In this exclusive interview with GBI Magazine, Blackfinch’s Dr Dan Appleby joins us to discuss his latest report providing an outlook on the economy for Q1 2025 amidst Donald Trump’s second term.
The report offers actionable insights into global markets and how investors and advisers can navigate the year ahead, along with exploring how global investors can balance these dynamics.
In this interview, Dr Dan outlines how President Trump’s policies might affect inflation trends, global markets, and US trade relations. He also discusses the S&P 500 and reveals his thoughts on AI investment.
1.) In the report, you discuss President Trump’s second-term policies and the potential effects they may have. How do you see these policies influencing inflation trends, and what challenges might they pose for the Federal Reserve in managing monetary policy?
President Trump’s proposed second-term policies do appear to have inflationary implications. For instance, the implementation of trade tariffs is widely expected to drive up consumer prices, while fiscal expansion fuelled by tax cuts could risk overheating an economy already experiencing above-trend growth. This wasn’t such an issue during Trump’s first term given that inflation had been consistently below the Federal Reserve’s 2% target since the Global Financial Crisis. Rather, such policies may have even supported the Fed’s efforts to lift inflation towards 2%.
Inflationary dynamics are different today. Indeed, the Federal Reserve’s policy is in restrictive territory as it attempts to bring inflation back down to target. In its December meeting, the Fed revised its inflation forecast for 2025 upward to 2.5%, compared to the 2.1% expected in its pre-election forecasts. Additionally, the Dot Plot indicated two fewer rate cuts than projected in September, signalling a more hawkish stance.
Higher inflation forecasts leading to higher for longer interest rates is not what President Trump wants from his central bank. The president has gone as far as stating he will demand that interest rates are cut, claiming that he knows “interest rates much better than they do,” in reference to the Federal Reserve.
Therefore, President Trump’s potentially inflationary fiscal policies look set to clash with the Federal Reserve’s goal of pushing down on inflation, making the job of the Fed that much harder as we enter 2025. And as evidenced by the sharp sell-off across assets following the hawkish messaging at the December meeting, markets were pricing in further policy easing for this year. This may not happen as quickly as investors expected before Trump returned as president.
2.) Despite efforts to weaken the dollar for trade competitiveness, a strong US economy and high interest rates may keep the dollar dominant. In what ways do you think this will impact global markets and US trade relations in 2025?
The dollar has been a bit of a release valve recently as any comment on the prospect of lower tariffs resulted in the currency weakening. This suggests that the dollar is already pricing in the likelihood of a return to trade wars, where higher tariffs lead to a stronger dollar. On top of this, the dollar tends to appreciate when the US economy is strong and growing quicker than other economies as this attracts capital inflows. The problem, for President Trump, is that this is working against his goal of increasing the competitiveness of US exports.
But while there have been numerous warnings from President Trump, including 60% tariffs on all Chinese imports into the US, and 25% tariffs for the country’s two biggest trading neighbours in Canada and Mexico, there is enough evidence to suggest that tariffs will be used as part of wider negotiations. For instance, the initial tariff threats for China, Mexico and Canada on the first day of Trump’s presidency were linked to issues regarding illegal immigration and drug trafficking, rather than as a policy for raising tax revenue. President Trump’s later comment that he would “rather not” impose tariffs on China further suggests a preference for using tariffs as leverage in broader negotiations.
This leaves US trade relations as being subject to negotiation this year, with the dominant dollar likely acting as a thorn in President Trump’s side, inhibiting his ability to impose aggressive tariffs. However, the difficulty for businesses and politicians, and therefore global markets, stems from Trump’s unpredictability as forward planning and forecasting becomes almost impossible. In turn, volatility becomes the only likely certainty.
3.) While the S&P 500 has long outperformed global peers, valuations remain stretched. With that in mind, what opportunities do you see in terms of mid and small caps, and in alternative indices like the S&P 500 Equal Weight Index?
The S&P 500’s outperformance is a relatively short-term phenomenon in the much longer-term view of financial markets. For example, during the 2000s, bonds and small caps offered superior returns when compared to the S&P 500. What has really pushed the S&P 500 higher over recent years are the global technology companies, initially labelled as the FANGs (Facebook, Amazon, Netflix, and Google) and now referred to as the Magnificent 7. The dominance and profitability of these companies are undeniable, and there is little to suggest any structural decline. However, history shows that market leadership evolves over time; take Nvidia replacing Intel as the leading semiconductor company from the 1990s to where we are today.
