Geopolitical Instability, Inflation and What's Gonna Happen in 2025?

What happened this week?

Throughout last year, I maintained all along that the S&P 500 would attain 5950 sometime in 2024. It did even better, touching 6090 on December 6, registering a year-to-date raw gain of 27.7%. I didn't think that the election of Donald Trump as President of the U.S., albeit bullish, would have catapulted the market to 9 all-time highs since Election Day to reach a record high of 6090.

U.S. equities are trading at elevated forward P/E ratios, highlighting potential overvaluation, while international equities offer a valuation discount.

It was a banner year for U.S. stocks in 2024, although the fuller story can be told under the surface of the capitalization-weighted indexes like the S&P 500. As shown below, the S&P 500 was up more than 23% in 2024, bested by both the Nasdaq (up nearly 29%) and the Nasdaq 100 (up nearly 25%). Those gains were boosted by the Magnificent 7 group of stocks (up nearly 67%) along with a handful of other mega-cap stocks (more on that below). That performance left the S&P 500 Equal Weight and the Russell 2000 index of smaller cap stocks in the dust—albeit with respectable gains of 10-11%.

Michael Cembalest’s 49-page 2025 outlook, The Alchemists,1 reads like an economic autopsy on policy experimentation. With a flair for dissecting the complex, Cembalest, Chairman of Market and Investment Strategy at J.P. Morgan Asset Management, sets a tone that’s both provocative and data-driven. This year's edition is unapologetically bold, presenting a wide-ranging exploration of deregulation, tariffs, energy policy, AI, and geopolitical traps. Here’s an elaborate take on the seven themes that define his report.

In equity and bond markets increasingly punctuated by volatility and unexpected economic events, the traditional investment framework is facing growing scrutiny. Picton Mahoney Asset Management has delivered a trio of timely insights to address this challenge, covering portfolio de-risking, diversification, and the strategic inclusion of alternative investments. These insights form part of its comprehensive 6-part, 3-hour CE accredited course to navigating today’s complex financial landscape while maximizing opportunities for alpha generation.

2024 was a year of geopolitical instability, and 2025 is already starting off with a bang as Canadian Prime Minister Justin Trudeau announced his resignation in the first week of the new year. 2024 was also a year of better-than-expected stock market performance, and I expect 2025 to be another positive year with performance broadening from what we saw last year. Where else might the trends from 2024 extend into 2025? Follow along to find out.

Economically, the closest thing to a tough year for the U.S. recently was 2022. While the market has largely moved past that year’s recession debate, it’s worth noting that the traditional definition that persisted for all our careers—two consecutive quarters of negative GDP growth—did occur in the first half of 2022.

Exactly 25 years ago today, I published the first memo that brought a response from readers (after having written for almost ten years without receiving any). The memo was called bubble.com, and the subject was the irrational behavior I thought was taking place with respect to tech, internet, and e-commerce stocks. The memo had two things going for it: it was right, and it was right fast. One of the first great investment adages I learned in the early 1970s is that “being too far ahead of your time is indistinguishable from being wrong.” In this case, however, I wasn’t too far ahead.

Top Performing

• uniQure N.V. (QURE): This biotechnology company experienced a significant increase of approximately ▲108% over the week, attributed to positive developments in their gene therapy treatments.
• Reviva Pharmaceuticals Holdings Inc. (RVPH): Specializing in therapies for central nervous system disorders, Reviva Pharmaceuticals saw its stock rise by about ▲66% this week, likely due to favorable clinical trial results.
• Procaps Group S.A. (PROC): A pharmaceutical company focusing on advanced drug delivery technologies, Procaps Group's stock increased by approximately ▲61% over the week, possibly due to strong quarterly earnings.
• Rigetti Computing Inc. (RGTI): A quantum computing firm, Rigetti Computing's stock rose by approximately ▲44% over the week, likely due to advancements in their technology and strategic partnerships.
• SoundHound AI, Inc. (SOUN): An AI company specializing in voice recognition and natural language processing, SoundHound AI's stock surged by about ▲36% this week, potentially driven by new product launches or partnerships.

Bottom Performing

• Check-Cap Ltd. (CHEK): This medical diagnostics company experienced a significant decline of approximately ▼48.9% over the week, possibly due to unfavorable clinical trial results or financial challenges.
• NFT Limited (NFTL): Specializing in non-fungible tokens, NFT Limited's stock fell by about ▼47.9% this week, potentially influenced by market volatility in the digital asset space.
• Intchains Group Limited (ICG): A technology firm, Intchains Group's stock decreased by approximately ▼46.1% over the week, which may be related to sector-specific downturns or company-specific issues.
• Global Clean Energy Holdings Inc. (GCEH): This renewable energy company's stock dropped by about ▼40.2% this week, possibly due to project delays or changes in government policies affecting the clean energy sector.
• The Glimpse Group Inc. (VRAR): Involved in virtual and augmented reality, The Glimpse Group's stock declined by approximately ▼36.6% over the week, potentially due to slower-than-expected adoption of its technologies.

This week in the Canadian investment industry, several notable developments have emerged:

Market Movements

• TSX Futures Steady Ahead of Employment Data: Futures tracking Canada's main stock index remained steady as investors anticipated crucial employment data from both the U.S. and Canada, which could influence future interest rate decisions. The S&P/TSX Composite Index had previously closed lower, impacted by rising U.S. borrowing costs.
• Canadian Dollar Weakness: The Canadian dollar continued to show weakness against the U.S. dollar, influenced by factors such as potential U.S. tariffs on Canadian imports and political uncertainty following Prime Minister Justin Trudeau's announced resignation.

