Art by Andrea D’Aquino

2024 was a strong year for domestic and global equities; the second year of a bull market, the S&P 500 had returned 23%. Outsized returns in large-cap technology stocks, primarily the “magnificent seven,” are primarily responsible for lifting the S&P 500 and Nasdaq 100 indices.

Analysts expect more sectors to outperform this year, rather than mostly the handful of tech stocks that drove the market to record levels. Equity analysts and strategists also see 2025 opportunities beyond artificial intelligence and in emerging markets, but will likely tread carefully to start the year to see how tariffs and other policies play out from the incoming Donald Trump administration.

“The [U.S.] economy is broadly strong, and we expect that to continue for the near future; that bodes well for most sectors,” says Ian Toner, CIO of Verus.

That said, the Federal Reserve put somewhat of a damper on expectations after its December Federal Open Market Committee meeting, when it signaled that inflation risks are back, which may mean fewer rate drops from the central bank than forecast. Expectations for 2025’s monetary policy caused an immediate decline in stock markets, and, if persistent, could shift expectations for the longer term in 2025, according to some analysts.

Under a New Administration

Investors expect the new Trump administration to loosen regulations and lower corporate taxes; Scott Bessent, nominated to be Treasury Secretary has touted a so-called 3-3-3 plan, cutting the federal deficit to 3% of gross domestic product, achieving growth of 3% of GDP and increasing U.S. energy production by the equivalent of three million gallons a day.

“The Republican sweep of the U.S. election is likely to boost equity markets, particularly those in the U.S., if the patten of the first Trump administration is any guide,” wrote Daniel Morris, chief market strategist at BNP Paribas, in the bank’s 2025 outlook. “The risks are that either growth accelerates too much and the U.S. economy overheats, or that large tax cuts prompt a negative reaction from the bond market.”

Matthew Palazzolo, senior national director of investment strategies at Bernstein Private Wealth Management, also noted “a generally constructive view on stocks in 2025.”

That view is “underpinned by a still solid economic backdrop in the U.S. and high single digit earnings growth. We’re mindful of the bullish sentiment recently, but much of that could simply be consensus coming around to the positive fundamentals,” Palazzolo says.

A number of investors point to small-cap stocks, which could be set to perform well next year.

“I’m optimistic about small caps heading into 2025 and expect them to benefit from a favorable domestic economic environment and potential regulatory changes,” says Jeff Weniger, head of equity strategies at WisdomTree. “There’s also a lot of buzz around a revival in [mergers and acquisitions,] with large-cap banks likely to see gains from more deal activity, though that trend may already be priced into the markets.”

The current market environment also could be favorable for passive investors.

“We believe we’re in a positive environment for risk assets, at least for now,” Toner says. “The economy is running well, and while inflation hasn’t yet gone all the way to target it’s much lower than recent high levels. Passive investors are likely to benefit from this environment.”

But concentration continues to be a risk, with around “40% of the S&P 500’s weight in the top 10 stocks, those few names account for an outsized amount of risk in indexed portfolios.” Palazzolo cautions.

Sectors and stocks that are set face headwinds in 2025 include those sensitive to tariffs and green energy companies that rely on materials like lithium and graphite, the supply of which could become constrained in a trade war with China, which controls much of the supply.

What Do Investors Like in 2025?

A common investment theme found across 2025 outlooks is artificial intelligence, which drove performance in 2024, while other sectors did not see strong growth. Some strategists see this distribution to be more evenly balanced this year.

“We think there is potential for markets to broaden out further in the U.S., particularly given Trump’s focus on deregulation and corporate tax cuts,” writes Johanna Kyrklund, group CIO at Schroders in the firm’s 2025 outlook.

Weniger says he is bearish on energy stocks, such as oil and gas, saying that they are oversupplied in the market. “I also expect the stronger dollar to be a headwind for all commodities. While big returns may be hard to come by, focusing on stable, value-oriented stocks is a solid strategy, with U.S. equities likely to outperform global stocks due to this stronger dollar environment,” Weniger says.

Macquarie Asset Management, in its outlook, expects strong opportunities in value stocks, small-caps and across diverse geographies. Macquarie also suggested listed real assets, which it wrote, “continue to be an interesting asset class in an environment in which inflation becomes more of an ongoing, structural challenge.”

In Europe and Asia, Goldman Sachs Asset Management sees strength in the financial sector, as well as healthcare, clean energy, and luxury goods companies without a U.S. equivalent. “Across non-U.S. developed markets, we see opportunities in dividend-paying companies with sustainable returns on invested capital, strong cash flow generation, a track record of capital discipline, and consistent payout histories,” said Alexis Deladerrière, head of international developed-market equity at GSAM, in the firm’s 2025 outlook.

