Schroder: The resilience of the U.S. economy is still there, but we need to pay attention to policy risks. Small and medium-sized U.S. stocks may present investment opportunities.

Schroders Global Investment released a report stating that with Trump's reelection, the focus has once again shifted to the direction of the US economy and policies. The firm believes that entering into 2025, the US economy is more optimistic than expected, with consumer spending sustainably driving economic growth. However, if Trump implements his campaign policies such as protectionist measures, deporting illegal immigrants, and imposing tariffs, the risk of stagflation in the US will increase. Until the new government confirms its trade policy, the US dollar may experience some fluctuations, as inflation prospects push the dollar stronger, with the dollar index approaching a two-year high. In terms of investment advice, with US stock valuations near all-time highs, causing some concern, for investors worried about high US valuations, investing in small and medium-sized companies is a more direct way to invest in the US economy with lower costs. The Schroders Global Investment Economic Research team predicts that the US GDP growth rate will be 2.5% in 2025, rising to 2.7% in 2026. This will keep inflation consistently higher than previous forecast levels, with the Federal Reserve expected to cut interest rates once in 2025, and then raise them in 2026. For investors, evaluating the likelihood of implementing specific policies is a major challenge, and this issue will persist until the policy direction becomes clear. Senior emerging markets economist David Rees says that throughout 2025, any policy news can affect financial markets, leading to increased volatility in various assets, even if these policies are not actually implemented. Trade policies will have a significant impact on the US dollar. David Rees notes that any imposition of tariffs will support the dollar because this measure will balance the impact of tariffs on trade and economic activity to a certain extent. We also expect interest rate differentials to provide support again, so a strong dollar is likely to continue for some time. Fiscal prospects are a key factor affecting bonds As investors assess the potential impact of Trump's policies on inflation and interest rates, significant changes have also occurred in the fixed income markets recently. Fixed income strategist James Bilson says that as the second Trump administration approaches, with strong US economic growth, recent stable inflation data, and the expectation of further monetary expansion policies by the new government, bond yields have been raised. Currently, the bond market reflects that the Federal Reserve will cut interest rates once or twice by 0.25% each in 2025, whereas in September 2024, it was expected to cut interest rates more than four times. Just as they are closely monitoring economic activities, bond market investors will keep a close eye on trade and immigration policy actions. From the perspective of corporate credit, Lisa Hornby, head of US fixed income, adds that risky assets are entering into the current period from an expensive start. Corporate credit spreads, or excess spreads relative to US treasuries, are at their highest levels in decades. However, the driving force behind the tightening of credit spreads comes from the high demand for attractive overall yields. With yields remaining high, it is difficult to see anything that could reverse the direction of credit spreads. Can the US stock market's exceptional performance continue? Regarding the stock market, the US's dominance in the global stock market is at historically high levels. By the end of 2024, the MSCI USA Index accounted for 74% of the MSCI World Index and 67% of the MSCI All-Country World Index. Furthermore, aside from the dot-com bubble peak, US stock valuations are at or near their highest levels in the past 143 years. Regardless of the policies of the new US administration, the question remains whether these valuations can continue. High US valuations are unsettling Director of Strategy Research Duncan Lamont says that high US stock valuations and the relatively high proportion in the global market are not new phenomena. However, US stocks also have many advantages, including soaring US productivity compared to other regions globally, better economic momentum, and high corporate purchasing power. Another advantage is more favorable population forecasts, but once loose immigration policies change, this advantage will disappear. For investors concerned about high US valuations, one option is to look for opportunities in smaller companies, as the valuations of small and medium-sized companies are lower than large companies. Bob Kaynor, US Small and Mid Cap Stock Manager, says that the US benefits from a strong labor market and potential policies to support domestic growth in the second Trump administration. Small and mid-cap companies are more likely to attract investors primarily located in the US. Therefore, investing in small and mid-cap stocks allows investors to directly invest in the US economy. Given the high share prices of large enterprises currently, small and medium-sized enterprise stocks offer a lower-cost investment option.