Must Read Research

All hands on deck! This week, we cover the wave of startups and capital investment putting wind in U.S. productivity’s sails, where investors have anchored bullish expectations in the 9th annual Global Wealth & Investment Management (GWIM) Survey, the deployment of new global defense funding, and how a potential peace deal in Ukraine could ripple through markets.

 

Productivity re-accelerated in 2023, approaching levels seen during the tech boom of the 90s.

 

The U.S. Economics team expects this improvement to endure, a bullish development for the economy and markets. The “startup deficit” since 1980 came with a 3% productivity drag, but business applications have surged 37% since 2019, led by tech. The Trump Administration’s deregulation agenda should benefit highly-regulated sectors like Financials, since barriers to entry are likely to be dialed back. Capital investment has also improved, starting in software and continuing with structures and equipment. We expect more investment to come with the potential return of full capex expensing and lower corporate taxes. The adoption of AI could be icing on the cake. U.S. Equity Strategy points out that higher neutral rates, which should accompany better productivity, would give the Fed more room to cut in the next recession. Historically, higher real rates have been negatively correlated with equity risk premium (ERP).

 

The 9th annual Global Wealth & Investment Management (GWIM) Survey revealed that Financial Advisors remain bullish on U.S. stocks and the economy.

 

Savita Subramanian notes that 70% of the 248 respondents expect the current bull market to continue beyond 2025 with 63% discounting above-trend U.S. GDP (gross domestic product) this year, up from 35% last year. Advisors think Trump policies will bolster markets with 69% citing deregulation as the biggest benefit. At 62%, stock allocations are 3ppt (percentage points) higher than last year and the highest since 2022. Across global equities, net sentiment is bearish on Europe for the second year in a row and on emerging markets for the first time in the survey’s history. Outside of equities, allocations to bonds and cash fell to lows of 24% and 8%, respectively. On the other hand, around 30% of advisors have gold allocations of 1% or more while 24% are adding alternatives, up from 10% in 2017.

 

Higher defense spending is a global phenomenon.

 

Despite uncertainty around potential spending cuts in the U.S., recent resolutions from the House & Senate Budget Committees included $300 billion of increased defense and border spending. In Europe, BofA’s Global Defense analysts highlight that NATO (North Atlantic Treaty Organization) members could see defense spending targets rise from 2% to 3%, equivalent to $250 billion in additional outlays, after an 18% expenditure increase last year. Global demand has been positive for Korean defense companies which posted 114% operating profit growth in 2024, powered by record exports.

 

A potential peace deal in Ukraine would have important implications for the countries at war along with energy prices, Developed Europe, Emerging Markets (EM), rates and currencies.

 

An agreement could lead oil prices to drop by $5-$10/bbl and could mean an almost 50% drop in European gas prices by summer, subject to policymaker decisions. Lower energy prices could send European Union inflation below 1.5%, boosting the consumer. 10-year rates and the EUR would be likely to climb somewhat on higher growth and defense spending. And while Europe strategy believes that European equities already price in a rosy macro-outlook, the team does see opportunity in small caps where price is at a 9-year low relative to large. EM strategy believes that a peace deal could underpin their constructive view and that markets may not yet be positioned for improvement due to an excessive focus on tariffs and U.S. exceptionalism.

 

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