COVER STORY
deficit . Nonetheless , trade policy is likely to dominate the economic headlines for the next several months as some worry tariffs could rekindle inflation at a time when the U . S . economy is operating near full employment .
“ Any larger-than-expected U . S . government spending cuts , aggressive trade actions , or immigrant deportation could pose cyclical downside risks to both U . S . and global growth ,” Pimco ’ s Tiffany Wilding and Andrew Balls wrote in a recent commentary . “ Conversely , greater U . S . tax cuts and deregulation could enhance U . S . growth prospects , potentially aiding consumer and business confidence and risk asset performance .
Orlando says there could be a reversion to a less concentrated market : After the so-called Magnificent 7 tech stocks outperformed for so long , the so-called Forgotten 493 other stocks in the S & P 500 will start catching up , a phenomenon that began in mid-2024 and is likely to continue into 2025 .
PHIL ORLANDO Chief market strategist , Federated Hermes
“ A focus on achieving fairer global trade , more efficient markets , and a sustainable U . S . debt trajectory could help maintain rising U . S . living standards ,” they continue . “ Thoughtful immigration overhauls that expand the productive labor force , streamlined regulations that encourage investment , and opening export markets for U . S . projects could also yield benefits for U . S . businesses and workers .”
Strategists such as Orlando believe the president will use tariff and immigration policies to strengthen America ’ s trade position and workforce . Orlando thinks Trump will try to create a path to citizenship for both highly educated and low-skilled workers while deporting about “ 250,000 criminals .”
More than half the new U . S . jobs , more than 15 million , created since 2020 have gone to foreignborn workers , said David Kelly , chief global strategist for J . P . Morgan Asset Management , in comments on a January 22 webcast , and employers are still finding it difficult to fill the eight million job openings available . In recent months , there has been an uptick in conventional immigration applications , he added , which could signal a more normalized process going forward .
One downside , said Kelly , is that across-the-board tariffs — against China in particular — could hurt those most vulnerable to inflation : middle- and lower-income Americans . Shoppers at retailers like Walmart might be rudely surprised to learn how much merchandise they rely on is produced in China .
Curtailing immigration too much could pose economic risks , too , Invesco ’ s Hooper says . Industries including construction , hospitality and agriculture are particularly reliant on foreign-born workers .
Still , President Trump ’ s election sparked a huge jump in small business confidence while raising overall expectations for both economic growth and inflation in 2025 . Kelly said that both statistics could be more subdued but positive , consistent with a soft-landing scenario . He sees GDP growth of 2.0 % and thinks inflation figures are facing easy comparisons and likely to be closer to 2.0 % than 3.0 % in the first half .
Market participants are eagerly anticipating that Congress will extend the 2017 tax cuts . But the likely extension would mostly preserve the status quo , says Gabriela Santos , chief market strategist for the Americas at J . P . Morgan Asset Management , who spoke on the webcast with Kelly . That means the tax cuts would not have the same stimulative effect they did in 2018 .
However , the U . S . dollar has climbed 9 % since last fall , and Santos said it was possible European stocks could sell off in the near term , creating an opportunity for value investors . If President Trump ’ s overtures to Russia to end the war in Ukraine turned out to be successful , European markets would be a primary beneficiary .
So what ’ s the smart money doing ? Hooper says it ’ s probably time for a thoughtful rebalancing of portfolios that have become overweight in U . S . large-cap growth stocks .
Over the last year , several consultants to large billion-dollar family offices have reported that their clients are growing frustrated with large allocations to private equity . The returns aren ’ t materializing , the distributions have turned out to be paltry , and when the payouts do occur the private equity managers expect participants to reinvest in a new fund . More than a few billionaires have said , “ No thanks .”
Instead , on the advice of several famous institutional consultants , they ’ ve rolled their distributions into boring equal-weighted S & P 500 ETFs . Sometimes boring is better .
36 | FINANCIAL ADVISOR MAGAZINE | JANUARY / FEBRUARY 2025 WWW . FA-MAG . COM