CIO Insights: No Pain, No Gain

10 minute read

In our 2025 Macro Outlook: “FAT” is the new normal, we wrote that, on the whole, the Trump administration’s pro-business stance was likely to be positive for growth over the longer term – but noted that uncertainties surrounding its policy plans meant potential for headwinds depending on their timing, size, and scope. 

Indeed, since US President Donald Trump’s inauguration in January, policy announcements coming out of Washington, D.C. tied to spending cuts and tariffs have been dizzying in their speed and scale. That’s contributed to some cooling in the economic data, which has spooked investors.

In this month’s CIO Insights, we assess the state of the US economy, and how the current sequencing of Trump’s policies could impact the macro environment and markets.

Key takeaways

• While the “soft” data show that the economy is cooling, the “hard” data is still solid. Uncertainty over Trump’s policies has hit the “soft” or survey-focused economic data such as purchasing managers’ indexes (PMIs) . That said, this hasn’t yet fed into the “hard” data that measures real economic activity. Ultimately, how the data evolve will depend on how the Trump administration’s policies unfold in the months ahead.
• Trump’s overall stance is pro-growth, but spending cuts and tariffs are emerging as near-term headwinds to the outlook. The recent sell-off in US equities likely reflects market participants recalibrating their expectations around the timing and sequencing of Trump's policies and their impact on growth. While growth-supportive measures like tax cuts and deregulation will take time to materialise, other policies like spending cuts, government layoffs, and tariffs are being implemented more quickly – creating near-term headwinds for the economy. 
• The bigger picture: no pain, no gain. The Trump administration appears willing to endure short-term economic pain in pursuit of longer-term gains. While uncertainty surrounding its policies may weigh on near-term growth, the administration’s focus – led by figures like Treasury Secretary Scott Bessent and Department of Government Efficiency (DOGE) head Elon Musk – is on lowering long-term borrowing costs. The goal: easing the government's refinancing burden and improving fiscal sustainability. In the meantime, this approach could slow the economy and contribute to market volatility in the coming quarters. 
• Given the uncertainty surrounding the US outlook, this is where the power of diversification comes into play. Over the past few months, gold has seen continued gains due to its safe-haven characteristics, and weaker economic data has contributed to a rally in bonds. Non-US equities have also performed better, highlighting the benefits of diversification. Year-to-date, our globally-diversified General Investing portfolios powered by StashAway have outperformed their same-risk benchmarks on average.

While the “soft” economic data is cooling, the “hard” data is still holding up 

Markets have been on edge in recent weeks, with the uncertainty over tariffs and other Trump policies, as well as cooler economic data, contributing to concerns about growth. Here, it’s important to distinguish between the “soft” data – which are survey-based gauges that measure sentiment – and the “hard” data – which measure actual economic activity.

Concerns have largely been driven by recent weakness in the soft data:

• The ISM manufacturing Purchasing Managers’ Index (PMI), which is based on surveys of manufacturing executives, showed US factory activity slowed in February with the indexes measuring new orders and employment falling into contraction. 
• Consumer surveys from the University of Michigan and the Conference Board both showed a deterioration in sentiment related to the impact of the new administration’s policies on the economy. 

However, soft data can be noisy and subject to swings in sentiment, making it difficult to extrapolate. Taking the hard data into account, the economic picture is still holding up:

• The latest jobs report showed continued employment gains, or 151,000 in February, as the private sector offset the impact of layoffs related to DOGE’s cost-cutting efforts. The unemployment rate, at 4.1%, is still low from a historical perspective.
•   Gauges like the Dallas Fed’s Weekly Economic Index (WEI) – which compiles higher-frequency economic data like retail sales, unemployment claims and electricity usage – show that real activity is still holding up. Based on that gauge, the US economy is still growing at a healthy clip of about 2.5% on average over the past 3 months.

The big question is how the development of Trump’s policies will impact growth going forward. If uncertainty persists, weaker sentiment can translate into weaker activity as businesses hold back on investment and households pull back on spending. 

Timing matters: Trump’s pro-growth agenda is off to a rocky start

Following Trump’s election in November, we shared that Trump’s policy platform had mixed implications for the macro environment, but the overall policy impact would be pro-business. (For more on that, see CIO Update: What another Trump presidency could mean for your investments.) The sequencing of these policies could have a large impact on the economy’s path.

DOGE spending cuts and tariff uncertainty are near-term headwinds

The Trump administration has prioritised tariffs and spending cuts via DOGE over other policies, leading to concerns on the immediate economic outlook. 

Take spending cuts related to DOGE: Elon Musk declared an ambitious goal of cutting $1 trillion in federal spending by September 2025 (although that target and timeline has been moved several times). According to DOGE, it has saved $105 billion in about 2 months. That figure annualised would mean a reduction in government spending amounting to more than $600 billion in 1 year, or about 2% of GDP. In other words, steep spending cuts could be a credible concern.

Then there’s the economic uncertainty caused by the back-and-forth on tariffs – which is also weighing on the outlook. Given that negotiations are still in progress, it’s difficult to quantify the precise impact at this point, but the uncertainty alone has been enough to move markets and create concern for businesses and households.

Chart 2 below illustrates the potential impact of these forces. Using Bloomberg’s SHOK macro model, we estimate the impact of $1 trillion in DOGE-related spending cuts from now to June 2026, as well as tariff-related uncertainty this year. Those forces, all else equal, would result in GDP being 2.1% lower by year-end relative to the baseline growth forecast, and 2.8% lower at its trough in mid-2026.

