2025 Market Outlook

The global landscape in 2025 is one of transformation: central banks have orchestrated a soft landing, artificial intelligence (AI) is revolutionising industries from healthcare to defence, and elections continue to reflect the influence of living costs and the resurgence of populism. With arguably the biggest event of 2024, the US election, peacefully out of the way, focus is squarely on the direction of interest rates and if inflation’s ‘last mile’ can be tamed amid Trump 2.0. 

Stocks markets are keen to see if companies can match the elevated earnings growth expectations. The US indices strong back-to-back annual outperformance has many now questioning how much further upside there is. The breadth of the market continues to be a concern, though the equal weighted benchmark S&P 500 is 15% higher in 2024 [x]. 

Interest rate policy divergence in pace and timing is expected to continue. It seems everyone is long the dollar and “US exceptionalism” is the only game in town as the Fed enters a new phase, whilst also being forced to react to the new Commander-in-Chief’s protectionist plans.  

Will tariffs be as severe and wide-reaching as threatened? In fact, that applies to all the 47^th President’s policies. It’s quite possible he doesn’t know either, so once more, buckle up for another year of thrills and surprises with much volatility to offer trading opportunities aplenty. 

Recap of 2024 Market 

Economic growth exceeded virtually everyone’s expectations with the “Goldilocks” economy – one not too hot but not too cold – hitting the sweet spot for consumers amid US resilience. In fact, US “exceptionalism” is probably one of the key phrases of 2024, with the manufacturing of a soft/no landing  powering markets to continuous fresh record highs in the major stock market indices. 

The Fed pivot eventually came as inflation eased, with policymakers cutting back on policy restrictiveness in pursuit of a soft landing. Tech dominance remained and carried on fuelling market gains. A summer flash crash caused very minor worries as the yen carry trade was upended with the end of NIRP and ZIRP in Japan. But the latter part of the year saw the Trump 2.0 theme kick in. A more business-friendly regulatory environment, with more tax cuts and increased M&A added further fuel to the risk rally. Bitcoin joined the party too, as Trump said he wanted to make the US the “crypto capital of the planet”. 

US Market Outlook  

Stock Markets  

US stocks led the charge, which they have done for many years now, with the blue-chip S&P 500 index up over 20%. The tech-dominated Nasdaq index even beat that broad-based index as the tech sector once again dominated. After a strong 2023, market outperformance in 2024 has been a major pleasant surprise. The rally has been driven by an unusual combination of rising earnings and higher valuations. 

The main drivers included cooling inflation and the Fed pivot. Chair Powell went ‘all-in’ on delivering a soft landing with the Fed reducing policy restrictiveness with a jumbo-sized half-point rate cut. That came in the face of a robust US economy and labour market which defied signs of a slowdown. That helped the US consumer continue to stay resilient amid persistent corporate earnings and a strong culture of promoting innovation. Optimism around AI and tech dominance barely waned and continued to underpin stock market gains. 

US Dollar, Gold & Oil  

The greenback has returned to its perch as the top performing major currency, with just the pound anywhere near it on an annual basis. But we should not forget it has been a volatile year with an initial appreciation in the first few months being reversed through the summer. The last quarter has been very strong as expectations of a Trump presidency became reality. Recent two-year highs were brought about by the Republican clean sweep and the potential for dollar supportive policies. These include inflation-inducing tariffs, tax cuts and immigration plans. 

Oil proved volatile but ended the year lower as the outcome of the US election was probably net bearish for prices. OPEC+ policies were critical for the market with a succession of voluntary supply cuts through the year. Demand was also seen softer, as the Chinese economy especially, disappointed. Gold enjoyed a record-breaking rally supported by the Fed’s easing cycle, central bank purchases and safe haven demand. Heightened geopolitical and economic risks also helped push prices to an all-time top at $2790 in late October ^[2]. 

The Economy and Fed  

The Fed eventually pulled the trigger on its policy easing cycle, though markets had priced in the start on a few occasions actually before the kick off in September. That came with a surprise jumbo-sized 50bps rate cut as policymakers nailed their mast to a soft landing. Like many, we were sceptical that the FOMC could pull off such a move, but a material slowdown failed to occur. 

Surprisingly robust growth, with real US GDP in 2024 of around 3.1% in the 3rd quarter of 2024 has seen off the doomsayers ^[3]. The biggest driver of this strength has been consumer spending. According to JP Morgan, it contributed an average 78% of growth in the first three quarters, which has been dominated by high income households ^[4]. Elsewhere, consumers have been more cautious but continue to spend. 

