Will President Trump’s reshoring policies fuel an industrial acceleration?

The start of 2025 has presented a range of surprises for investors. The news that DeepSeek, a Chinese start‑up company, could deliver an artificial intelligence (AI) model comparable to ChatGPT more efficiently and at a fraction of the cost, has posed questions about the growth trajectory of many companies aligned to the AI boom. Meanwhile, the new U.S. administration has been busy implementing tariffs and other policy changes that are likely to have significant implications for the economy.

"…it is important to focus on areas where you can identify economic improvement."

President Donald Trump advocates for lower interest rates and taxes, fewer regulatory hurdles, and reshoring manufacturing activity back to the U.S. This has the potential to benefit the industrials sector, in particular domestic and cyclical areas of the market. However, choosing where to include cyclical risk in a portfolio is vital to success in this shifting and less predictable environment. Not all areas of the market will necessarily benefit, so it is important to focus on areas where you can identify economic improvement. We believe the supply/demand dynamics within the housing market make it an area to watch.

Focus on areas where you can see improvement in corporate earnings growth

History tells us that a reacceleration in the U.S. economy doesn’t lift all boats equally. Different areas of the market will generate better returns than others as industries peak or trough. Figure 1 illustrates the pace of growth and deceleration across a range of different industries. Earnings growth is currently declining in areas like autos, leisure/travel, and consumer spending companies (e.g., the retail sector). Technology company earnings growth has also peaked, after an extraordinarily strong period over the last couple of years. Earnings for the “Magnificent Seven” group of technology stocks hit maximum earnings growth back in the fourth quarter of 2023¹ and have since started to decline on a quarter‑on‑quarter basis (although they still outpace the majority of the market). By contrast, earnings in areas such as housing, general merchandise, and transportation are starting to inflect, or accelerate.

"…earnings in areas such as housing, general merchandise, and transportation are starting to inflect, or accelerate."

Potential implications of President Trump’s reshoring policy

President Trump is looking to tackle the sizable U.S. trade deficit, especially with countries where the deficit is most significant (China, Mexico, and Canada). At the end of 2024, the trade deficit stood at USD 918.4 billion, with imports having increased to an all‑time high of USD 364.9 billion.² Currently, the U.S. manufactures only 15% of global goods but consumes 29% (Figure 2). By contrast, China produces 32% of global goods and consumes 12%. The “reshoring” of manufacturing back to the U.S. is therefore a key priority for the Trump administration.

This would also help tackle the fall in manufacturing jobs in the U.S., which has been in decline for many years as the economy has shifted to a more services‑based one and production in some sectors was relocated overseas to take advantage of lower costs. Data show that manufacturing employment has fallen 34% from an all‑time high in 1979 (Figure 3). The new policy measures aim to address these long‑term trends, including placing imported goods tariffs on a range of countries and sectors, and are expected to have an impact on the U.S. industrials sector, especially in areas like construction, housing, and transportation. For us, these represent key areas to explore potential beneficiaries.

The housing sector offers up cyclical opportunities

Construction, and housing specifically, has the potential to reaccelerate faster than most. Prior to the global financial crisis, too many new homes were being constructed. Building has since been more muted, creating an undersupply. Currently, the U.S. construction sector is adding 1.3 million homes per year, while demand is estimated at around 1.7 million per year.³ Contrary to trends seen in many other nations (including China, Japan, and across Europe), the U.S. is also experiencing relatively strong population growth through immigration and a higher birth rate. A combination of growing demand and a decade of underbuilding is now underpinning the need for more construction.

Since 2000, the U.S. has built 33 million new homes, while household formation has been around 29 million.⁴ That might indicate that housing starts have matched population growth over the period. Yet it fails to account for demand for second homes and the impact of housing obsolescence. Additionally, the average age of housing stock has been ticking higher since the millennium, with the average house now 40 years old (Figure 4). This trend is sustainable if houses are well‑built and maintained, but the reality is housing obsolescence is adding to the demand for new homes. We estimate that obsolescence and second home demand have added to incremental demand by 400,000 homes per year. That means the total demand for homes since 2000 could be in fact around 37 million, a deficit of 3 million–4 million.

What factors might subdue demand? Mortgage rates average around 7% at present, much higher than they have been for many years. Home sales have consequently fallen from around 6 million–7 million through the last decade to between 3.5 million–4 million sales in 2024, with higher rates limiting the potential of large parts of the population to afford new mortgages and move. However, while this might constrain demand for new housing, it may work to benefit companies that specialize in areas like reconstruction, household goods, and furnishings as people choose to renovate and extend their existing homes rather than moving.

Potential for an industrial pickup—what are equity markets saying?

There appears an inflection point in industrial activity, which is coinciding with corporate optimism and potential deregulation after the election. The January United States ISM Manufacturing Purchasing Managers’ Index rose above 50 for the first time in nearly two years, and remained above 50 in February. At current levels, the impact of reshoring policies and potential construction growth are not being reflected in stock prices, however.

"At current levels, the impact of reshoring policies and potential construction growth are not being reflected in stock prices...."

Concerns remain around the possible impact from tariffs, inflation, and the ongoing uncertainty around policy initiatives. However, we believe the long‑term trends and potential growth rates in areas like transportation, freight, and housing mean that the risk/reward balance remains in our favor even without an acceleration in the economy.