INVESTMENT OUTLOOK JANUARY 2025
The story of 2024 closely mirrored that of 2023, with U.S. stocks once again outperforming their global counterparts as Wall Street underestimated just how strong the year would be for equities. The S&P 500 surged 23%, achieving 57 record closes, supported by a healthy economy, declining inflation, and an AI-driven rally in big tech. This marked the fourth year in the past six with gains exceeding 20%.
At the start of 2024, few anticipated such robust growth, though some volatility in the final trading days caused minor setbacks. Still, the index delivered its best back-to-back years since 1997–1998. 2024 delivered exactly what investors hoped for: a strong economy, easing inflation, and looser monetary policy, paired with extraordinary technological advancements.
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However, with economic uncertainties, stretched valuations, and potential trade risks under Donald Trump, replicating such a favorable mix in 2025 seems unlikely.
Paradoxically, the rampant optimism about the US economy makes a renewed acceleration in growth less likely in 2025. Given the sky-high optimism inherent in asset prices, this justifies a defensive portfolio structure on a 12-month horizon. We therefore remain defensively positioned and are tending towards a low-risk portfolio strategy with an underweight in equities and credit risk and a higher allocation to government bonds.
BENDURA Market Views
The terms attractive / unattractive describe the return potential of the various asset classes. An asset class is considered attractive if its expected return is above the local cash rate. It is considered unattractive if the expected return is negative. Very attractive / very unattractive denote the highest conviction views of the BENDURA Investment Committee. The time horizon for these views is 3-6 months.
Global Economy
U.S. economy defied expectations in 2024, maintaining its position as a global leader in economic resilience and reinforcing its dominance in both economic and financial performance. Despite this progress, the economy’s strength created some challenges for the Federal Reserve. The robust growth and ongoing labor market tightness led to hesitancy from the Fed to cut rates as aggressively as initially anticipated in early 2024. Markets now expect less than 40 basis points of rate cuts in 2025, reflecting the balancing act the central bank faces between supporting growth and ensuring inflation remains under control. Inflation continued to ease, further bolstering economic sentiment.
The headline Consumer Price Index (CPI) rose 2.7% year-over-year in November, down from 3.3% in December 2023. Core CPI also moderated, rising 3.3% compared to 3.9% a year earlier. The labor market also showed resilience. Nonfarm payrolls added nearly 2 million jobs in the first 11 months of the year, though the unemployment rate ticked up to 4.2% in November, compared to 3.7% at the end of 2023. Meanwhile, consumer activity remained robust, with early reports indicating a stronger-than-expected holiday shopping season. The U.S. remains the only major economy where output has surpassed pre-pandemic trends.
U.S. politics will dominate the spotlight in many countries around the world, especially early in the year. Donald Trump’s campaign promises of sweeping change will soon face the realities of governance. His pledge to end the war in Ukraine within a single day will be put to the test as pressure mounts for quick results. On the geopolitical front, how his administration approaches China—a more assertive and powerful rival than in 2017—will be critical. Domestically, immigration reform and substantial tax cuts (with $10 trillion in new tax-cutting pledges made during the campaign) will take center stage. Unlike 2024, the year 2025 will feature relatively few elections, aside from Germany and potentially France, and little in the way of major sports events.
China’s President Xi Jinping, GDP is the country is expected to grow around 5% in 2024, which would put the country on track to meet its official target. New data suggests Chinese stimulus is having the intended effect of lifting the economy. Services activity expanded at the fastest pace in nine months while the manufacturing sector grew for a third straight month. The broad uptick in activity would be welcomed by policymakers seeking to bolster domestic demand to offset the effects of a potential trade war with the incoming Trump administration, although economists warn the boost may be short-lived. Meanwhile, Chinese stocks clocked their first annual gain since the pandemic, with the benchmark CSI 300 Index climbing almost 15% since the end of 2023 to halt an unprecedented three-year losing streak.
Equities
The MAG 7 drove more than 53% of the S&P 500’s total return, with NVIDIA alone contributing 21%. Big Tech’s dominance is evident in the contrast between the Equal-Weighted S&P 500, which gained just 4% by mid-year, and the market-cap-weighted S&P 500, which rose 14% in the same period. For context, the Equal-Weighted S&P 500 matched the performance of the MSCI World Index (ex-U.S.), highlighting the outsize influence of U.S. Big Tech.
