Schroders global investment reports that, with Trump's re-election, the focus is once again on the direction of the US economy and policies. The bank believes that entering 2025, the US economy is more optimistic than expected, with consumer spending sustainable driving economic growth. However, if Trump enacts his campaign policies such as protectionist policies, deporting illegal immigrants, and increasing tariffs, the risk of stagflation in the US will increase. Before the new government confirms its trade policy, there may be some volatility in the US dollar, with inflation prospects prompting the dollar to strengthen, and the US dollar index nearing a two-year high. In terms of investment advice, US stock valuations are close to multi-year highs, causing concern. For investors worried about high US valuations, choosing small and medium-sized companies is a more direct way to invest in the US economy and at a lower cost. Schroders global investment team predicts that the US GDP growth rate will be 2.5% in 2025, rising to 2.7% in 2026. This will result in sustained inflation levels above previous forecasts, with the Federal Reserve expected to cut interest rates once in 2025 and then raise them in 2026. For investors, evaluating the likelihood of implementing specific policies is a major challenge, and this challenge will continue until policy directions become clear. Senior emerging market economist David Rees suggests that during the entire 2025 period, financial markets may be affected by any policy news, even if these policies are never truly implemented, leading to increased volatility in various assets. Trade policy will have a significant impact on the US dollar. David Rees suggests that levying any tariffs will support the US dollar because this measure will to some extent balance the impact of tariffs on trade and economic activity. We also expect interest rate differentials to provide support again, so a strong dollar is likely to continue for some time. Fiscal prospects are a key factor affecting bonds As investors evaluate the potential for Trump's policies and their potential impact on inflation and interest rates, there have been significant changes in the fixed income markets recently. Fixed income strategist James Bilson states that as the second Trump administration approaches, bond yields have risen due to strong US economic growth, recent stable inflation data, and expectations that the new government will adopt further inflationary policies. Currently, the bond market reflects the Federal Reserve cutting rates once or twice in 2025, by 0.25% each time, while in September 2024, more than four rate cuts were expected. Just as bond market investors are closely monitoring economic activity, they will keep a close eye on policy actions related to trade and immigration. From the perspective of corporate credit, US fixed income director Lisa Hornby adds that risk assets are entering the current period from an expensive starting point. The credit spread for corporate bonds, or the excess premium relative to US Treasuries, is at its highest level in decades. However, the driving force behind the tightening credit spread comes from the high demand for attractive overall yields. With high yields expected to remain high, it is difficult to see anything that can reverse the direction of the credit spread. Can the US stock market exceptionalism continue? Regarding the stock market, the US's dominance in global stock markets is at a historical high. As of the end of 2024, the MSCI US Index accounted for 74% of the MSCI World Index and 67% of the MSCI All Country World Index. In addition, apart from the peak of the dot-com bubble, US stock valuations are approaching the highest levels in the past 143 years. Whether this valuation can be sustained is still a question mark, regardless of the policies of the new US government. High US valuations are unsettling Head of strategy research, Duncan Lamont, states that high US stock valuations and their relatively high share in global markets are not a new phenomenon. However, US stocks also have many advantages, including soaring US productivity compared to other regions globally, better economic momentum, and high corporate purchasing power. A more favorable demographic forecast is another advantage, but once the generous immigration policies change, this advantage will disappear. For investors concerned about high US valuations, one option is to look for opportunities in small and medium-sized companies, as their valuations are lower than those of large companies. Bob Kaynor, US small-cap stock director, states that the US benefits from a strong labor market and potentially supportive policies for domestic growth from the second Trump administration. Small and medium-sized companies are more likely to attract investors primarily based in the US. Therefore, investing in small and medium-sized stocks allows investors to more directly invest in the US economy. Given the current high prices of large corporate stocks, small and medium-sized corporate stocks provide a lower-cost investment opportunity.