Key Takeaways:

• President Trump’s inauguration saw an unprecedented wave of executive orders, targeting energy, immigration, tariffs, and technology.
• The European equity market started the year strong, with the Stoxx Europe 600 Index up 4.5% YTD, but strategists anticipate limited upside for the rest of 2025.
• Renewed optimism in U.S. pro-growth policies, AI investments, and easing geopolitical tensions are buoying markets, yet volatility risks persist.
• Investors are advised to remain cautious and focus on fundamentals, with sector-specific opportunities in energy, technology, and financials.

1. Energy Reform: U.S. and Global Impacts

President Trump has prioritised energy independence by lifting restrictions on fossil fuel production and withdrawing from the Paris Climate Agreement. While these measures aim to support the domestic oil and gas industry, increased production could pressure global energy prices.

Investor Implications:

• Lower energy prices benefit consumers and reduce inflationary risks.
• However, U.S. refiners may face logistical challenges, and oversupply could weigh on the earnings of major oil producers.
• European energy companies could experience spillover effects, particularly those reliant on international pricing dynamics.

2. Immigration Reform: Labour and Economic Considerations

The administration’s initial immigration actions aim to secure borders and target illegal activity. While broader deportation measures remain unclear, the potential decline in legal immigration poses long-term risks to labour supply and economic growth.

Investor Implications:

• Sectors dependent on skilled labour, such as technology, could see rising costs.
• Labour market tightness may lead to wage inflation, impacting corporate margins, particularly in Europe, where workforce flexibility is already constrained.

3. Tariffs and Trade Policy: Awaiting Clarity

Despite campaign rhetoric, no immediate tariff actions have been taken. However, with federal agencies reviewing trade practices, targeted tariffs remain a possibility in the months ahead.

Investor Implications:

• European markets, previously anxious about potential U.S. tariff policies, are momentarily relieved. Still, any escalation could disrupt trade-dependent sectors, including manufacturing and automotive.
• The Stoxx Europe 600 Index, which trades at a significant discount to U.S. equities, offers valuation appeal, but trade-related risks could temper sentiment.

4. Technology Investment: AI Dominance and Growth

President Trump’s ambitious AI agenda, including a proposed $500 billion private-sector investment through Project Stargate, underscores the U.S.’s commitment to maintaining technological leadership. These initiatives could have ripple effects on global markets, particularly in Europe.

Investor Implications:

• European tech companies may benefit from increased global demand for AI infrastructure and applications.
• Key beneficiaries include semiconductor manufacturers, cloud providers, and software developers specialising in AI solutions.

European Equity Market: Strong Start with Lingering Uncertainty

The Stoxx Europe 600 Index has outperformed U.S. benchmarks in January, supported by easing inflation, dovish ECB policies, and improving global growth prospects. However,  a Bloomberg survey of strategists projects limited gains for the rest of 2025, with the index forecasted just 1% above current levels.

• Overbought Sectors:
  Financials, consumer products, and banks are leading the rally but show signs of overextension, with 17% of index members now in overbought territory.
• Earnings Growth:
  Consensus estimates for 7% EPS growth in Europe hinge on improving margins. However, UBS and JPMorgan remain sceptical, citing risks of margin contraction in key industries.
• Geopolitical and Economic Risks:
  Geopolitical uncertainties in France and Germany, coupled with potential U.S. trade actions, could dampen investor sentiment.
  The ECB’s expected rate cuts (3-4 by year-end) provide a tailwind, but questions about long-term monetary policy effectiveness remain.

Market Sentiment: Balancing Optimism and Caution

• Investor Positioning:
  According to Bank of America’s European fund manager survey, optimism has moderated, i.e., 44% of investors expect near-term gains, down from 56% last month.
  Excessive optimism, coupled with overbought conditions, suggests a potential for market corrections.
• Systematic Buying:
  Systematic strategies, including Commodity Trading Advisor (CTA) funds, are rebuilding equity allocations as volatility declines. Goldman Sachs estimates CTAs could inject $34-38 billion into equities, providing additional support in the short term.

Looking Ahead: Opportunities and Risks

Short-Term Opportunities

• Valuation Discount: European equities trade at a 40% discount to U.S. stocks, creating potential for re-rating if earnings growth materialises.
• China’s Stimulus: Renewed demand from China could bolster European exporters, particularly in industrials and luxury goods.

Long-Term Risks

• Policy Uncertainty: Delays or changes in U.S. trade and fiscal policies could introduce volatility.
• Earnings Pressure: Margin contraction remains a key concern, especially for industries facing cost inflation.

Final Thoughts: Stay Disciplined Amid Market Shifts

Investors should focus on long-term fundamentals rather than short-term policy developments as the global economic landscape evolves. The robust U.S. consumer and easing inflationary pressures provide a solid foundation, while European markets offer attractive valuations despite lingering risks.

Our Recommendations:

• Diversify portfolios across sectors and geographies to mitigate risks.
• Focus on high-quality companies with resilient earnings and strong competitive positioning.
• Use market volatility as an opportunity to rebalance and add to core holdings.