2025 Outlook  

In the year ahead, continued progress in real wage growth is expected to broadly support consumers. But the tailwind that we have seen since the pandemic of pent-up savings and debt may largely fade. That means consumption may contribute less to growth going forward.  

The hawkish re-tuning of the Fed’s communication at its final meeting in December will potentially lay the foundation for sustained dollar strengthening into the new year. The updated median dots now project only a single 25bp cut every six months for the next two and a half years, while the longer-term dot was raised by 0.1pp to 3.0% ^[5].  

Undoubtedly, the major question is to what extent we see the key election promises of Donald Trump’s America First strategy. These include tax cuts for businesses and individuals, immigration controls, tariffs to incentivise re-shoring and cost-cutting efficiency savings to rein in the deficit.   

These will most likely push inflation higher, leading to higher for longer interest rates and a floor under bond yields. More domestic proposals like immigration and tax cuts could come first, while the speed and scale of tariffs remains hugely open to debate. Many economists predict there will be no winners, with US consumers and exporters paying a heavy price. 

UK Market Outlook   

Stock Markets  

The major UK stock market, the FTSE 100, hit a record high in May. But that is where any other positive comparison with its global peers ends. The main index, as at the time of writing, once again dramatically underperformed the benchmark US S&P 500 and other global indices like the German Dax. 

The US index was led by the megacap tech titans, something the UK is obviously lacking. The main UK index is still dominated by interest rate sensitive companies like banks, homeowners, and insurers. Add energy and utility sectors like oil majors and mining companies to the mix and it is not hard to see why there have been relatively disappointing gains.   

That said, we have seen mildly changing perceptions about the UK’s investability, while election positivity outweighed result uncertainty for a time.  Falling inflation, an initial rate cut in August and the perception of UK stocks as a safe haven amid a couple of tech corrections in the US also featured. This does mean the UK index is cheap, with substantial value across UK equities. 

The Sterling 

GBP was comfortably the best performing major currency versus the dollar in 2024, and some way ahead of the euro which was next best. A higher interest rate environment acted as support for the pound, even if there remain question marks about weakness in the underlying economy. 

The high in cable made in late September at 1.3434 did presage eight consecutive weeks of selling into the US election ^[6].  But on a broad trade-weighted basis against global currencies, the pound has performed admirably through most of 2024.  

The mild year-long downtrend in EUR/GBP saw it drop to lows last seen in March 2022 and close to pre-Brexit referendum levels. Certainly, both the economic and political picture between the UK and Europe diverged to the benefit of sterling. 

The Economy and Bank of England (BoE) 

Despite all the UK political drama and uncertainty in 2024, the economy is forecast to grow by 0.9% over the year, according to Barclays, leaping from the 0.3% posted in 2023 ^[7]. However, momentum has faded recently, as uncertainty over the October budget weighed on sentiment, both for companies and consumers. Headline inflation fell from more than 10% in 2023 to below 2% in the twelve months to September 2024 ^[8].   

That helped the Bank of England cut interest rates for the first time in the summer. But the policy easing cycle proved more gradual than most of its central bank peers. Services inflation became the key driver for policy as wage growth has become unhelpfully sticky and too elevated for most rate setters on the MPC. Labour’s expansionary first budget since 2010 could also have inflationary consequences due to the government’s decision to direct around two-thirds of additional borrowing towards day-to-day public services spending, rather than investments. 

2025 Outlook  

The UK economy faces both structural and cyclical challenges in the new year. The former are well known headwinds and include low productivity and labour force participation. Fiscal pressures might also be an issue, though consumers still have excess savings that could be called on if some of the macroeconomic uncertainty clears. If that happens, investments may be supported, and activity pick up further during 2025. 

A cheap and largely export-driven stock market should present opportunities. The magnitude of interest rate cuts by the Bank of England is unclear and a more cautious path is currently assumed. If activity does start to roll over and with it wage growth, then more policy easing than priced in by money markets could see the support for GBP fade as interest rates differentials narrow. 

Europe Market Outlook  

Stock Markets  

European stock markets have delivered mixed performance with divergence between some of the major stock indices. The EuroStoxx 50 and 600 have posted gains of between 7% and 9% with the top European markets in Germany and Italy gaining up to 20%. The heavy weighting of technology, financial and industrial sectors has boosted performance. SAP, one of the Dax’s biggest constituents and Germany’s leading tech giants, performed strongly up over 65% on the year and this pushed the index to fresh record highs ^[9]. 

On the flip side, France was the only market to lose money over the year, falling over 2%. It especially struggled during the second half of the year due to major political uncertainty and concerns over its high debt levels. The election of Donald Trump in early November also played a part in worsening sentiment more broadly as tariffs on eurozone goods and China’s too could further weigh on the region’s economy.

