Jared Cohen
President of Global Affairs and
Co-Head of the Goldman Sachs Global Institute
Sam Morgan
Global Co-head of Client Coverage for Global Banking and Markets (Public)
Market Themes in 2025
Sam Morgan
Global Co-head of Client Coverage for Global Banking and Markets (Public)
The pro-business orientation of Trump 2.0 is clear, and the key policy areas of immigration, trade, tax, energy policy and foreign policy are well defined. The president has issued a series of wide ranging executive orders that touch on many of these subjects. These include actions clarifying US policy against the Organization for Economic Co-operation and Development’s global tax plan, declaring a national energy emergency to boost US energy, eliminating the previous administration’s “electric vehicle (EV) mandate,” and launching a series of measures on US trade policy that he has said aim to address “unfair and unbalanced trade” and to increase the US’s economic security.
However, while the new administration has already taken impactful actions, these are still early days. Many of the policy specifics on each of these executive orders and how they will be implemented are yet to be fully understood. We do not yet have clarity on how international markets and other countries will react. Tariff policy is of particular focus for the market, with significant implications for FX markets and a wide range of potential outcomes in terms of the level of tariffs, breadth of countries/goods they are levied on, and the sequencing of such changes.
Early 2025 is characterised by a strong market sentiment of US exceptionalism. US real GDP growth is running at around 2.5% and the labour market is robust. The macroeconomic fundamentals of the US remain very healthy, but question is: How much is already in the price?
The dollar has strengthened considerably in the last 6 months, and US equity markets (especially tech) have outperformed strongly over a multi-year period. The US’s net international investment position (NIIP), which measures the difference between US owned assets abroad and foreign owned assets in the US, has moved considerably in recent years (and is now ~80% of GDP).
Fiscal deficits have continued to grow in the recent years, and the US Treasury (UST) market has largely tolerated the increase in bond supply without major hiccups. But, despite this apparent stability, questions remain. At what stage will bond vigilantes rear their head? What set of macroeconomic – or geopolitical conditions – would be the spark? Will the UST market face similar issues to recent concerns around UK and French debt? The equity market retains a focus on bond yields, any sharp increase in yields (especially if driven by fiscal deterioration or inflation rather than stronger growth) could have a major impact on equity market sentiment.
Europe is likely to grow below 1%, with headwinds from trade policy uncertainty and domestic political uncertainty. The extent to which these headwinds reverse or accelerate depends on many unresolved questions. Will the ECB cut far enough and fast enough to cushion growth? Will Germany or other countries undertake pro-growth fiscal policy? How will migration flows react to the changing geopolitical tensions in Ukraine and the Middle East? What will be the shape of the Europe – US, and Europe – China relationship? What role will European companies play in AI?
Geopolitical Themes in 2025
Jared Cohen
President of Global Affairs and
Co-Head of the Goldman Sachs Global Institute
The day after President Trump’s inauguration, Vladimir Putin and Xi Jinping had a call to discuss strengthening their ties. And in many parts of the world, China, Russia, Iran, and North Korea are deepening their cooperation. US officials have warned that China’s economic support is “powering” Russia’s economy. More than 90% of Iran’s petroleum exports go to China. Perhaps most surprisingly, Russian and North Korean troops are fighting together for the first time since the Korean War, this time in Ukraine.
Democratic societies have many advantages when it comes to cooperation. Those advantages include robust alliance systems, such as NATO and defense pacts in Asia, and leading world economies with deep economic and capital market connectivity. The US has a strong economic position, and its share of global GDP is roughly the same today as it was in 1990, at just over 25%. And when America’s economy is combined with those of its treaty allies, their combined totals represent around 60% of global GDP.
Meanwhile, competitors and adversaries face their own challenges. China’s share of GDP has been falling for several years. And Beijing’s economic challenges – overbuilding, overcapacity, debt, and demography among them – may prove to be more structural than cyclical. Sanctions and export controls have damaged Russia’s economy. Iran and its proxies have been weakened by Israel since 10/7. And there are strategic differences between the US’s competitors that limit their cooperation.
Russia’s full-scale invasion of Ukraine began nearly three years ago. Hamas’s 10/7 attack against Israel was more than 15 months ago. President-elect Trump has made it clear that he intends to end both wars in Europe and the Middle East. The big questions are is that possible, how, and under what terms?
Today’s wars are rooted in issues that go beyond the headlines. Among them, will Russia under Vladimir Putin accept the existence of an independent, sovereign, Western-aligned Ukraine? How long will Western support for Ukraine continue, and in what form? How has the decimation of Iranian proxies in Gaza, Lebanon, and Syria changed the Middle East, and what opportunities and risks does that create? How will a weakened Iran try to shore up regime stability? And what will be the role of outside powers in any settlement?
Ceasefires can postpone settlements on major issues. But for wars to truly end, root causes need to be resolved.
In 2025, governments are making investments in hard power. In his first administration, with bipartisan support from Congress, President Trump increased the defense budget by an estimated $225 billion. Congress has shown interest in working with President-elect Trump on similar investments now. A record 23 of 32 NATO allies now spend 2% or more of their GDP on defense, and in constant dollars, the alliance’s defense spending is up 18.5% since 2016. On the other side of Eurasia, Japan has pledged to increase its defense spending to 2% of GDP by 2027.
These investments follow significant increases in defense spending by competitors. The Pentagon now estimates that China’s annual defense spending has increased to between $330 billion and $450 billion. And Russia’s wartime government spends as much as 6.3% of its GDP, around a third of government revenue, on its military.
Across the G7, the democratic coalitions are facing headwinds. Amidst a leadership change in the incumbent party, Canada will have a national election, and polling favors the opposition Conservative Party. Following a political crisis in Germany in November, snap elections were called for February, and Chancellor Olaf Scholz’s party is unpopular. Japan has had four prime ministers in the last four years. In the UK, Prime Minister Starmer’s approval ratings are declining. France, which is not scheduled to have elections until 2027, could continue to see political unrest this year.
The anti-incumbent mood isn’t confined to the G7. Australia will have elections in May, and approval ratings for the incumbent party are dipping. South Korea – which has a history of tumultuous presidential politics – is seeing political instability.
But in many cases, authoritarian regimes are experiencing even greater fragility. There was a reminder of the brittleness of authoritarian governments fact last year, when the Syrian regime collapsed rapidly, an outcome few predicted.
Artificial intelligence may be the most revolutionary technology of our lifetimes, with significant implications for the global economy and the balance of power. But more than two years after the release of ChatGPT, there are major questions about where the rapid innovations are taking us, and what their effects will be on markets and geopolitics.
When will returns justify spend? Will the scaling laws that saw large-language model performance improve with more compute and more power continue? Where can the massive infrastructure behind AI – not only chips, but also data centers – be built and operated? And is artificial general intelligence coming, and if so when – ten years, five years, five months?
We may get closer to some of the answers to those questions this year. My co-head, George Lee, described 2025 as part of AI’s “deploy and scale” era, when AI tools will be put to work across the enterprise, and by governments.
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