Will the equities rally continue in 2025?

US equities outlook

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The US economy is on a solid footing, with inflation declining, the US Federal Reserve cutting rates and the yield curve re-inverting.

We are introducing a two-year target on the S&P 500 Index of 7,500 for year-end 2026 and raising our year-end 2025 target from 6,000 to 7,000. We continue to expect the broader market to perform well in 2025, and remain overweight stocks versus bonds and within stocks, tilted in our balanced portfolios toward large-cap value and small-cap stocks.

Our reasoning is as follows: Firstly, the US economy is on a solid footing, with inflation declining, the US Federal Reserve cutting rates and the yield curve re-inverting. We expect the federal funds rate to settle at 3.0% sometime in 2026, with the 10-year US Treasury yield stabilising around the 4.0% level. Although the path for getting there is likely to be volatile, on a two-year view, this trend is equity-market and valuation supportive.

Figure 1: Large-cap and small-cap US stocks 2024 YTD

Secondly, given the conclusive outcome of the 2024 US election, we anticipate a relatively quick implementation of President Trump’s pro-growth agenda. That agenda includes lower corporate tax rates and, as a minimum, no hike in personal tax rates, including no hike in the higher bracket rates that impact many of the tens of millions of more than 33 million small businesses in the country. In addition, we expect a substantially lower government regulatory burden to improve economic productivity and growth. Trade policy is likely to raise in-bound US investments and improved exports for US corporations. All of these agenda items should improve economic growth.

Finally, once interest rates stabilise at lower levels, we think the valuation on the S&P 500 can expand to a level around 21.5x forward earnings. This multiple, though historically high, is really a blended valuation target based on a more normal 18 multiple on the broad market, excluding the mega-cap US growth companies which can and should trade at a substantially higher premium given their solid long-term fundamentals and relatively asset-light business models.

Figure 2: US 10-year Treasury yield vs. federal funds rate

International equities outlook

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In most developed markets we expect inflation to come down to target rates, giving central banks in Europe and the UK room to lower rates and stimulate their economies.

As we look out into 2025, we see a lot of uncertainty among international investors. Whether due to political gridlock in Germany, France and Japan, ongoing wars in Ukraine and the Middle East or the impact of Trump’s proposed tariffs on economic growth, investors are concerned about economic and earnings growth in both developed and emerging markets.

In most developed markets we expect inflation to come down to target rates, giving central banks in Europe and the UK room to lower rates and stimulate their economies. China will continue to fight deflation as the Beijing government looks to stimulate internal demand to offset weaker export growth due to higher US tariffs. Higher rates in the US will put upward pressure on the US dollar, a headwind for international equities, especially in emerging markets.

Europe’s economy will improve, coming off a low base. Growth will continue to come from the service component of the economy as the European consumer is still strong with unemployment levels low and savings rates high. Manufacturing will recover, again coming off of a low base, but with the threat of a trade war with the US and slower growth in China, recovery will be isolated to manufacturing related to national defence and electrification.

The story from the UK is more compelling. The UK has a stable government, inflation is moderating and the Bank of England has room to lower rates to stimulate growth. UK equities derive a lot of revenue outside of the country which means a weaker pound should be a tailwind to earnings growth. We expect the Bank of Japan to raise rates to fight Japan’s newly found inflation, but with wages rising we don’t see higher rates materially impacting the Japanese consumer.

China’s growth will be below consensus, but the Beijing government will introduce additional fiscal stimulus to increase domestic demand. A full-blown trade war is not our base case, but trade will dominate the headlines.

Global emerging markets outlook

Many emerging countries have pivoted towards domestic consumption, ramping up investment in infrastructure and increasing the penetration of digitisation.

Despite negative headlines, we believe that a Trump presidency 2.0 will not change the structural growth drivers of emerging markets. Many countries have pivoted towards domestic consumption, ramping up investment in infrastructure, and increasing the penetration of digitisation, driving efficiency and productivity. In addition, emerging economies control significant portions of critical resources and have leadership in critical tech supply chains with no credible Western alternatives. Most emerging economies will also benefit from favourable demographics and, therefore, supply of labour, and consequently are not impacted by the wage hike spiral, which many Western economies may have to deal with.

Overall, the fundamentals of emerging markets are sound, with China signalling more significant support for the domestic economy and putting a floor on the property sector issues. In times of fiscal profligacy in the West, most emerging economies are doing the right thing by managing the bond market’s expectations. Economic vulnerability is low, structural growth drivers are intact, and valuations in the equity market are at a significant discount to developed markets. Most emerging economies have not cut rates substantially, and a few have already started hiking, continuing their track record of monetary policy prudence.

Impact equities outlook

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Impact investing provides a way for private capital to help tackle some of the pressing issues of our time, such as air, water and soil pollution, climate migration and the ageing of many countries’ populations.

The backdrop in 2025 remains favourable for impact investing as critical environmental and societal problems have taken a back seat over the last few years given the worries around macroeconomic factors and geopolitical tensions, while market returns have been dominated by the ‘Magnificent Seven’. However, the challenges we are facing, such as air, water and soil pollution, climate migration, the ageing of many countries’ populations, the speed of technological change and social implications coupled with an increase in inequality have only worsened.

