Jan, 2025
As we move into 2025, global investors are navigating a complex macroeconomic landscape shaped by divergent growth trajectories, monetary policies, and geopolitical dynamics. Equity markets are expected to offer selective opportunities, while fixed income instruments could see varied performance as interest rate cycles diverge globally. This year’s outlook hinges on three core themes: Navigating through the Trump Tariff policies, evolving trends of AI secularization, stabilizing growth in key regions, and the balancing act of central banks between supporting economies and maintaining price stability.
United States
The U.S. economy in 2025 is expected to grow moderately, with GDP growth projections from institutions such as the Congressional Budget Office (CBO), indicating growth around 1.9% from 2.3%. This slowdown, compared to 2024, stems from tighter monetary policy and reduced fiscal stimulus. The Federal Reserve has made significant progress in its fight against inflation, with expectations of inflation stabilizing near the 2% target by mid-year, as suggested by Federal Open Market Committee (FOMC) communications. However, the risks remain should monetary policy shift too quickly or too slowly. Fed has been very cautious about cutting rates too quickly since the inflation continues to drop however at a slowing pace coupled with a hot labor market situation. The opinion on higher for longer is playing out and we believe that the Fed could deliver another three rate cuts, 25 bps each during the calendar year 2025.
The anticipation of lower rates and moderating inflation poses favorable bias towards cyclical sectors. However, we remain wary of the tech valuation of US lister universe and expect a moderation going further into 2025.
Sector wise, the U.S. economy presents opportunities across healthcare, consumer discretionary, financials and information technology. The technology sector is supported by advancements in artificial intelligence (AI) and the ongoing digital transformation of industries. AI-related capital expenditures from corporations are projected to rise reaching around $300bn for 2025 and surpassing $800bn by 2027, this also exceeds US total military budget, fueling demand for data centers and semiconductor advancements. Major firms such as NVIDIA, Microsoft, and Alphabet continue to benefit from the adoption of AI, but regulatory scrutiny and data privacy could impact long-term growth. However, AI is an extremely fast paced evolving sector and new innovations can quickly change the landscape of investment of the sector. Within AI we particularly like enablers such as cooling devices, data centers and infrastructure, power generation companies and cloud companies.
Healthcare, particularly pharmaceutical innovation, remains a defensive play with long-term growth potential. We subsectors such as medical devices, laboratories and longevity-based drug discovery.
Analysts suggest that earnings growth for S&P 500 companies might be modest, but elevated valuations could pose risks if macroeconomic conditions worsen.
U.S. equity markets are likely to remain resilient but uneven. SPX is currently trading at P/E of 27.32x, we expect a modest correction in the pricing by end of 2025 leading to a P/E of 25x with SPX target of 6500 at EPS estimate of 600.
On the fixed income front, the U.S. Treasury market presents opportunities as the yield curve is expected to normalize. Current projections from Goldman Sachs suggest the benchmark 10-year yield could decline closer to 4.3% by the end of 2025 as markets price in slower economic growth. High-quality corporate bonds could offer attractive risk-adjusted returns, given improving credit spreads.
Eurozone
The Eurozone’s economic outlook for 2025 remains subdued, with GDP growth forecast at 1.3%, as indicated by the European Commission’s latest economic outlook. Weak domestic demand and persistent geopolitical uncertainties are key constraints. The European Central Bank (ECB) is expected to maintain a cautious approach to monetary policy, with rates likely staying higher for longer to anchor inflation expectations, which the ECB projects to hover around 2.1% for the year.
Geographically, export-oriented economies like Germany and France could benefit from recovering global trade, particularly if China’s growth stabilizes. Peripheral economies, however, may face challenges due to fiscal constraints and slower structural reforms. Countries like Spain and Italy, which rely heavily on tourism, could see uneven recovery depending on geopolitical developments and consumer sentiment.
Sector wise, defensive industries such as healthcare, consumer staples, and utilities are poised for resilience amid economic uncertainty. Meanwhile, export-driven sectors like industrials, luxury goods, and automotive could benefit from improving global trade conditions. Luxury goods, in particular, may experience strong demand from high-income consumers in the U.S. and Asia. However, skeptics argue that geopolitical tensions and sluggish reforms could cap gains, making the STOXX Europe 600 index susceptible to underperformance.
The Eurozone faces increasing recession risks such as tight monetary policy, weak industrial production, and slow credit growth suppress expansion. The European Commission’s 1.3% growth forecast is cautiously optimistic, but declining business confidence and stagnating consumer spending suggest potential downside risks. If the ECB maintains restrictive policies for too long, the region could see a more pronounced slowdown. However, potential fiscal stimulus in key economies like Germany and France may provide some relief.
Overall equity markets in the region are likely to see underwhelming performance. Analysts expect the STOXX Europe 600 index to close around 535, which is flat or slightly underperforming.
In fixed income, the Eurozone government bond market is likely to remain under pressure. German Bund yields, according to Goldman Sachs forecasts, may stabilize near 2.2%. However lowering yields due to rate cuts from ECB could support mid to long dated corporate bonds.
China
China’s economy is projected to experience decent growth in 2025, with GDP growth estimates from the World Bank suggesting growth around 4.5%, supported by accommodative policies and a gradual recovery in domestic consumption. The government’s focus on stabilizing the real estate sector and fostering innovation in key industries, such as semiconductors and renewable energy, is expected to underpin growth.
Sector wise, technology and consumer discretionary sectors are expected to outperform. The semiconductor industry, in particular, continues to benefit from strategic investments aimed at reducing reliance on foreign technology. On the other hand, consumer discretionary stocks may experience a rebound as domestic consumption improves.
Geopolitical risks remain a key concern for global markets. Strained U.S.-China relations, ongoing technological decoupling, and trade sanctions could impact supply chains and corporate earnings. Additionally, the potential reinstatement of aggressive Trump-era tariffs poses a significant challenge for global trade. If higher tariffs on Chinese imports are reintroduced, U.S. businesses reliant on Chinese supply chains could face increased costs, potentially leading to higher consumer prices. Retaliatory tariffs from China and other trading partners could further disrupt global trade flows, particularly affecting export-driven sectors such as technology, automotive, and industrial goods.
The Chinese equity markets may offer significant upside potential, with valuations still attractive compared to historical averages, as noted by Goldman Sachs, a rebound of 7% or more in 2025 is plausible. Analysts expect a year end target for HSI of 25000 indicating a possible growth of 25%. However, geopolitical tensions and regulatory risks remain key concerns for international investors.
China’s fixed income markets may not offer a compelling set of opportunities in comparison with other markets, with the government bond market only yielding around 1.7%, and thus not providing an attractive proposition in comparison to other major economies due to the low expected rates as the government continues its fight against deflation and trade tensions.
Conclusion
Our investment outlook for 2025 underscores the importance of selectivity and diversification. While major economies like the U.S., Eurozone, and China present opportunities in equities and fixed income, challenges such as geopolitical uncertainties, inflation pressures, and currency volatility cannot be ignored. Investors should adopt a nuanced approach, focusing on sectors and regions with favorable structural trends while maintaining a balanced portfolio to navigate potential risks. The views expressed in this outlook are analytical opinions of the authors and in no way represents an investment recommendation.
Contact:
Jinesh Rajpara, CFA
Investment Advisor
jinesh@mef.bh
+973-1711 1703
Yusuf Ahmed
Jr. Investment Analyst
yusuf@mef.bh
+973-1711 1700
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