View From The Top: Numbers, not noise

View from the very top: Things are certainly not dull. Investors in 2025 to-date have had to endure a seemingly unending barrage of often conflicting headlines from a deeply transactional (not to mention unconventional) Trump administration. It can be hard not to get caught up in the noise. However, for us the direction of travel matters much more. Focus instead on the numbers. The US economy remains in growth mode and data points from the rest of the world speak to expansionary output. Both fiscal and monetary policy are highly supportive. Over time, AI led productivity gains could provide an additional output boost. No surprise that both investors and corporates are confident, even if consumers appear somewhat more cautious. Do not forget, for the Trump administration, a stronger stock market counts as a form of policy vindication. Confidence, of course, should not be confused with complacency. Watch for sticky inflation, potential earnings disappointments and unravelling geopolitics as potential risk factors. For now, use any weakness as an opportunity and focus on diversifying portfolios wherever possible.

Asset Allocation:

• Equities: Despite a weaker performance in February, equities globally are higher than at the beginning of the year. Most importantly, the rally is broadening with the long-dominant Magnificent Seven falling out of favour. Seven of the top ten contributors to the MSCI World’s year-to-date performance have from outside the mega-cap tech complex, per Bloomberg. This is an environment that should benefit active managers. Robust earnings growth (13.4% reported for the S&P 500 Index on a year-on-year basis for Q4, with 10.3% projected for calendar 2025, per Bloomberg) can help drive further gains, particularly after the multiple expansion story of 2023 and 2024. We favour global strategies oriented towards growth, US small and mid-caps and certain regions such as India and Japan.  
• Fixed Income/Credit: Investors in US Treasuries have benefited from a ~40 basis point decline in 10-year yields since the start of 2025. It is unclear for now how inflation and Fed policy may evolve, but yields could trend lower should investors wish to position more defensively. At 4.3% for the US ten-year and with the Bloomberg US Aggregate Bond Index yielding more than the Fed Funds Rate, there is a case for locking in yield at current levels. Consider too that US corporate bond spreads over Treasuries are at their lowest since 1998, per Bloomberg. We counsel selective investments.   
• Currencies: The US Dollar Index has continued to weaken since its mid-January peak. However, this move needs to be seen in the context of a ~15% rise in the Index over the last four years. Tariff uncertainty may be undermining the Dollar trade in the near-term, while hopes of Ukraine peace are helping to boost the Euro at the same time that the Yen is benefiting from stronger Japanese growth. Over time, we believe currencies will have a tendency to mean revert.
• Gold: The precious metal has continued its recent strength, touching an all-time high in February. It remains an obvious safe haven and a logical asset to own given all the conflicting headlines and geopolitical uncertainties. Gold is a tangible asset and a clear hedge against fiscal profligacy. We see it as a crucial diversifier. Central Banks are also ongoing buyers.
• Alternative Assets: We believe this asset class can provide another useful form of diversification. Many alternative assets offer collateral-based cashflows. At the same time, they benefit from an illiquidity premium too. We advocate being highly selective across this broad and diverse area, favouring differentiated and uncorrelated strategies.

The first sixty days of 2025 and the first forty of Donald Trump’s Presidency have certainly not been dull. If there is a lesson to be taken from the year’s to-date tumult, then it is simply that nobody knows anything, at least in the very near-term. Our counsel, therefore, is very simple: forget the noise and focus on the numbers. Crucially, despite investors seemingly jumping from one news story or narrative to another, most asset classes continue to perform well. Global equities are currently just 2.7% from their all-time nominal high, bond yields are lower and gold is higher. Diversification is the name of the game.

Take a step back. The MSCI World Index has risen close to 70% from its pre-pandemic peak, and a remarkable 150%+ from its March 2020 trough, almost five years ago. Few rallies, however, are linear. Some consolidation and sectoral rotation – what we are currently witnessing – is only normal. It is also understandable that given the many perceived uncertainties, investors might plausibly want to default to somewhat more defensive positioning. From our perspective, it is logical to use sell-offs as opportunities, particularly if there is a chance that the policy and macro environments become more stable as the year goes on.

We are all having to get used to living within the new American political administration. Any President who says that “tariff is the most beautiful word” is clearly taking a wrecking ball to convention. Many of team Trump’s other proposed policies can be considered highly unorthodox too. Have no doubt, tariffs are negative for growth, resulting in inefficient resource allocation, which can serve to emphasise economic distortions. Whether the President is serious in all his threats is to miss the point – investors still have to live with an overwhelming and conflicting news cycle.

