The economic outlook is as uncertain as ever, with fear creeping in to the stock market and the Supreme Court possibly preparing to strike down some of the American President’s tariffs. However, in Sweden the outlook is finally turning brighter. This will lead to a steepening of the yield curve and a stronger SEK.

Peak Trump?
The American President has dominated news cycles and financial markets since his inauguration – not without success. The American economy is showing resilience despite tariffs, the stock market has superseded previous records, and he still has control over Congress. However, several cracks are appearing.

• In recent elections, Democrats have fared better than expected, in all kinds of races. Both left-leaning and centrist candidates have beaten their Republican opponents.
• The main reason seems to be that the American public is dissatisfied with the administration’s economic record. Trump promised to bring down inflation – but poor “affordability” is still the single most important issue. This is clearly at odds with the President’s tariff strategy, which threatens to increase prices further.
• Several polls indicate that the President’s popularity among voters is low and falling.
• The shutdown of federal government is beginning to have repercussions on several fronts, including food stamps and domestic air travel. However, there are signs that the deadlock in Congress is about to be solved.

Mr Trump likes to exert maximum pressure in negotiations, in order to hopefully emerge with a big beautiful deal. However, this time it is possible that he simply has bitten off too much and needs to back off. China has shown it is a capable adversary, and its use of the rare earths weapon forced Mr Trump to lower the tariffs on China. The Supreme Court has still to decide on the legality of the tariffs, but during the initial hearing several of the judges appeared sceptical that the President’s use of emergency powers is legal.

Should the Supreme Court strike down some of the tariffs, it might actually help him in pushing down inflation. Nonetheless, it will be a political humiliation, and he will surely attempt to fight a number of legal battles, not least to protect some of the tariff revenue. The point is that we must be prepared for yet more political uncertainty from the US.

Stock market jitters
After an exceptional bull run since spring, a lot of voices can be heard questioning today’s stock market levels There are several reasons for this. Valuations are high, while fears about future cash flow compared to planned huge investments in data centres and energy supply have surfaced. After some super-optimistic deals boarding on lunacy (according to the FT), several analysts and CEOs have warned of bubble symptoms. On top of that, Fed’s quantitative tightening and the Government shutdown has hurt liquidity – reversing the liquidity boom driven by years of QT, low rates and increasing government deficits.

So what will happen now? Previous episodes of bull markets indicate that we often go through a period of smaller dips before a bigger setback sets in. Furthermore, many optimists are convinced that the Fed will bail them out if the market really will take a sharp fall. To time major setbacks is almost impossible. We both recall Alan Greenspan’s warnings of “irrational exuberance” after which the bull market raged on for another two years…

What makes this episode somewhat special is that the expected potential effects of the AI revolution vary wildly – from an unprecedented productivity boom to the extinction of humanity. The somewhat facetious graph from the economists of the Dallas Fed below illustrates both the optimistic and the pessimistic case – along with the historic surprisingly steady long-term growth of US income. The historic trend is productivity growth of around 2 per cent annually, throughout all technological revolutions during the past centuries. Since it will take time before we know which trajectory will materialise, our best guess is that markets will be nervous and volatile for some time yet.

Sweden
For several years, Sweden has been stuck with weak growth, mainly because of careful households who have opted to keep their savings high. In last month’s Market View, however, we claimed that this was about to end. Now, we can ascertain that this is indeed the case. GDP growth in Q3 exceeded expectations (according to preliminary estimates). The positive trend will continue into 2026; GDP may grow up to 3 percent, courtesy of strong disposable income growth, defence spending and tax cuts.

Of particular importance is the halving of the VAT on food next year. This will lower both inflation and the price level and will thus contribute to consumer confidence, which has been hampered by households’ fear of inflation returning. Consequently, private consumption should recover after several weak years.

Economic policy will help boost growth by strong fiscal stimulus. But even though inflation is projected to fall courtesy of lower VAT, the Riksbank will stay put. The VAT effect is temporary and ought not to affect monetary policy. The next move from the Riksbank will therefore not be another cut, but probably a hike – but not until end of 2026 – as GDP growth picks up and capacity utilisations improves. Consequently, the yield curve will steepen somewhat, as short-term rates stay where they are while longer bond yields will rise slightly due to increased government borrowing and stronger economic growth. The SEK will strengthen, especially against the EUR, due to a bleaker economic outlook in the core euro area countries.