Jump Start - Trump's inauguration, earnings season & the BoJ update
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Welcome to this week's Jumpstart, your quick guide to the key market events this week in just under five minutes. It's Monday, the 20th of January. I'm Belinda Peters from the UBS Chief Investment Office in Zurich. This week, the key event will be Trump's inauguration. How will his policy changes impact the markets? Earnings season for the fourth quarter is well underway. Can we expect solid performance amid anticipated market volatility?

The Bank of Japan is set to hold its monetary policy meeting this week. Will the BOJ finally resume its rate-hiking cycle this week? Donald Trump is set to take office today as the 47th President of the United States. As investors await his administration's first announcement, Treasury Secretary Scott Besson provided insights into Trump's agenda during his Senate confirmation last week.

He expressed support for Trump's plan to impose tariffs to address unfair trade practices and enhance U.S. negotiating leverage. Additionally, he emphasized the importance of extending Trump's 2017 individual tax cuts to prevent a significant middle-class tax hike.

Investors will now be closely watching whether Trump will implement universal or selective tariffs and which countries will be most affected, adding uncertainty to forecasts. In our view, we expect selective tariffs rather than broad measures due to their potential economic costs. While these tariffs may affect certain sectors, they are unlikely to derail overall economic growth.

We anticipate a phased increase in the effective U.S. tariff rate on Chinese goods from 10% to 30% by the end of 2026. Regarding tax policy, the Trump administration is likely to extend temporary tax relief but may refrain from lowering corporate taxes due to high federal deficit and a slim Republican majority in Congress.

So, while we expect near-term market volatility, the overall economic backdrop remains favorable. In this context, US equities and quality bonds are attractive options, with gold serving as a solid hedge against volatility.

With the start of the fourth quarter earnings season this week, investors are likely to shift their focus from macroeconomic data to micro trends in the coming weeks. However, some clouds remain on the horizon, including a strong US dollar, potential Trump tariffs, and elevated valuations of US equities. Despite these headwinds, we believe the strong dollar is mainly driven by higher yields, which in turn are supported by positive economic growth.

Furthermore, the anticipated impacts of tariffs are unlikely to be strong enough to derail healthy earnings growth. And while valuations are historically elevated, such higher valuations are typical in an environment characterized by low inflation expectations and low unemployment.

Therefore, we maintain a positive outlook for US equities, forecasting 9% earnings growth this year, which could propel the S&P 500 to 6,600 by year-end. We anticipate that large cap stocks will outperform mid and small cap stocks, benefiting from greater exposure to AI advancements and stronger earnings trend. For more information on US 4Q earnings, please read our S&P 500 EPS season "Still Good But Some Noise" publication.

Japan's economy has been going through a notable shift in recent years, moving from a long stretch of deflation to a more inflationary environment, mainly due to a weak yen that has pushed up import prices and fueled inflation. However, recent economic data have now been showing strong domestic wage growth and new price pressures, which could bolster the case for a potential rate hike.

As a result, investors are paying particularly close attention to the Bank of Japan's monetary policy meeting this week. Here, markets are expecting the BOJ to raise rates by 25 basis points to 0.5%, which would be the first time since last March. We also expect one more rate hike this year, bringing the base rate to 0.75% by the end of 2025.

In this environment, the outlook for Japanese equities remains neutral, and we suggest that investors focus on high-quality, domestically-oriented stocks. The financial sector is likely to benefit from potential rate increases, while the yield on Japanese government bonds is expected to rise gradually. So that's it, your Jumpstart for the week. I'm Belinda Peters from the UBS Chief Investment Office in Zurich. If you have any questions, please reach out to your UBS representative and have a good start to the week.

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