The inevitable fear that follows is that volatile policy pronouncements from the Trump administration may threaten to undercut the economic resilience that has played an important role in equities’ relentless rise. The weight of policy uncertainty may start to have a corrosive effect. Some of the recent data appear to corroborate this view. Consider that US industrial output is flat, services output is contracting for the first time in two years, housing starts are slowing and retail sales growth is at its weakest since 2023. Consumer sentiment stands at a seven-month low.

We have in the past cautioned against reading too much into one month’s set of data. All the above figures were released in February and pertain to activity in January, a period that was distorted by wildfires and storms across America. Further, even if retail data were weak – and bear in mind that consumers have been the mainstay of economic growth – figures for the prior month were revised up. Nonetheless, some caution in activity should not be surprising given the huge unknowns relating to tariffs. No one seems to have a clear view whether tariffs are on or off, the extent to which they may be delayed, their size, to whom they may be applied and whether there may be exemptions. Why be an optimist when there are so many unknowns?

A more rational perspective might be as follows: the more noise that there is without action on tariffs, the lower should be their shock value to investors. Do not forget that as the world’s largest importer, the US clearly has some leverage and would have an advantage in any trade war. Given the robustness of the US economy versus others globally, it starts any negotiations from a position of strength. Further, proposed tariffs may be designed to influence not just trade policy but also border policy and broader international relations. More critically, it does seem clear that President Trump both wants and cares about stock market vindication; the performance of equities constitutes some form of scorecard. If we know anything, then it is simply that Presidential actions can shift very quickly. We may then get a ‘Trump bump’, but just not immediately.

Meanwhile, the economy is doing fine. Recession does not look at all imminent. Rather, the economy looks to be on glide path towards a perfect (or no) landing. The Atlanta Fed’s live GDP tracker suggests that the US is growing at 2.3% this quarter, consistent with the figure reported in Q4. Inflation has barely moved in the past month (an increase of just 10 basis points versus the prior period) and although at 3.0% it is above the Fed’s target, upward pressures are being mitigated by 4.1% annualised wage growth. Unemployment is also steady at 4.0%. Look elsewhere and industrial output is in broadly expansionary territory across the world. Fiscal and monetary policy are broadly supportive and are likely to remain so. Investors should not forget that the Trump administration has an explicit pro-growth agenda. Other countries may be wise to consider replicating supply-side reforms.

This set up explains why investor sentiment is very different currently to consumer sentiment. Consider the latest Bank of America Merrill Lynch Fund Manager survey: cash levels are at a fifteen-year low and global recession expectations at a three-year low. Data from the Conference Board show that CEO confidence is at its most elevated since 2022. Announced capital expenditure plans beyond just mega-cap tech businesses speak to optimism. M&A may pick up as the year goes on, particularly should there be increased policy visibility. It is also encouraging to see that corporate earnings are continuing to rise. The fourth quarter earnings season closed in the US with the average company reporting a 7.2% positive earnings surprise and 13.4% year-on-year earnings growth, the best performance since the first quarter of 2022, per Bloomberg.

Even if the Federal Reserve appears to be on an extended pause for now, it still has huge policy flexibility. Investors (and consumers) should see this as a positive. While it is logical for Jerome Powell to wait for more evidence on inflation trends before lowering rates, just two cuts before the year-end – what is currently being discounted – would still leave the Fed Fund’s Rate at 3.75%, still well above pre-pandemic levels. There is also the potential upside to the economy from AI-driven productivity gains. Were these to materialise, then this could help prolong the current cycle and boost returns.

Of course, there is no room for complacency. Consider that inflation might remain sticky or even rise from current levels. How the Fed would respond to this is not clear. Any reversal in policy could undermine hard-won credibility and provoke political criticism. Then there is the concern that given the still-high levels of equity market concentration (both in the US and globally), what might happen were earnings from tech companies to disappoint. At some stage, the US may also face a reckoning regarding its debt burden, which is set to pass its World War Two peak of 122% of GDP, per the Congressional Budget Office (when measuring government debt). All the above is occurring at a time when we are seeing arguably the biggest realignment in global geopolitics since the end of the Cold War. Known unknowns will never not exist; however, learn to live with them, focus on the direction of travel and continue to diversify.

Alex Gunz, Fund Manager, Heptagon Capital