The Euro 

The euro performed relatively quite well considering the headwinds hitting the region’s economy. The single currency was the second best performing major versus the dollar, but still finished the year down by around 5%. EUR/USD couldn’t get beyond the top made in September above 1.12 and has since collapsed to a low of 1.0331 in mid-November ^[10]. 

Similar to its peers, the euro has sold off sharply since November and the hawkish December Fed meeting has pushed the world’s most popular currency pair down through long-term support at 1.0448 ^[11]. The anticipation of Trump’s policy agenda is keeping dollar rate spreads wide, plus US exceptionalism in general and its impact on the FOMC, is seeing the currencies of trading partners remain under pressure.  

The Economy and the European Central Bank (ECB)  

The uptick in the region’s economy seen up to the midpoint of 2024 faded after France and German elections, and the ensuing grim political backdrop. The lack of functioning governments in the two pillars of the zone has essentially ruled out major fiscal support for the region in the near term. The flip side to these two mainstays has been some countries, like Spain, which stand out with growth on a par with a resilient US economy. 

That means the ECB has been forced into doing the heavy lifting of supporting the economy, after a protracted battle between the hawks and doves on the Governing Council. Sticky core and services inflation, plus higher than expected wage growth amid low unemployment, saw a muted start to rate cuts and a gradual easing path. But the many headwinds have caused stagnation and policymakers appear more determined to get ahead of the curve and return interest rates to neutral as quickly as possible. 

2025 Outlook  

Downside risks emerging in the economy are plentiful and include domestic politics frustrating the recovery and geopolitics putting pressure on an economy very open to the world. Even if inflationary pressures do not disappear entirely, it will likely mean the ECB cutting rates more than expected and below neutral. 

That said, a combination of low inflation, lower rates and a low base could drive a decent improvement in GDP growth, though absolute expansion is likely to remain subdued. Any European rebound will also be beholden to the bloc’s outsized exposure to China.  

Again, Donald Trump holds the keys to many of these worries, with European government ministers perhaps hoping Chinese stimulus plans offset new Trump tariffs. Conflict in Ukraine and the Middle East, and any possible positive signs too of a reduced risk premium, will also be worth watching. 

China Market Outlook  

Stock Markets  

Chinese stocks indices have endured a highly volatile year, mostly in the green in the first half of 2024, before dipping to lows amid depressed valuations in September. That saw a huge surge higher, with gains of over 20% over the month, before a spike of a similar size saw selling and choppy price action into the end of the year. 

Moves to enhance equity market liquidity and mortgage rate cuts lifted domestic stocks as both the mainland and Hong Kong’s Hang Seng indices experienced blistering rallies. This also spread to China-exposed stocks like European luxury names. But this wasn’t the ‘big bang’ of policy measures many hoped for, and the CSI 300 suffered huge losses, with the index plunging over 7% on October 9, its biggest one-day fall since 2020 ^[12]. 

The Economy and the People’s Bank of China (PBoC)  

The Chinese economy slowed in 2024 and is forecast to grow by around 4.8% [13]. Market ructions fuelled some of the most dramatic stimulus measures since the pandemic, with numerous reductions in borrowing costs to boost the ailing real estate market, recapitalising large Chinese banks and handouts to consumers.  

The bursting of the 2022 housing bubble hurt their savings which hit broader measures of confidence. Rising debt levels and stubbornly low levels of inflation have also cast a shadow over the economy. 

More recently, Chinese authorities surprised markets by signalling a shift to its monetary policy stance to “moderately loose”, the first change in 14 years. This really indicated the economic challenges facing the country and the potential determination in its quest to avoid a sharp economic slowdown. 

2025 Outlook  

More policy measures are expected as China battles with domestic demand issues and Trump tariffs, which may come in earlier or higher than currently anticipated. A more forceful fiscal package to tackle local government debt issues has also been announced. This plays into the theme that the PBoC is very much aware of doing too little, too late. 

While stimulus measures can help the economy in the short-term, worrying demographic trends and major trade tensions will put the authorities under a lot of pressure to act. The China slowdown is unfolding with multiple flashpoints around the world that could spark unpredictable outcomes and volatility. 

Asia-Pacific Market Outlook  

Stock Markets 

Japanese stock markets enjoyed a strong start to 2024 with record highs for the Nikkei 225. The surge was primarily driven by positive corporate earnings and expectations for continuous monetary policy easing, amid a weak yen. Active retail investor participation and foreign investor trading around large cap value stocks continued to also support equities. Share buybacks picked up through the year amid companies gaining an increased awareness of returning value to shareholders. 