Regulatory and Policy Updates

• Potential U.S. Tariffs on Canadian Imports: Reports indicate that U.S. President-elect Donald Trump may declare a national economic emergency to introduce new tariffs, raising concerns about a potential 25% tariff on Canadian imports. This development has created apprehension among Canadian investors and policymakers.
• CIRO Proposes Short Selling Reforms: The Canadian Investment Regulatory Organization (CIRO) has proposed reforms aimed at addressing concerns about short selling practices in Canada. The proposed changes include mandatory "close-out" requirements to guard against failed trades.

Corporate Developments

• Focus Financial Partners Expands in Canada: Focus Financial Partners has designated Cardinal Point Capital Management in Toronto as its first Canadian hub. This move is part of Focus's strategy to centralize operations, with larger firms acting as hubs to acquire smaller ones, signaling a consolidation trend in the wealth management sector.
• Goodman Group's U.S. Expansion: The Goodman Group has entered the U.S. industrial real estate market, involving the Norwegian sovereign wealth fund, following the exit of the Canadian Pension Plan Investment Board from their joint venture. This move highlights the dynamic nature of international investments involving Canadian entities.

Industry Trends

• Increased M&A Activity Anticipated: Analysts predict a significant increase in Canadian mergers and acquisitions (M&A) activity in 2025. Factors contributing to this expectation include a more merger-friendly regulatory environment in the U.S., stabilized interest rates, and a surplus of institutional capital.
• Pension Fund Performance: Canadian defined benefit pension funds ended 2024 on a high note, with funding and solvency ratios reaching levels not seen since the dot-com era. This positive performance reflects strong investment returns and favorable market conditions.

These developments underscore the dynamic nature of Canada's investment landscape, with significant market movements, regulatory considerations, corporate strategies, and industry trends shaping the future of the sector.

Private Equity Challenges

• BlackRock's Investment Loss: BlackRock has incurred a substantial loss exceeding $600 million on its equity investment in Alacrity, an insurance outsourcing company. Alacrity faced financial difficulties due to high debt levels and declining business, leading to a takeover by private credit funds. This situation underscores broader challenges within the private credit industry, particularly for private equity-backed companies burdened by elevated interest rates and significant debt.

Wealth Management Trends

• Consolidation in UK Wealth Management: The UK wealth management sector continues to experience significant consolidation, driven by cost pressures and the pursuit of scale. In 2024, there were 67 mergers and acquisitions (M&A) transactions worth $10.5 billion, reflecting ongoing fragmentation compared to more mature markets like the U.S. Industry leaders anticipate continued M&A activity in 2025, especially among smaller firms, despite geopolitical uncertainties, including the implications of a second Trump presidency and global conflicts.

Hedge Fund Activism

• Saba Capital's Move on Herald Investment Trust: U.S. hedge fund Saba Capital, holding a 20% stake in the ￡1.2 billion Herald Investment Trust, has proposed offering shareholders a cash exit at a 1% discount to the trust's net asset value, contingent on gaining control. Saba has called for a meeting to replace current directors and possibly dismiss the fund manager. Herald has countered, arguing that Saba's proposal could lead to forced sales of illiquid assets, disadvantaging shareholders, and has urged investors to vote against the proposals.

IPO Market Outlook

• Anticipated Revival in IPO Activity: Investment bankers are optimistic about a resurgence in initial public offering (IPO) activity in 2025, supported by a robust pipeline of high-profile companies planning to go public. Notable firms expected to list in the first half include Venture Global, Medline, and SailPoint. Improved economic confidence is driving this uptick, which is crucial for private equity-backed companies that have faced challenges in exiting investments due to high interest rates and market volatility over the past two years.

Market Volatility

• Significant Stock Market Declines: Major stock indices experienced notable declines, with the Dow Jones Industrial Average dropping nearly 700 points (1.6%), alongside similar decreases in the S&P 500 and Nasdaq. This downturn was influenced by stronger-than-expected job growth, intensifying investor concerns about potential Federal Reserve hesitancy in cutting interest rates. The 10-year Treasury yield also rose to 4.76%. Despite the broader market downturn, airline stocks such as Delta Air Lines and United Airlines saw gains, with Delta reaching an all-time high.

Industry Personnel Movements

• Promotions and Job Cuts: Morgan Stanley promoted 173 new managing directors, marking a 12% increase over the previous year. Jefferies also elevated five investment bankers to managing director roles in Europe and the Middle East. Conversely, BlackRock announced plans to cut approximately 1% of its workforce, affecting about 200 employees, as the firm shifts focus to private markets following major acquisitions.

Geopolitical and Technological Influences

• Key Trends Impacting Finance in 2025: The financial services industry is expected to be shaped by geopolitical instability, technological integration, economic reforms, and evolving client demands. Advanced AI adoption, geopolitical impacts on regulation, and a potential return to economic protectionism are among the key trends. Strategic partnerships and consolidations are anticipated to grow, reshaping asset management industries, with an emphasis on personalized financial advice and bridging investment gaps.

#ThrowbackThursday: Cole Smead unpacks the fascinating Jevons Paradox—a concept born in 19th-century Britain when coal was king. Policymakers feared coal scarcity as its use skyrocketed, but here's the twist: technological advancements led to more coal consumption, not less.

?? Fast forward to today, the lesson still holds. Despite incredible innovations, we’ve never reduced overall energy consumption in modern history. Why? Increased efficiency often fuels greater demand.

? More tech doesn’t mean less energy use—it means we need smarter ways to think about sustainability and resource management. Are we destined to consume more as we innovate, or can we break the cycle?

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