Impact investing is a way for private capital to be deployed to help tackle these issues and has been backed by regulatory changes in the UK and the EU, which affect both corporates and investors. This is important, as according to the latest UN Sustainable Development Goals (SDGs) progress, only 17% of the SDG targets are on track, nearly 50% are showing minimal or moderate progress, and progress on 30% has stalled or even regressed¹. In terms of expectations for 2025, sectors which benefit from decarbonisation and electrification should continue to see robust demand. Some drivers of this demand are secular; some 750 million people globally lack access to electricity, while the growth in data centres equates to 800TWh in new electricity consumption² – similar to that consumed by the whole of Germany. In terms of 2025, it is estimated we will see 20% annual growth in demand for electric vehicles³, which remains a core investment opportunity. With regards to the US, despite all the rhetoric around recent elections, over the past fifteen years, the fact remains investment in clean energy has grown every year irrespective of the US administration.

We also expect to see a recovery in life sciences as we are in the early innings of a restocking cycle. Lastly, another big theme where we see ample opportunities in 2025 and beyond is water. There is a global imbalance between water supply and demand coupled with climate effects such as droughts and regulatory drivers around water pollution. Water is a huge ecosystem with a global total addressable market for solutions at US$800bn and global water infrastructure capital expenditure requirement of US$12.6tn over the decade⁴. The enduring source of demand for products that provide the solutions to global challenges such as these, should ensure that remains the case.

Developed market equities outlook

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Trump’s agenda of deregulation and lower taxes is pro-business and, in the nearer term, we expect smaller cap and value stocks to be favoured.

The Republican sweep in the US election could have wide-reaching implications for stock markets, currencies, commodities, and foreign countries. In the long run, Trump’s agenda of deregulation and lower taxes is pro-business and, in the nearer term, we expect smaller cap and value stocks to be favoured.

However, we should not expect a smooth ride. Trump’s ‘America First’ policies could increase global trade tensions, especially with China and potentially the EU. Moreover, the fiscal deficit, policy unpredictability and his geopolitical stance on Russia and the Middle East could have a major impact on energy markets, military spending and traditional alliances.

Regardless of the potential impacts of the election result, it’s worth noting that the impact of the state is often exaggerated. The US economy is a large machine that marches relentlessly forwards by people and businesses making individual decisions, regardless of who resides in the White House.

It’s also worth remembering that the economy appears to be resilient. The latest earnings season has surpassed expectations so far, and it is notable that the positive surprises have been broad-based. We also expect the earnings growth gap between the so-called ‘Magnificent Seven’ and the rest to start to close, supporting a broadening out of the market, which for a diversified portfolio of companies with attractive fundamentals should be positive.

Elsewhere, the Beijing government’s monetary and fiscal pronouncements suggest that policymakers are finally trying to get a grip on the liquidity, banking and real estate crises that have engulfed its economy. More specific policies are needed (and expected) to kickstart the economy and if successful, companies with Chinese exposure could benefit, notwithstanding the concern over the potential for trade tensions.

Europe remains a concern. The economy looks sluggish and, in contrast to the US, the regulatory environment is a relative headwind for the region. The political environment also looks increasingly uncertain, especially after the collapse of the German government, which could drive volatility. We expect that earnings resilience, high quality management and a global footprint will be characteristics that will likely be favoured.

Our ethos of diversification ensures that portfolio risks are controlled with exposure to a broad range of sectors and themes across the style spectrum. We believe this approach will be important in negotiating a market that is likely to be more volatile.

In the nearer term, the new regime should lead to deregulation and an easing of banking rules that would be favourable for the Financials sector. Trump’s promise to “drill, baby drill” should lead to some energy projects being fast-tracked and regulatory barriers lowered, benefitting the Energy sector.

A Republican-controlled US government is also likely to take more of a hands-off approach with technology. However, trade tensions with China could impact tech companies relying on international supply chains. We continue to remain positive on artificial intelligence (AI), however, which offers exceptional growth. Further down the AI value chain, exposure to data centres within Real Estate and Industrials provides attractive indirect exposure.

Sustainability is one area that could come under pressure. There is a real possibility that President Trump could pull the US out of the Paris agreement when he takes office. Actions like this are likely to affect sentiment towards companies providing the solutions to the sustainability challenges we face.

However, in the wake of recent extreme weather events in the US and Spain, we know that climate change is already upon us, and the instances of such events will only increase in regularity and severity. Consideration of physical risks, such as who is most exposed to extreme weather events and how these risks are being managed, will be crucial.

An environmental, social and governance (ESG) approach to investing, therefore, is arguably more important than ever. Our approach does not take a moral view and is not constrained by thematics. Instead, we favour companies with good or improving ESG characteristics, while avoiding the worst companies, as we believe this enhances performance. Good governance will be a central component of this as those that are well managed are less likely to be exposed to unnecessary risk. It is something we place great store on.