Welcome to this month’s edition of the True Potential Monthly Report. In this update, we cover developments in asset markets and the wider macroeconomic environment. Key points are set out below:
• Global earnings expectations have recovered sharply, led by the US but followed by Japan and Emerging Markets. Even so, equity valuations generally offer fair value at best.
• Given solid consumption, healthy corporate profits, heavy investment in artificial intelligence (AI) and improving financial conditions, we still expect the US economy to grow throughout 2025.
• Lower prices, rate cuts and fiscal stimulus should also keep European growth positive.
• Trade tensions have continued to ease due to tariff exemptions and the US’s constructive negotiations with India and China.
• We have a modest preference for equities over bonds and for non-US stocks, especially in Japan. In fixed income, we prefer UK government bonds, given the yields on offer.
Global earnings revisions have turned positive. This has been led by a sharp rebound in the US, although Japan and Emerging Markets are now catching up. Sector-specific tariff exemptions and progress on trade agreements have helped to restore corporate confidence. Meanwhile, tax cuts, deregulation and the positive effects of a weak dollar look set to support US earnings into next year.
Trade tensions have eased further, with the US now expected to reach deals with China and India. The potential for renewed tensions remains, however, given the substantial revenues that tariffs yield for the US government. The recent export tax on sales to China levied on Nvidia and AMD opens a new source of revenue for the Trump administration, which could create further uncertainty for anyone doing business in the US. Meanwhile, the potential for the Supreme Court to strike down the tariffs paints an even more uncertain picture.
The US economy continues to experience strong growth, helped by improving financial conditions, interest-rate cuts, Trump’s spending plans, heavy investment in AI and the US’s unique productivity impulse. Domestic consumption is strong and corporate profits remain healthy.
We expect European growth to be modestly positive, given the disinflationary effect of lower energy prices and excess Chinese goods. Lower interest rates and increased government spending (especially in Germany) should support this.
Equity valuations look fair at best, but increasing earnings expectations remain a tailwind. There are, however, significant variations between regions and within markets – especially in the US. The major non-US markets offer better value, but the robustness of US earnings has confounded the sceptics.
We remain modestly overweight in equities, with a preference for non-US stocks. We now favour an overweight position in Japan, where corporate reforms are gaining momentum and valuations remain attractive. Government and corporate bonds currently offer only limited value. Here, UK Gilts look more attractive than US Treasuries, given their elevated yields. We think investors may be reacting disproportionately to the UK fiscal outlook. Given the risk of higher short-term inflation and bigger fiscal deficits, prudent selection is required in alternatives, where we have a neutral view. We prefer to be underweight in cash.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest.
This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors.
Opinions, interpretations and conclusions represent the views of True Potential Investments at the date of publication and are subject to change. Forecasts are not a reliable indicator of future results.
All data sourced from Bloomberg L.P. (02/10/2025)
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