Emerging and Global Markets

The MSCI Emerging Markets Index returned 4.35% in 2024 through late December, far below the S&P 500’s results, but investors see opportunities in these markets. Some point to outsized returns available in EM, which could provide diversification compared with the tech-heavy concentration of the S&P.

In a November roundtable discussion, strategists in Vontobel Asset Management’s quality growth team note that many global and emerging market equities have outperformed U.S. equities. Their favorite global stocks: SAP, Hermes, RELX Group, and Ashtead.

Vontobel analysts noted that many companies that fall into the “global” equities category have significant exposure in the U.S., and vice versa. “You can invest in great international companies and participate in the U.S. economy,” says David Souccar, portfolio manager at Vontobel Asset Management. “Now, by the way, when you invest in the U.S., half of the earnings come from the outside. We live in a globalized economy. We need to stop the division between domestic and international… invest in great companies wherever you find them.”

Elias Erickson, portfolio manager at Ninety One adds that: “The opportunity cost of investing overseas has been much higher than most anticipated, especially when comparing index returns. However, this blunt comparison misrepresents the attractiveness of international markets, which actually house the majority of outperforming shares on a global basis.”

In a broad sense, two primary factors will likely impact emerging market performance next year; U.S. monetary policy and the approach to tariffs under the Trump administration, says Crit Thomas, global market strategist at Touchstone Investments.  “Emerging markets tend to benefit from looser U.S. monetary conditions. However, long-term rates may remain elevated, and the Fed could slow its pace of rate cutting,” Thomas says.

Meanwhile, the Trump administration’s focus on tariffs and encouraging manufacturing onshoring could disadvantage emerging markets, which have been long-term beneficiaries of offshoring. “Many emerging market economies have benefited from the reshoring of Chinese manufacturing, but President-elect Trump aims to bring that production to the U.S., potentially redirecting foreign direct investment from emerging markets to the U.S.,” Thomas says.

There are two drivers behind the “U.S. vs. non-U.S. question,” says Bernstein’s Palazzolo. “Will the U.S.’s earnings growth advantage offset or be offset by other markets valuation advantage? We think it’s likely to be the former, but you can only have so much conviction in that view given the exceptional run U.S. stocks have had.”

While China is generally becoming excluded from many asset owners’ benchmarks, analysts note that government policy has an outsize effect on the performance of Chinese equites and corporate profits. “China has started implementing more stimulus, which could stabilize this important [emerging market] economy. An active manager may be in a better position to manage through the cross currents,” says Thomas.

Emerging markets are attractive, and could provide opportunities in 2025, but the strength of U.S. equities, driven by strong financials, will continue to be the staple of equity portfolios. “As always, a broadly diversified portfolio makes sense, but overweighting the U.S. continues to appear to be a reasonable approach for many investors,” Toner says.

What About the Fed?

The Federal Reserve’s December 18 decision to cut the federal funds rate by 25 basis points and lower the outlook for more rate cuts in 2025, though expected, was greeted as a surprise in the U.S. equity markets. The S&P 500 fell as high as 3% the day of the meeting.

“Overall, [the] FOMC meeting brought back some unwanted clouds of uncertainty over monetary policy .. At a minimum, market expectations have shifted toward a shallower- and slower-than-anticipated rate-cutting cycle,” said Adam Turnquist, chief technical strategist at LPL Financial in a statement after the December Fed meeting.

Turnquist noted that the near-term risk remains to the upside for 10-year Treasury yields, likely creating a headwind for stocks. “Based on this backdrop, and the deterioration in market breadth over the last few weeks, we recommend waiting for support to be established and for momentum to improve before stepping up to buy this dip,” he said.

Charlie Ripley, senior investment strategist at Allianz Investment Management, said in a statement that, despite having been able to make 100 basis points of reductions so far in this rate cutting cycle, it may be tough to continue at its current pace.  “The other reality is Powell and Co. cannot afford to be wrong on inflation again as upside risks continue to persist,” Ripley continued. “Therefore, we see the bar being raised for rate cuts going forward from here and given this Fed is operating on a data-dependent level, any meaningful upticks of inflation raise the risk that additional rate cuts, if any, will be few and far between.”

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Tags: Adam Turnquist, Alexis Deladerrière, Allianz Investment Management, Charlie Ripley, Crit Thomas, David Souccar, Elias Erickson, Goldman Sachs Asset Management, Ian Toner, Jeff Weniger, Johanna Kyrklund, LPL Financial, Matthew Palazzolo, Ninety One, Schroders, Touchstone Investments, Verus, Vontobel Asset Management, WisdomTree