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2025: what lies ahead

Carmelo

24 Dec 2024 — 13 min read

As we dive into 2025, the investment world is buzzing with both challenges and opportunities. Economic shifts, tech breakthroughs, and global tensions are shaping a year that promises to keep us on our toes. The forecast? Moderate growth, but don’t expect it to be smooth sailing. The U.S. is set to lead the pack, Europe’s facing some tough structural battles, and emerging markets are showing glimmers of strength.

Here’s the twist: central banks might hit the brakes on their tightening policies, creating a potential boost for riskier investments. Add in the explosive rise of artificial intelligence, the push for sustainable infrastructure, and ongoing geopolitical drama, and you’ve got a recipe for a dynamic investment environment.

This year, smart investors will need to rethink their strategies, jump on thematic trends, and stay sharp with policy changes. Agility and foresight are the name of the game in 2025. Let’s explore the big ideas and insights that could help you stay ahead in what’s shaping up to be a transformative year in the markets. Ready to make 2025 your year? Let’s go! 🚀

HOLD ON! Before we take our crystal ball for 2025, I though it might be useful to check the article I wrote around the same time last year on 2024 predictions and sense-check how far we actually landed.

2024 predictions revisited: what they got right and wrong

Around one year ago I read almost 500 pages of reports from major banks and investment firms. The idea was to summarize the predictions and suggestions from these big companies to craft a juicy list of recommendations for an ideal portfolio. Did they deliver? Let's find out.

Inflation and Monetary Policy

Prediction: inflation would continue its disinflation trend, falling within the 2% to 2.5% range by the end of 2024, approaching central bank targets.
Outcome: ✅. If we exclude extreme cases such as Argentina, Turkey or Iran where rates have peaked to as high as 166%, this prediction held true. Major economies like USA, Euro Area, UK and Japan have all reached an average of 2.5% by December 2024, aligning with central bank targets.

Economic Growth and GDP

Prediction: the global economy would remain resilient despite restrictive monetary policies, with below-trend growth improving in the second half of the year.
Outcome: ✅ spot on. The global economy demonstrated resilience, with GDP growth picking up in the latter half of 2024, matching the forecasted trend. A couple examples include EU GDP 0.3% (predicted) vs 1% (delivered) or US 0.7%(predicted) vs 2.6% (delivered).

Geopolitical

Prediction: ongoing conflicts such as the Israel-Hamas War, the Russia-Ukraine War, and US-China trade tensions present substantial risks to financial markets.
Outcome: ❌wrong. Most indexes have demonstrated notable performance, with many growing double digits. This despite the even more uncertain geopolitical landscape due to things like the Israel-Hamas Conflict, Syria's political shift or the squeaky situation for EU primer ministers.

Stocks

Prediction:
- S&P 500 to a modest 4700 and 6% return including dividends
- Dominance of the "Magnificent 7" mega-cap tech stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla)
Outcome: ❌ wrong. The S&P 500 destroyed the expectations. At the time of writing it has a total return of almost 29% YoY. The Magnificent 7 have been the rock stars of the S&P500, growing staggering 65% YoY combined.

Bonds

Prediction: interest rates to fall and price increase
Outcome: 🟠 mixed
Government bonds like U.S. Treasuries, UK Gilts and Eurozone bonds fluctuated during the year with some yields closing 2024 higher than when they started
Corporate bonds remained overall stable

Yield in various bond markets vs last year's peak and 20-year avg | Source: Barclays

Commodities

Prediction: Outlook optimistic | Gold stable | Gains expected to slow in 2024
Outcome: 🟠 mixed.
- Agricolture: cocoa +185% , coffee:+80-100% YoY
- Oil: stable
- Metals: gold: +3%, copper +5% YoY, aluminum +7%

So overall the predictions were not totally off but not totally right either. Imagine if you were to stay off the S&P500 and lose on that +28%..and the results can swing widely the more precise you go. That's why it's important to take then for what they are: an indication - that can be wrong - not an absolute truth.

Now let's sit on out comfortable velvet armchair, and let's look at our crystal ball, powered by 500 pages of so of outlooks from major banks (full list and links at the bottom of this article).

