The year kicked off on a positive note in the markets, as both the equity and fixed income markets performed well last year. What is the starting position for the markets heading into 2025, and what themes should investors follow this year?
2024 was a strong year in investment history on both the equity and fixed income markets. The US stock market was particularly successful once again, rising by more than 30 percent during the year, taking into account the currency level. It was also not a bad year for Europe or the emerging markets, although these markets were significantly weaker than the US.
The US stock market has seen many strong years in the 2020s. In 2021, 2023, and 2024, American stocks returned over 20 percent. Last year’s returns were also driven by the big winners of the current decade, namely technology companies.
But what will emerge as the three main themes of 2025 on the markets?
The strength of economic growth in the USA came as a surprise last year too, and relatively strong growth is expected again this year. Global growth appears to still rest on the shoulders of the USA, while Europe and China are in need of some kind of stimulus.
Right now, the likelihood of a so-called soft landing has increased. The inflation outlook eased already last year, but especially in the USA, the final stage of the inflation battle still lies ahead.
The environment for a decline in inflation is currently challenging in the USA, as strong economic growth is likely to fuel inflation. In addition, president-elect Donald Trump, who will be inaugurated in January, is expected to impose new import tariffs and immigration-related reforms, which could also contribute to rising inflation.
As we head into the new year, the list of potential threats looks rather familiar from a market perspective.
The already mentioned inflation is at the top of the list. After slowing down last year, inflation in the USA appears to have stabilised at around 3 per cent, above the Fed’s 2 per cent target. So far, however, there have been few signs of an increase in prices.
Another potential risk is the US labour market. The most pressing concerns in the labour market have decreased, but longer-term changes still point to a cooling labour market. If it were to slow down, the labour market would pose challenges, particularly in lower income brackets. For example, immigration to the USA has decreased in recent years, which will also reduce the size of the labour force in the future. This could potentially cause challenges for the labour market.
The third risk to arise yet again is geopolitics. Geopolitical flare-ups coloured the global markets several times last year but ultimately had relatively little impact on market performance. This year too, geopolitical turmoil is unlikely to subside, and escalating risks could upset the markets.
For the current year, the equity market’s earnings expectations appear more even than in recent years, when US tech companies considerably outperformed other stocks. Market expectations for tech companies are still high, but no longer significantly higher than for other companies.
Last summer, the equity market saw the first signs of rotation, with investors selling their holdings in tech companies and buying companies in themes and industries that had recently performed less well. This year, there is also plenty of room for rotation towards themes and areas that have been neglected in recent years. The very strong sentiment on the markets could lead to rapid corrections, opening up opportunities for opportunistic investors.
Relatively high return expectations on the bond market support a strong year ahead, especially on the corporate bond market. A decline in interest rates would bring good momentum. Credit spreads are on the low side, but in a positive economic scenario, there is still room for tightening, particularly in Europe.
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