Wall Street’s outlook for 2025 is cautiously optimistic, with analysts predicting a slow but steady rise in the S&P 500, targeting year-end levels in the 6500-6600 range. This comes after a strong 2024 that saw markets surpass many analysts’ forecasts. However, the key focus of 2025 projections isn’t just economic growth, inflation, or other standard indicators. Instead, the outlook is largely shaped by the anticipated return of Donald J. Trump to the White House. S&P 500 net profit margins are projected to reach 13% in 2025, surpassing the current record of 12.6% set in 2021. If achieved, this would mark the highest annual net profit margin tracked by FactSet since 2008. This reflects optimism around operational efficiencies and potential tailwinds from easing inflation and continued technological innovation.
European stocks ended the year higher but failed to match the strong performance of 2023, again trailing U.S. peers. The best-performing major index was the German DAX, which rose nearly 19%, driven primarily by a few key companies that have been referred to as Germany’s answer to the U.S. “MAG 7.” These included software giant SAP, defense company Rheinmetall, industrial conglomerate Siemens, Siemens Energy, Deutsche Telekom, and insurers Allianz and Munich Re. SAP alone contributed to nearly 40% of the DAX’s gains. Following the DAX, Italy’s FTSE MIB and Spain’s IBEX 35 also saw solid performances, gaining 12.6% and 14.9%, respectively. The Italian index benefited from strong bank stocks, much like the Spanish IBEX. Market strategists have lowered their outlook for European equities due to a challenging macroeconomic environment. The Stoxx 600 is expected to rise less than 3% in 2025, significantly lagging behind the anticipated 7.5% gain for the S&P 500. The 40% valuation discount of European stocks compared to the U.S. is being driven by factors such as stronger U.S. growth, a sluggish European economy, geopolitical risks, and concerns over potential trade tariffs.
While Europe faces considerable headwinds, particularly from economic sluggishness and geopolitical risks, there are some positive factors such as attractive valuations and potential fiscal and monetary support that could help the region’s markets in 2025. However, the outperformance of U.S. stocks is expected to continue, with European equities likely to underperform in comparison.
Fixed Income
In the US, yields have risen sharply since the FED began cutting interest rates in September, with the 10-year rate climbing more than full percentage point. Since the historic losses of 2022, expectations that the Fed’s steep rate hikes beginning that year would cause a recession and a rush into bonds have been foiled. Inflation slowed but didn’t return to pre-pandemic levels, and US stocks soared. The 10-year Treasury yield ended 2023 at 3.9% — little changed on the year — and rose around 70 basis points in 2024 to 4.6%.
The average of the Bloomberg-compiled forecasts suggests the US 10-year yield will finish 2025 around 4.12%. It was there as recently as early December, before Fed policymakers published revised quarterly forecasts suggesting they expect to cut interest rates by half a percentage point in 2025, less than previously. December 2024 was marked by significant activity in Eurozone bond markets, driven by central bank policy adjustments and evolving economic conditions.
In December, the ECB reduced its key interest rate to 3%, signaling a shift towards monetary easing. However, ECB President Christine Lagarde emphasized that the fight against inflation was still ongoing, particularly noting that services inflation remained elevated at 3.9%. The 10-year bond yield in Germany rose approximately to 2.3% on December 23, making it the highest level since November. Italy’s 10-year bond yield climbed to around 3.5% during the same period, reflecting similar investor sentiment regarding ECB policies. French bond yields also saw upward movement, with the spread between French and German yields narrowing to approximately 75 basis points, indicating increased investor confidence in French debt.
Commodities and Currencies
Gold had an exceptional year, rising 27.5%—its best performance since 2010—and reaching a record high of just over $2,800/oz on October 30. The rally was fueled by strong demand amid persistent inflation concerns, geopolitical uncertainty, and safe-haven buying.
Bitcoin surged approximately 122% year-over-year, buoyed by optimism surrounding the incoming Trump administration and increased interest in digital assets. It broke the $100,000 milestone in mid-December before retreating slightly, reflecting heightened investor enthusiasm for crypto markets.
WTI crude edged up just 0.1% for the year, while Brent crude declined by 3.1%. While WTI briefly approached $90 per barrel in the spring, oil prices remained range-bound in the final quarter of 2024. The market grappled with concerns over softening demand from China and increased global output, contributing to muted price action. The U.S. dollar strengthened considerably in 2024, driven by resilient U.S. economic growth and expectations that the Federal Reserve would proceed cautiously with further rate cuts. The Dollar Index (DXY) rose 7.0%, reversing a 2.1% decline in 2023. The greenback was a standout performer, particularly against the Japanese yen, reflecting divergent economic dynamics and monetary policies.
