Navigating 2025 With Flexibility
Pictet North America Advisors
Our mission is to advise private clients, families and institutions in the complex business of managing their wealth.
A tale of two realities
Last year highlighted the stark contrast between US and international markets. The S&P 500 index returned 23.3%, while the MSCI World ex US index returned just 5.3%, an 18% difference. Although the US market has been relatively strong for years, last year's relative performance was particularly notable. Furthermore, the US dollar appreciated significantly, with the US Dollar Index (DXY) rising 6.2% in 2024. For US investors, international diversification proved costly again, as domestic assets significantly outperformed international counterparts.
These positive financial results stand in sharp contrast to the ongoing conflicts in Ukraine and the Middle East, as well as the natural disasters that ravaged many parts of the world this year. We also saw notable corporate failures and bankruptcies, including Spirit Airlines, Tupperware, and The Body Shop
The political landscape in the United States has been a major driver of market dynamics. Donald J. Trump’s victory in the Presidential election, along with a Republican sweep, has raised market expectations for wide-ranging reforms. This decisive outcome has unleashed animal spirits, boosting the relative performance of US assets across equities, bonds, and the US Dollar.
However, the remarkable performance of these assets has led to demanding valuations that will require substantial earnings growth in the coming years to be justified. While valuations are not always reliable predictors of short-term performance, they do impact long-term investment returns. Additionally, the outstanding performance of the US equity market has been driven predominantly by a handful of exceptionally performing stocks. Since the current bull market began in mid-October 2022, the S&P 500 index has outperformed the MSCI EMU index by approximately 9% until year-end 2024. However, as illustrated in the chart below, one stock, namely Nvidia, explains the bulk of this outperformance, given that the Euro-Zone equity index has performed in line with the S&P 500 index without Nvidia.
Chart 1: US and Euro-Zone equity market returns in USD since mid-October 2022
领英推荐
Outlook for 2025
Looking ahead into 2025, we believe the US economy is in a healthy state, supported by cyclical and structural tailwinds and a Federal Reserve in easing mode. Although a slowdown is expected, our base case scenario is for growth, with a recession appearing unlikely this year. In contrast, Europe, and China face headwinds due to manufacturing and domestic economic challenges, compounded by political uncertainty in Europe. An "America First" policy could exacerbate this divergence, boosting US growth while trade tariffs, if implemented, impact Europe and China.
However, there is potential for positive surprises, such as a peace agreement in Ukraine or political stability in the Euro area, which could alter the outlook favourably. Conversely, negative outcomes like a trade war could adversely impact global growth.
Our core positioning is crucial for portfolio resilience and is designed to seize opportunities presented by our base case scenario. We favor US equities, particularly cash-rich companies, and are keen to gain exposure to the resurgence of American re-industrialization likely to get a boost from the incoming administration’s policies. In the bond market, we will prioritize the short end of the Treasury curve until there is more clarity on the fiscal trajectory and favor corporate credit across investment grade, high yield, and convertible bonds. We are also keen to tactically take advantage of the USD strength momentum.
Retaining flexibility will allow us to react to unexpected surprises, whether positive or negative. European equities or US Treasuries could offer opportunities depending on how the economic and political landscape evolves. Additionally, in the event of a monetary or fiscal error leading to a shock impacting risk assets, holding safe-haven assets such as gold could prove valuable, hence our exposure therein.
Last year has demonstrated the importance of strategic positioning and flexibility in navigating a complex and evolving market environment. We remain committed to leveraging our convictions around specific markets and segments to generate attractive returns. We are confident in our ability to adapt, ensuring your investments are well-positioned for both opportunities and challenges that lie ahead.