Economic Growth: steady steps into resilience

As we head into 2025, the global economy seems set for moderate growth, with most forecasts pegging it around 3%. While some experts see a slight slowdown compared to 2024, others anticipate a modest rebound. The outlook is anything but straightforward, with regional variations and potential challenges shaping the narrative.

Global real GDP growth, % | Source: Allianz

United States: leading the charge
The U.S. economy is poised to remain a major engine of global growth, with projections ranging from 1.7% to 2.7%. Resilient consumer spending, loose fiscal policies, and possible manufacturing boosts are keeping spirits high. However, there’s a catch: trade tariffs and tighter immigration policies later in the year could act as speed bumps.

Financial heavyweights like Vanguard, JP Morgan, and Deutsche Bank are painting a picture of a strong U.S. economy, bolstered by easing inflation, robust consumer activity, and tech advancements. Goldman Sachs takes a particularly optimistic view, predicting 2.5% growth, well above the consensus of 1.9%. They credit improved labor productivity and business-friendly policies like tax cuts and lighter regulations.

By the end of 2025, tariffs on imports, particularly from China, might push up costs, stirring inflation concerns and influencing employment dynamics into 2026.

Europe: a slow but steady climb
Europe’s growth story looks more tempered, with predictions ranging between 0.7% and 1.5%. Investment and consumption are expected to pull their weight, helped along by looser monetary policies and the perks of nearshoring. Yet, challenges abound—Germany is grappling with a lingering recession, fiscal constraints, and the region’s aging population.

Europe economic forecast | Source: Barclays

Goldman Sachs foresees euro area GDP growth at just 0.8%, undercutting the consensus of 1.2%. Fresh tariffs and trade uncertainties are dampening the manufacturing and export sectors, particularly in Europe’s economic heartlands.

China and Emerging Markets: mixed fortunes
China’s economic prospects are shrouded in uncertainty, with growth forecasts hovering between 4% and 5%. While recent stimulus measures could offer some relief, issues like the real estate crisis, U.S.-China trade tensions, and local government debt are casting long shadows. China’s gradual pivot towards domestic consumption might also mean less of a lift for global growth in the near term.

Projected impact of each policy stimulus on GDP growth in 2025 | Source: Vanguard

Emerging markets outside of China, on the other hand, are stealing the spotlight. Growth projections range from 3.6% to 3.9%, driven by strong exports, improving domestic conditions, and a potential shift in investment flows away from China. Still, vulnerabilities like geopolitical risks could trip up individual markets.

Capital Investment: driving the transformation forward

Capital investment is stealing the spotlight, with AI, green energy, and infrastructure development leading the charge. The scale of these investments is being compared to nothing less than the Industrial Revolution—transformative and monumental. BlackRock calls these shifts “mega forces,” shaping the economy of tomorrow, with AI and decarbonization taking center stage.

The decarbonization journey strains supply | Source: HSBC

Artificial Intelligence: the opportunity of the decade
AI is making waves across industries, from healthcare innovation to automation and robotics. UBS, BNP Paribas, and JP Morgan are hailing AI as the investment opportunity of the decade, drawing massive capital from both public and private sectors.

The map below from Barclays shows the number of AI systems identified by country, where AI models are defined as “large-scale” when their training compute is confirmed to exceed 10²³ floating-point operations.

Deloitte is especially bullish on generative AI, citing its potential to revolutionize operational efficiency and sales distribution in investment management. On the flip side, Barclays urges caution, warning of overblown expectations and highlighting that only companies delivering tangible results will emerge as winners.

Morgan Stanley and iShares highlight AI’s role as a hotbed for innovation, spurring investments in everything from advanced chips to cutting-edge applications. Whether it’s turbocharging productivity or creating entirely new industries, AI is a cornerstone of future capital flows.

Sustainable Infrastructure: building for tomorrow
Green energy and sustainable infrastructure are more than buzzwords—they’re the foundation of long-term growth. Investments are flowing into power grid modernization and decarbonization technologies, essential for tackling climate challenges.

US power demand is surging (MWh) | Source: BNP

HSBC stresses the importance of securing critical materials for decarbonization, while Allianz underscores how fiscal initiatives are driving both public and private projects to keep economies competitive. Goldman Sachs highlights bipartisan infrastructure legislation as a significant boost, paving the way for investments in U.S. manufacturing, housing, and infrastructure. With the private sector stepping in, the landscape for sustainable development looks more promising than ever.