In isolation, that’s a significant slowdown. However, it’s important to keep this in perspective. For one, policymakers can use other tools in the face of a slowdown in growth. The Federal Reserve, for example, can cut interest rates more aggressively. If the US dollar weakens as a result, that’s also supportive of growth. 

In addition, there’s considerable uncertainty around whether the Trump administration can achieve its stated goals in full. For example, the legality of DOGE’s spending cuts and layoffs is under scrutiny. The on-again-off-again tariff announcements with Canada and Mexico also show that policies can shift quickly. 

Finally, it’s worth noting that $1 trillion of cuts is still an incredibly aggressive target. And if the proposed idea of “DOGE dividend” checks pans out – where 20% of savings are returned to taxpayers –  that would also cushion the drag on growth. 

Longer term, tax cuts and deregulation should support growth

As we shared earlier, sequencing matters. We expect Trump’s other policy plans – like tax cuts and deregulation – to support economic growth. These will just take more time to materialise.

For example, extending the Tax Cuts and Jobs Act (TCJA) of 2017 – set to expire at the end of 2025 – along with further individual and corporate tax cuts could offset the impact of cuts to government spending. A proposal to further reduce the corporate tax rate from 21% to 20%, or as low as 15%, for example, could enhance corporate profitability and incentivise business investment.  Tax Foundation, a think tank, estimates that Trump’s tax proposals in aggregate could raise GDP by 0.8% over the long run.  

Similarly, easing regulatory constraints – particularly in energy, financial services, and technology – could lower compliance costs and stimulate economic activity. However, the timing and effectiveness of these measures will depend on political negotiations and fiscal constraints, especially given concerns about the federal deficit.

The bigger picture: Trump may tolerate some short-term pain for longer-term gain

A critical focus for policymakers – as  Treasury Secretary Scott Bessent and DOGE head Elon Musk have clearly stated – has been bringing down long-term borrowing costs, particularly 10-year Treasury yields, to ease the burden of refinancing government debt. Why? As shown below in Chart 3, more than $9 trillion in US government debt – roughly a quarter of the total $36 trillion – is set to mature in 2025.

To refinance its borrowing at sustainable interest rates, the administration may pursue measures that bolster investor confidence in US debt, such as  spending cuts or broader fiscal discipline to ease concerns over deficit expansion. Keeping long-term borrowing costs in check not only reduces the government's interest expense but also supports broader financial conditions, lowering financing costs for businesses and households over time.

Lowering long-term interest rates ultimately requires taming inflation, and one way to achieve that is by slowing the economy. And if growth decelerates meaningfully, the Fed would have more room to cut rates, which could further ease borrowing costs.

For US equities, this backdrop suggests that markets could face heightened volatility in the months ahead. Expensive valuations, combined with uncertainty over growth, could lead to choppy price action. Indeed, as shown in Chart 4, the S&P 500’s forward price-to-earnings (P/E) ratio remains elevated at 20.3x – about 10% above its 10-year average of 18.5x.

One way to navigate choppy markets: diversification 

While we believe that the US equity market may go through a rougher patch in the next few months, it should not deter your long-term investment plans. In the face of uncertainty, this is where diversification and having the right risk-level ensures you stay invested through the ups and downs.

Year-to-date returns, illustrated in Chart 5 below, show the importance of diversification: while the S&P 500 is down 5% for the year to 11 March, global equities outside the US are up 5.8%. Meanwhile, balancing assets like gold and bonds are also performing as they should – with the former gaining 10.4% so far this year and the latter returning 2.5%.

Take our General Investing portfolios powered by StashAway, for example. Given our portfolios’ structural allocation to gold, the safe-haven asset has been a key source of support across our portfolios during these turbulent times. 

In our higher-risk, equity-focused portfolios, exposure to defensive sectors like healthcare consumer staples, as well as to non-US equities, has helped cushion declines in harder-hit areas of the market. And in our lower-risk, bond-focused portfolios, the rally in fixed income due to weaker economic data has helped performance. 

In total, that’s contributed to the outperformance in our General Investing portfolios on average versus our same-risk benchmarks year-to-date. In particular, during a period when US equities are in the red, all of our General Investing by StashAway portfolios have maintained positive returns.

Successful long-term investing requires patience, discipline, and a clear understanding of your financial goals. By staying invested in diversified portfolios that match your risk tolerance, you can navigate uncertain times and build wealth over the long run.

Glossary

Soft data

Survey-based economic indicators that measure sentiment and expectations, such as consumer confidence or business outlook surveys.

Hard data

Economic indicators that measure real activity rather than sentiment – like employment figures, GDP growth, retail sales, and industrial production

Consumer sentiment

A measure of how optimistic consumers feel about their finances and the economy's outlook. When sentiment drops, people may opt to spend less, slowing economic growth.

DOGE (Department of Government Efficiency)

The Trump administration's cost-cutting agency, headed by Elon Musk. Its stated mission is to identify and eliminate wasteful government spending.

Deregulation

The process of reducing government rules on businesses, which can lower compliance costs and encourage investment and innovation.

Tariffs

Taxes on imported goods, which can protect domestic industries and bring in government revenue, but also result in increased prices for consumers and businesses.

Fiscal deficit

The gap between government spending and revenue. When spending exceeds revenue, the government borrows to cover the difference, adding to national debt.