But the fly in the ointment for the Magnificent 7 stocks is one of valuations. These stocks do appear to be priced to perfection, resulting in the S&P 500 Index trading on an earnings multiple not too far off where it was at the peak in the market during 2021. Therefore, earnings must grow at pace to support these valuations.
The same cannot be said for the S&P 500 Equal Weight Index, which is trading at an earnings multiple of about 20, so quite a bit lower than the traditional S&P 500’s multiple of over 27. Yet simply buying based on cheap valuations is not often the best approach. Stocks can always get cheaper – or, conversely, more expensive.
But with a US president determined to put ‘America First’ by prioritising tax cuts for domestic producers and applying tariffs on foreign countries exporting into the US, it may be time to look further down the market cap of the S&P 500 and beyond into smaller caps that stand to benefit from these policies more than the global mega caps. These policies may act as the catalyst for earnings growth to broaden beyond the Magnificent 7, and then potentially driving outperformance in smaller caps. Of note, the S&P 600 Small Cap Index is trading on a lower forward earnings multiple than the S&P 500 today, in the same way the S&P 500 Equal Weight Index is.
There are certainly risks to consider, not least from rising inflation and a Federal Reserve that maintains restrictive monetary policy longer than the market anticipates. This further supports diversification into alternative indices as the S&P 500 is not far off its most concentrated in its history due to the priced-to-perfection Magnificent 7. So by broadening exposure to smaller caps, investors can position themselves to capture potential upside in a shifting market landscape.
4.) Lastly, what are your thoughts on the strong AI investment and the likelihood of it generating sustainable returns?
Recent excitement in artificial intelligence (AI) is reminiscent of arguably the last technological megatrend: the proliferation of the internet. There is no doubting how impactful the internet had, and still does today, on the world. But we’re still very early in the AI megatrend. If anything, this only heightens excitement in AI as there are still a lot of unknowns and speculation on where we might end up.
One thing is for sure, investment in this area is not slowing down. Already this year, President Trump announced Project Stargate, an up to $500 billion investment project in infrastructure for AI enablement. Additionally, Meta CEO Mark Zuckerberg has stated this will be a defining year for AI, while committing to build a mega data centre “so large it would cover a significant part of Manhattan.” Zuckerberg also confirmed Meta’s capital expenditure will be $60-$65 billion this year, up from about $38 billion in 2024, with analysts estimating that up to half of this spend will go towards graphics processing units (GPUs) that power these data centres. As the leader in GPU development, Nvidia’s revenues stand to benefit from this potentially defining year for AI.
But increasing excitement usually comes with increasing valuations. And with Nvidia, now the most valuable company in the world, its earnings multiple for next year stands at 33. Not exactly cheap on the face of it. Hence its revenues must grow at pace for this sort of valuation to be warranted. As it stands, with aggressive investment into AI, Nvidia does seem to justify its lofty valuation.
However, we are looking to see further adoption of AI in the wider economy to support this significant investment. It’s one thing investing in the infrastructure to enable AI, and something else for AI developers using this infrastructure to profit off customers willing to pay for their AI-based products and services. Otherwise, excitement can turn into unsustainable valuations, like the case during the dotcom mania surrounding the internet at the turn of the century. As Scott McNeely, CEO of Sun Microsystems at the time said, “What were you thinking?” of investors that were willing to pay inflated valuations for the stock based on unsustainable growth expectations. So although we don’t see any immediate slowdown of investment into AI infrastructure, we do intend to keep thinking about the valuations we are willing to pay.
Check out the full report here.
About Dr Dan Appleby
Dan is the Chief Investment Officer (Listed Investments) at Blackfinch and leads the research and analysis across our range of listed portfolios. Before this, he was Head of Research for Blackfinch Group, and has held Senior Analyst and Investment Manager roles within Blackfinch for our Multi-Asset and Adapt AIM portfolios. Previously he was a Senior Analyst at Fidelity, working in fair value markets. Prior to that, Dan worked as an engineer at Intel. Dan holds a PhD in nanoelectronic research and is also a CFA Charterholder.