Monetary policy: shifting gears from tightening to easing

The stage is set for a global monetary easing cycle in 2025, as central banks pivot from battling inflation to sparking economic growth. This shift could spell good news for risk assets, creating a more favorable environment for investors. The trend is expected to kick off in earnest during the first half of the year, but how far and how fast central banks will ease depends on a variety of regional and economic factors.

Most policy rates will likely settle above inflation | Source: Vanguard

United States: a balancing act
All eyes are on the Federal Reserve, with markets anticipating rate cuts stretching into the first quarter of 2026, potentially bringing the policy rate near 3.5%. While many expect the Fed to ease cautiously in 2025, inflation concerns will likely keep the central bank on its toes. The Fed’s approach will hinge on key data points, like labor market conditions and inflation trends.

Post-election economic growth could play a wild card here—if it picks up, the Fed might dial back on aggressive rate cuts. For now, expect the Fed to play it safe, balancing growth stimulation with inflation vigilance.

Europe: cutting deeper
Across the Atlantic, the European Central Bank is expected to cut rates more aggressively than the Fed, with policy rates likely dipping below 2% by the end of 2025. This reflects a weaker economic outlook and subdued inflation expectations. However, there’s a catch—if inflation proves stickier than expected, the ECB may find its room to maneuver shrinking.

Eurozone real GDP, index 100=2019 Q4 | Source: Allianz

Japan: marching to its own beat
In a notable departure from the easing trends elsewhere, Japan is on a different trajectory. Economists expect the Bank of Japan to raise rates twice in 2025, as it works to normalize monetary policy amid rising inflation. This policy divergence highlights Japan’s unique position among developed economies.

Emerging Markets: room to breathe
Emerging markets, especially those outside China, stand to gain from a global easing environment. A softer US dollar, thanks to the Fed’s expected 50 basis points cut, could provide a tailwind for EM equities. In emerging Asia, monetary easing is likely to expand as external pressures ease and inflation continues to retreat, paving the way for broader policy support.

Geopolitical and policy risks: navigating uncertainty in 2025

As we step into 2025, geopolitical and policy uncertainties are set to play a pivotal role in shaping markets. From the U.S. presidential election to rising protectionism and evolving trade dynamics, the global landscape presents both risks and opportunities for investors. Insights from Deutsche Bank, Fidelity, and HSBC highlight these key areas of concern.

The U.S. Factor: policy shifts in the spotlight
The newly elected U.S. administration is a major source of uncertainty, with potential shifts in taxes, tariffs, deregulation, foreign policy, and Federal Reserve actions. Markets are bracing for volatility as the administration’s policies unfold, with investors watching closely for their impact on growth and stability. The uncertainty surrounding these changes could lead to heightened risk aversion, especially in the short term.

Trade policy: tariffs and global supply chains
Trade relations remain a hot topic, with targeted tariffs on specific goods or trading partners likely to disrupt supply chains. While blanket tariffs are seen as improbable, even selective measures could weigh on international trade and corporate earnings, making this an area to monitor closely.

Amount of time "tariffs" are mentioned during company earning calls | Source: Barclays

Fiscal policy: a double-edged sword
Governments are expected to lean into fiscal activism to stimulate growth and address challenges. While this could provide a boost, it also risks driving inflation higher and widening budget deficits, potentially pushing up government bond yields.

Global hotspots: risks beyond the U.S.
Several geopolitical flashpoints could impact global markets:

Ukraine and the Middle East: ongoing conflicts could escalate, creating ripples across energy and financial markets.
European political uncertainty: elections and the rise of anti-establishment parties could lead to instability and policy shifts.
South China Sea and Taiwan tensions: any escalation here could disrupt global trade and supply chains.
Emerging Market struggles: countries like Romania and Turkey face potential balance-of-payment crises, with possible spillover effects on other emerging markets.

The debt dilemma
With global public debt projected to exceed $100 trillion in 2024, concerns over fiscal sustainability are rising. The possibility of sovereign debt crises looms large, particularly for economies already under pressure.

