Key themes for 2025

Chhad Aul, CFA, Chief Investment Officer and Head of Multi-Asset Solutions, SLGI Asset Management Inc.

What’s ahead this year for the markets? This article summarizes what Chhad believes may be key market themes for 2025.

1) America 1st?

• U.S. equity markets have outperformed the rest of the world since 2023. Powering this ascent has been U.S. large-cap technology stocks and the artificial intelligence (AI) theme as well as the relative-strength of the U.S. economy.
• More recently, the return of Donald Trump as the next U.S. President and his “America First” policies of tax cuts, regulatory easing and trade protectionism have led markets to double down on U.S. assets including the U.S. dollar (US$).
• Valuations may look high relative to historical levels, but it’s not a necessarily a fair comparison due to massive sectoral differences in the composition of the S&P 500 Index from even just five years ago.
• So, what are markets pricing in now? President-elect Trump’s threats about tariffs may not be as severe as initially feared. However, we do expect tariffs to drive volatility and performance across many asset classes in 2025. (see #4 below)?

2) The Federal Reserve charts a path to its “terminal” destination

• From 2022 to mid-2023, global policy interest rates headed in one direction – up.?
• Following a prolonged period of higher rates, key central banks started on a clear rate-cutting trajectory in mid 2024. However, macro policy is now becoming a potential source of disruption.
• While rate cuts are likely to continue in early 2025, the interesting question for markets is at what rate will the Fed cut and where is the landing point at (so called “terminal rate”).
• Discovering the terminal rate is likely to be an experimental process for the Fed and other central banks, as they test how incoming inflation and growth data responds to declining rates.?This process is likely to be a key driver of underlying sentiment in both equity and fixed income markets.

3) 3 potential paths for the global economy

• Our base case, or first potential path is a soft landing for the global economy, where inflation normalizes without tipping into a recession. The other two paths are the threat of a hard landing (recession) or a no-landing (re-accelerating inflation, notably in the U.S.) likely to test markets in 2025.
• Potential policies of the new U.S. administration, such as trade tariffs and tax cuts, may exacerbate regional divergences. Many of these policies may spur inflation and put the U.S. at a risk of a “no-landing,” while increasing the risk of a hard-landing for the rest of the world.

4) Beyond the Magnificent 7: earnings set to improve with attractive valuations

• Earnings growth broadened out in 2024 – After a period of concentrated earnings growth in the S&P 500 Index (driven by Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla, referred to as “Magnificent 7”), earnings growth has broadened to include more companies in the S&P 500 and we expect this trend to continue globally.
• The S&P TSX Composite Index – It has outperformed many of its peers (as of early December) because earnings bottomed out early 2024 and will achieve positive earnings growth in 2024.?
• Earnings growth for developed market equities – Excluding U.S. (Europe, Australasia, and the Far East) and emerging markets equities (EM), earnings growth is still negative with weak earnings. However positive earnings growth is expected in 2025. ?
• Better risk-reward potential for investors – This is due to improving earnings growth and attractive valuations for the S&P 500 outside of the Magnificent 7 and the rest of the world. ?

5) Be active for an edge in 2025

• Increasing breadth of earnings growth and valuations re-rating higher globally is a great environment for active management.
• Active management can also exploit asset mispricing that arises from diverging global central bank policies and a still uneven economic recovery.
• Geopolitical shifts and supply chain realignments also mean different sectors and regions may benefit. In the past, asset class returns broadly benefited from global trends. Going forward, no single portfolio is likely to work across all scenarios over time; being tactical will be much more important.
• Private assets are becoming a growing share of financial markets. Private markets are playing critical roles in AI and low carbon transformations.? Expanding into private markets will be important to capture the broadening opportunity set. ?
• Finally, any remaining macro uncertainties such as trade tariffs may require active risk management.

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