Surprise, surprise, the unexpected hits you between the eyes
The unpredictable, that’s the surprise you see, surprise! surprise!

“Surprise Surprise”, Cilia Black

Surprise Surprise, with Cilia Black as its host and singer of its theme song (which has recently become a wildly all-purpose meme), was a pleasant little British TV show that ran from 1986-2001. It was a joyful show that delivered happy surprises to people, like reunions with long lost loved ones, and played soft, silly pranks on the public (nothing like the cringe of David Beckham’s statue prank).

As we reflect on DC policy meetings this week from Strategas’ Policy Conference, we can’t help but sense that investors are broadly expecting to live in the happy world of Surprise Surprise, forecasting a benign and beneficial policy mix out of DC, where the surprises are wholesome and to the upside.

Our 2025 “Great Expectations” Outlook was built around the concept that good things can happen, but in markets, the starting point of expectations matters. One “Great Expectation” we observed was that consensus assumed this benign and beneficial policy mix coming out of DC. 

What is interesting is how much control forecasters assume the White House has over economic and market outcomes. This assumption of control takes the form of assertions of the presence of a “Trump put” (that Trump will not stick with policies that cause equity market turmoil, as the equity market is seen as his barometer of success), or certainty that levers will be pulled to offset growth dampening policies (immigration, tariffs) with growth enhancing policies (tax cuts, deregulation), or even expressed desires for the 10 Year Treasury yield to be lower.

These notions of control could very well prove to be accurate, as they are consistent with President’s Trumps long-expressed favoring of pro-growth, pro-market policies, but as we have long seen in both DC and markets (and life for that matter!), just because you want something, it does not mean you are going to get it.

And even our jolly Cilia Black warns that sometimes “the unexpected hits you between the eyes”, so we think it behooves investors to be duly realistic about the potential policy pitfalls and volatility that could result out of DC in the coming year.

For example, one potential policy that was discussed at length by both Robert Lighthizer and Larry Kudlow at the Strategas conference was universal tariffs, or a blanket tariff across all imports into the US. Of course, this was presented by proponents as a way to spur a renegotiation of trade relationships, spark a reshoring of manufacturing capacity, and raise revenue to pay for tax cuts, all the while not being inflationary or dampening to growth. 

But there is a distinct risk that a tariff policy of this magnitude, if enacted, would not have a happy, Surprise Surprise-like outcome. Whether we are acknowledging that many goods the US consumes are 100% imported (making substitution more difficult), the limited evidence that prior tariffs resulted in substantial reshoring or a “manufacturing renaissance, or the reality that consumers are likely more sensitive today to the threat of higher prices than they were prior to the pandemic-era inflation episode (as seen in Friday’s University of Michigan Inflation Expectations jumping to their highest level since 2008), we must be realistic that pursuing a tariff policy may have its long-term merits, but is likely to cause short term disruption.

Another example is the assumption that tax cuts can be used to offset growth dampening policies like tariffs or immigration reform. After hearing the details of the many complications of the tax negotiations ahead (such as the ultra-slim majority in the House of Representatives that has no ability to see defections of Republican members that are pushing for no increases to the deficit as part of the tax bill), we see risk that clarification on and benefits from tax policy may not come until much later in 2025. We think a deal ultimately gets done (no one wants to see personal income taxes go up in a midterm election year), but the delay means that if “dampening” policies are enacted first, the offset from “stimulative” policies is unlikely to be able to be an immediate offset.

As we progress through 2025 and note the larger role that DC could play in economic and market outcomes, along with this sanguine consensus that policy and market needles will be thread to achieve only positive outcomes, we think it is important to continue to ask where the White House does have control over outcomes and where there could be policy or market surprises.

With equity and credit valuations elevated, positioning in 90^th plus percentiles across various metrics, and growth expectations starting from a higher level, we see less ability for risk asset markets to absorb negative surprises. This is what drives our expectation for a wide, choppy range in 2025 for both equities and yields, as good things can certainly happen, but we are vulnerable to downside shocks given a limited margin of safety in valuations.

It would be wonderful to live in the cozy world of only-happy Surprise Surprise, but the reality in 2025 is likely to be far more balanced between potential positive and negative surprises coming out of DC.

IMPORTANT DISCLOSURES