Since the end of summer, courtesy also of the US elections, equity markets have rallied while fixed income markets have had a tougher time. At the time of writing, bond yields had just come down after Scott Bessent was nominated as US Treasury Secretary, on the hope he’d save the US’s fiscal health from Trump’s largesse, just before rising again the next day as President-elect Trump made comments on a broader set of tariffs. Another set of truths that we will not be able to ascertain until we see which policies Trump implements in 2025 but, from which, the market has decided to extrapolate.
Broadening markets
Resilient macroeconomic growth and expectations for further rate cuts are a positive combination to support corporate earnings and, hence, equity markets. It is not surprising, therefore, that the US has been the outperformer among major equity markets in 2024.
Looking ahead to 2025, with overall market valuations having reached new post-Covid highs, the question that investors are most likely to ask is: “Does Wall Street still have room to run?” The answer is yes, in our view, but not all stocks have the ability to perform equally well.
While market chatter and media reports remain focused on the Magnificent 7 (Mag7)4, equity market performance has been broadening, even in the US.
For example, since the beginning of the year, the median Mag7 return has been 36.8%, while, in the S&P 500 Index, the median returns of the Top 200 performers (ex Mag 7) and the Top 100 performers (ex Mag 7) have been 43.1% and 57.2% respectively. At the same time, the technology sector has recorded a median return of 13.5% compared with 20.2% for the Index ex technology stocks5.
Two conclusions can be drawn: first, that investors are broadening their search for investment opportunities where valuations and expectations have been more reasonable. Second, that there are other areas that present positive prospects beyond technology.
As a result, the ‘Trump trade’6 is a trade on the broadening of returns across the market in areas that, until now, have remained in the shadows, rather than simply being a trade on the S&P 500 Index. The latter remains strongly influenced by the idiosyncrasies of the Mag7.
Among the most recent top US equity performers are stocks in the utilities, industrials and energy sectors, along with financials names.
The current earnings season also continues to indicate that stocks within the same sector are generating different growth and profitability, not only due to industry exposure, but to elements more specific to each company – such as product quality, innovation, balance sheet management and, of course, the quality of management.
For this reason, when it comes to equity investing in 2025, we believe in a strategy based on stock selection rather than one driven by top down exposure to countries or sectors.
Focus on Trump
Heading into 2025, the Trump trade is likely to remain the focus of many investors. Expectations of less regulation and lower taxes are positive for the immediate US macroeconomic picture, although the latter is not for the longer-term fiscal picture.
Import tariffs, however, represent a question mark. High import tariffs would have a negative effect on the US economy and, in particular, on inflation. Any inflationary impact from Trump’s policies could change the trajectory of US Federal Reserve (Fed) decision making in the coming year.
But there is a timing issue. Any potential impact on inflation will not take immediate effect and, until now, the Fed has looked at historic data to inform decision-making on interest rates.
The question that investors may ask in 2025 is: “Will the Fed start to look at the potential for Trump’s policies to impact inflation, or continue to cut interest rates based on pre-Trump data points and subsequently raise them again if Trump’s policies start to have an inflationary effect?” The second option could bring more volatility in the coming year, particularly to fixed income markets.
Trump’s policies are also likely to result in a strong dollar in 2025, with implications for other markets outside the US. Importantly, however, the Trump trade is not the only trade in town, if you’ll pardon the alliteration. A deterioration of the macroeconomic backdrop in the US could spoil the party for equity markets.
Opportunities in Europe and Asia in 2025
While the US market is likely to remain a relative outperformer in the near term, driven by more robust growth and Trump policy expectations, we still see compelling opportunities in other markets, including Europe and Asia. Here too, we seek bottom-up, stock-specific opportunities, rather than top-down or broader market index exposures.
Within Europe, for example, we are finding opportunities within more cyclical areas, such as chemicals and materials, given the depressed valuations reflecting a bottoming of end markets’ demand. We are also finding opportunities among well-capitalised, less rate-sensitive Northern European and UK banks.
Within Asia, the risk of higher US tariffs has increased investor caution, particularly towards Chinese equities, at a time when there is heightened uncertainty around China’s domestic economic stimulus and recovery. We believe this is creating interesting stock-picking opportunities for bottom-up investors to exploit in 2025.
We are seeing industry consolidation and corporate restructuring laying the groundwork for both top line and margin expansion in certain domestically-orientated sectors like real estate agency and hotels.
At the same time, it’s also worth noting that many China-based businesses have adjusted their supply chains toward Southeast Asia – so the impact of higher tariffs will be complex and likely quite different in some cases compared to six years ago, again creating potentially interesting stock-picking opportunities in the year ahead.
Selection remains essential
Looking at 2025, from our current vantage point, it is difficult to time a meaningful worsening of the macroeconomic backdrop. Common sense tells us that at some point it will happen, but calling it too soon can, as it has in the past, be a significant opportunity cost for equity returns. With that uncertainty in mind, we believe the key focus for investors should be to select the areas of the market that can offer the best performance, rather than trying to forecast overall index returns.
Since the beginning of 2024, in comparison to the 57.1% median return of the top 100 stock performers within the S&P 500 Index, the remaining 400 stocks returned a much lower 12.7%7.
As investors prepare to navigate the year ahead, we believe selection will continue to be essential in generating superior portfolio returns.