Government deficit-related indicators rising | Source: Deutsche Bank AG

Portfolio strategy 2025: striking a balance

In 2025, investors must balance caution with growth. Diversification, thematic investing, and adaptability will be crucial to navigating the opportunities and challenges ahead. Here’s a streamlined strategy based on expert insights:

Core Strategy

Balance stocks and bonds: equities offer potential, but bonds remain key for stability.
Active management: market shifts demand hands-on portfolio oversight.
Diversify: spread investments across regions, sectors, and asset classes.
ESG focus: integrating environmental, social, and governance factors is increasingly essential.

Equities: growth with precision

Prioritize quality: stick with resilient companies with strong fundamentals.
Focus on the US and Japan: both markets hold promise for growth.
Target select Emerging Markets: countries like India and Saudi Arabia are at the forefront of innovation.
Explore tech and recovery sectors: AI, Industrials, and Energy sectors are ripe for opportunity.

Equity market forecasts (local currency) | Source: Allianz

Fixed Income: stability first

Short-term credit: offers better compensation for rate risk.
Extend Maturities Selectively: reallocate from ultra-short instruments as conditions allow.
Focus on Quality: investment-grade bonds and mortgage-backed securities stand out.

10y government bond yield forecast, % | Source: Allianz

Alternatives and Cash

Alternatives for diversification: Private equity, infrastructure, and hedge funds help hedge against risks and enhance returns.
Reduce cash exposure: As rates fall, deploy cash into higher-yield assets.

Thematic opportunities 2025: AI and income-generating assets

The big ideas shaping 2025’s investment strategies are clear: artificial intelligence, sustainability, and decarbonization. These megatrends tap into fundamental shifts in the global economy, promising avenues for innovation and long-term growth. Here’s how investors can position themselves to ride these transformative waves:

Embrace income-generating assets in a falling rate world
With central banks shifting gears toward monetary easing and interest rates expected to decline, income-generating assets are poised to shine. Here’s the playbook:

Go long on fixed income: Extend maturities in bond portfolios, moving away from ultra-short durations to longer-term options for enhanced yields.
Pick quality bonds: Investment-grade corporate bonds, mortgage-backed securities, and asset-backed securities stand out as attractive bets in a lower-rate, low-inflation environment.
Chase dividend strategies: High-dividend equities or strategies like dividend growth and option premium strategies can outpace cash yields. The MSCI AC World High Dividend Yield Index, for instance, is projected to yield 3.5% to 4% in 2025.

Capitalize on AI and its investment boom
Artificial intelligence isn’t just a buzzword—it’s reshaping industries and driving massive capital investments. To make the most of this trend:

Invest in the AI ecosystem: look at companies along the AI value chain—chip designers, software developers, foundries, and data center providers. Opportunities abound in both established mega-cap firms and up-and-coming private innovators.
Target AI-Driven sectors: sectors like communication services, industrials, and energy are primed for growth. Dive deeper into sub-sectors like industrial machinery, electrical equipment, and midstream energy for even more potential.
Think infrastructure: AI’s growth requires robust infrastructure. Consider investments in utilities, power generation, and data center development as these sectors build the backbone for AI advancements.

Conclusion: navigating a transformative year

As 2025 approaches, investors face a dynamic and transformative environment, shaped by geopolitical uncertainties, evolving monetary policies, and groundbreaking technological advancements. The consensus across leading institutions underscores the importance of balancing resilience with growth in portfolios. Key takeaways include:

Adaptability: the global landscape requires investors to remain agile and ready to adjust strategies in response to shifting macroeconomic conditions and policy developments.
Diversification: a diversified portfolio across regions, sectors, and asset classes will be essential to mitigate risks and capture opportunities.
Focus on Megatrends: themes like AI, sustainability, and decarbonization provide a long-term roadmap for potential growth and innovation.

By staying informed, prioritizing quality investments, and leveraging professional advice, investors can navigate the challenges and opportunities of 2025, positioning themselves for success in an era of profound change.

Themes such as AI, sustainability, and decarbonization are set to define investment strategies in 2025. These mega trends align with structural shifts in the global economy and offer avenues for long-term growth.

That's all folks! Let's see how many of these predictions will materialize in 2025.

Happy holidays and happy investing!