In our previous paper published in November 2024, one of the key themes was that the US and Europe seemed to be on divergent growth paths. Europe was becoming more fragile, both cyclically and structurally. Meanwhile, the US remained what we called a grower economy, benefitting from both cyclical and structural resilience. 

Our view was that if nothing changed, this trend was likely to continue. However, since publishing the paper, a lot has changed. Donald Trump’s return to the White House, and the announcement of reciprocal tariffs that were more draconian than anyone expected, pose a significant risk to growth and increase the potential for US recession in 2025. 

At the time of writing, these reciprocal tariffs have been paused for 90 days. While the market has welcomed this development, it is worth noting tariffs are, for now, only paused, and, importantly, the political uncertainty resulting from the constantly shifting trade landscape is in itself likely to have a negative effect on investment and consumption. 

On the other hand, Europe’s response of more fiscal spending helps support growth, partly offsetting the drag from tariffs.  

From that perspective, we observe the dynamic between the two economies appears to have shifted from one of divergence to potential convergence, with a revitalised Europe and heightened risks that potentially lead the US to slower growth. 

In this paper, we explore these developments through our usual cyclical and structural lenses, as well as the investment implications of this developing macroeconomic environment. 

For investors, it is easy to get distracted by the headlines but a lot of what is happening is ultimately noise. We believe fixed income investors should continue to focus on the long-term fundamentals. Yields remain high and can therefore absorb a significant amount of near-term volatility. 

As simple as it sounds, yields are a proxy for future total returns. For example, looking at investment-grade corporate bond yields, history shows the correlation between starting yield and total return over the next five years has been extremely high. 

Today, depending on the quality of issue, fixed income markets offer yields of between 4% and 8% across sectors and locking in these yields offers good value over the long term. Meanwhile, high-quality assets should benefit from duration in a recessionary scenario where rates are expected to fall and also provide diversification.