Policy chaos and the demise of US exceptionalism. The story of US equities is a curious case of “self-inflicted pain”. Just when the S&P 500 as basking in the glory of being the “only game in town” following Trump’s election victory, the market gave up all its gains and started heading towards correction territory. The abrupt turnaround in fortunes lies squarely on the surge in policy uncertainties with the new administration unleashing a global tariff war and reshaping the world order with its “America First” agenda. The ensuing chaos is starting to weigh on business confidence and economic activities. ISM Manufacturing, for instance, fell to 50.3 in February and edged closer to contractionary territory while forecast from Atlanta Fed’s GDPNow is pointing to a -2.4% decline in GDP (vs a growth of 2.6% at the start of the year).

US consumers, meanwhile, are stuck between a rock and a hard place. Weakening macro conditions and looming job cuts coincided with plunging consumer confidence – which saw a 7-points dip to 98.3 in February, the biggest decline since Aug 2021 – while retail sales similarly corrected by 0.9% in January, the sharpest in two years. Yet, despite the dire consumption outlook, inflation remains stubbornly high and will only get worse if the tariff war escalates from here. Trump’s imposition of tariffs on Mexico, China, and Canada will affect a wide range of goods from delivery trucks and cars to petroleum – a strangely ironic situation considering Trump had made combating inflation the central rhetoric of his re-election campaign. The political optics of the new administration inflicting tariff pains at a time of resurgent inflation will not go down well with the American consumer.

When the unthinkable becomes reality – Investors “de-risking” from US equities. The acute correction on the S&P 500 and Nasdaq says it all. Investors are actively switching out of US equities to fund their positions in Europe and China. The very notion of “de-risking” from US equities, unthinkable just a month ago, is now becoming a reality. Under the “America First” policy agenda, the very rule-based global system that has served America so well for decades is crumbling. And with Trump announcing that this is “just getting started”, we see no immediate end in sight for the portfolio shifts away from the US.

Funds are pre-emptively switching out of the US based on expectations of a darkening economical and geopolitical mood. The change in sentiments, unfortunately, is coming at a time when US equities are trading at huge valuation premiums relative to the rest of the world. A “priced for perfection” market will need to see substantial unwinding before the negatives are fully priced-in and this is just only getting started. Forecasted earnings for the S&P 500 suggest that the downside has yet to be reflected in analysts’ forecasts and we anticipate more weakness ahead when downward earnings revisions begin.

Meanwhile, if the new administration thinks that they are “winning” this trade war, anecdotal evidence is suggesting otherwise. The “US Trump Tariff Losers” thematic basket, which tracks the performance of US stocks negatively exposed to Trump’s tariffs, has seen sharp correction since late-January while its European counterpart remains on a gradual uptrend. This suggests that the tariffs are hurting US companies more than their European peers.

2Q25 US Sector Strategy – Defensive shifts

Changing times call for changing strategy. Policy chaos means that businesses will hold back on their investment decisions until further clarity emerges. Similarly for consumers, purchases of big-ticket items will be postponed until the economic fog is lifted. Under such conditions, the US economic momentum will moderate, necessitating a recalibration of our US sector strategy. A more defensive tilt is necessary with the recent performance of US sectors already reflecting this new reality.

On a YTD basis, “crowded trades” like technology and consumer discretionary have lost 8.7% and 10.2% respectively (as at 6 Mar) while defensive sectors like healthcare (+8.6%) and consumer staples (+6.9%) have outperformed. For 2Q25, the key switches that we are making to our US sector allocation are:

• Upgrade consumer staples to overweight: Should economic conditions moderate from here, we expect consumer staples to outperform consumer discretionary as the former provides essential goods. Demand for consumer staples tends to be more inelastic and resilient to economic headwinds. Companies providing “value” goods selling at more affordable price points will see greater demand from consumer down trading.
  In the hypermarts space, companies with a stronger focus on private labels will benefit as the latter enhances customer loyalty and offer higher gross margins. Additionally, in an era of rising trade tension, we also favour companies that rely less on overseas suppliers. Walmart, for instance, has reduced its exposure to Chinese suppliers from 80% in 2018 to 60% in 2023 with further reductions expected.
• Upgrade utilities to neutral: Demand for utilities tends to be very resilient during economic slowdowns due to its provision of necessities like electricity, water, and gas. However, investment merit is partly offset by policy headwinds arising from the new administration’s approach to energy transition. Its withdrawal from the Paris Climate Agreement and the suspension of offshore wind power leases could all translate to higher equipment and material costs for renewables companies. Hence a neutral rating is warranted.
• Downgrade consumer discretionary to underweight: US domestic consumption is expected to face substantial headwinds from (1) new immigration policies that will drive down the number of undocumented migrants in the country, (2) aggressive job cuts by the Department of Government Efficiency (DOGE), and (3) the prevalence of sticky inflation and weak affordability. In such an environment, non-essentials within the consumer discretionary space will experience weaker demand. Following Trump’s election victory, our initial assumption is for the consumer discretionary sector to be boosted by taxation cuts. But given recent policy chaos and the plunge in consumer confidence, this thesis is now off the table as we expect the negatives arising from policy uncertainties to supersede the positives from lower taxes.
• Downgrade energy to neutral: We are downgrading the energy sector to neutral given the absence of catalysts. Brent crude oil prices are expected to moderate from 2024’s average price of USD80/bbl to between USD70-75/bbl in 2025 given (1) rising demand risks, (2) gradual increase in supply from OPEC+, and (3) diminishing geopolitical risks on the Middle East and Russia-Ukraine front.