Currency fluctuations through July added to stock market volatility as the yen surged to JPY149 to the dollar, a sharp increase from the 38-year low [14].  The crash in August was brushed off relatively quickly with a strong recovery and rebound in the run-up to the new Prime Minister. Market gains after the summer were again led by large-cap stocks following the trend in the US. Most recently, expectations of a BoJ rate hike and potential upcoming US trade policy changes impacted risk sentiment. 

The Japanese Yen 

The yen has been on a rollercoaster ride this year. The major opened below 141 and subsequently rose to multi-decade highs at 161.95 in July. It then tumbled for three straight months, adding 6.7% of its value in July and a total of over 11% across three months until the end of September. Prices have rebounded above 150 in recent months. 

A stronger currency will lower the costs of imports, notably for food and energy. But further appreciation of Japan’s currency will largely depend on policymaker decisions in both Japan and the US. A more dovish stance from the BoJ or a more hawkish tilt from the Fed could cause the yen to weaken further.  

The Economy and the Bank of Japan (BoJ)  

The BoJ marked a significant shift in its monetary policy in 2024. Officials ended its negative interest rate policy in March and raised its target rate to 0.25% in July, causing major volatility, especially in the FX market ^[15]. The central bank continued to signal a willingness to raise rates again with new PM Ishiba seen as an inflation hawk and supportive of additional interest rate increases. That said, he initially stated that rates were not yet ready to rise further. 

The main driver of Japan’s economic growth is shifting from external to domestic demand amid stronger wage growth. June 2024 marked the first time nominal wages outpaced inflation since 2022. 

2025 Outlook  

Japan is moving out of a long period of deflation, stagnant nominal growth and negative rates. In the year ahead, reflation should support consumer spending and domestic earnings more broadly. Japan’s corporate governance reforms, leading to record high buyback announcements and more M&A activity, should continue supporting flows and returns as its valuation discount fades. 

However, yen volatility has increased due to “yen carry trade” unwinds and higher US rate expectations, hurting sentiment and equity returns. Looking ahead, yen stability, which is crucial for internationally exposed companies and foreign investors, is expected to improve as Japanese interest rates normalise gradually and yen short positions close.  

Any BoJ rate decision will be a live decision and meeting, which means volatility could be heightened.  The BoJ will be wary of external risks and global financial market jitters, so the pace of normalisation could slow less than forecast. 

Market Trends to Watch in 2025 

As we look toward 2025, several key trends are expected to shape the financial markets. The above average pace of real economic growth seen in the US economy in recent years has delivered strong returns. But a normalisation in growth, job creation, inflation pressure, interest rates and earnings growth may now mean the economy is more vulnerable to shocks. Undoubtedly, valuations are now lofty in certain markets, but at least broader leadership has recently emerged in US equity markets.     

Here are three significant market trends to keep an eye on: 

1. Interest Rate Normalisation 

Interest rates are expected to normalise in 2025. Growth varies from strong to mediocre, but it is not negative. Stock markets are still higher than ever, and unemployment is just above all-time lows. While the economy may be back to normal, monetary policy is not. Rates remain at their highest level since before the GFC in 2008. Expect to hear much more discussion about the “neutral real interest rate”. That is the one, which excludes inflation and neither stimulates nor depresses the economy. 

2. Rising Concerns Over the US Budget Deficit 

Will markets start to finally worry about the US budget deficit? America’s government is now running a deficit of 6.4%, the highest in post-war history, outside of covid or the financial crash. Trump 2.0 is widely expected to widen it further.  One economist suggests it now takes nearly $2 of new government debt to generate an additional $1 of US GDP growth. If any other country were spending this way, investors would be fleeing. Will they demand higher interest rates or more fiscal discipline in the next 12 months? That would wean the US off its dependence on government spending. But that will hurt economic growth and corporate profits. 

3. AI’s Gradual Economic Integration 

AI is set to impact our lives, but it might take longer than anticipated to really do so.  Stock prices have surged (Nvidia millionaires, anyone?) but as yet there has been very little impact on the broader global economy. Businesses are typically slow to adopt new technologies. America’s Census Bureau asked companies if they use AI to produce goods and services and only 5-6% said yes. Capital investing remains fairly weak, so this disconnect between the real economy and financial markets could endure. 

Conclusion 

A new year always brings with it hope, expectations and a new start. But looming large over financial markets are Trump and technology, and this may bring large amounts of uncertainty and volatility. How long can US exceptionalism last as we enter the second presidency and cheerleader of MAGA? While US rate setters may have engineered a ‘no’ landing, other regions are more downbeat into the new year, which means increased policy divergence.   

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