovations like these will play a key role in addressing climate challenges. The resulting higher economic growth will ultimately resolve the debt problem while keeping inflation in check.
Currently, Europe is not sufficiently benefiting from developments in AI, and deregulation and lower taxes remain distant prospects. However, this is precisely what Mario Draghi’s vision advocates. Perhaps the end of the war on its own continent will allow Europe to make a fresh start. Altogether, this could lead to a significant broadening of the stock market in 2025, simply by viewing risks as opportunities.
Han Dieperink is Chief Investment Officer at Auréus Wealth Management. Earlier in his career, he was Chief Investment Officer at Rabobank and Schretlen & Co.