The Big Picture: Why 2025 promises to be a good – not a great – year for equities

Despite political and geopolitical tensions, 2024 delivered above-average returns. Equity markets, especially in the US, surged to record highs. Looking ahead to 2025, we see enough reason to be moderately positive, especially for the first half of the year. Therefore, we remain slightly overweight in both equities and bonds.

Looking ahead to the new year, we are mildly optimistic. The underlying economic picture is favourable. While the US economy shows signs of cooling, it still remains strong. A recession isn’t on the radar for the coming quarters, with the US charting a ‘soft landing’ marked by lower inflation and slower but positive growth (see forecast table).

The European economy is having a more difficult time. Weak domestic demand is causing a sluggish manufacturing industry, among other things. Yet, like the US, Europe is expected to avoid recession, and go on to deliver modest but positive growth.

In China, government-led stimulus efforts, announced in November, aim to revive a struggling economy. However, a potential renewed trade war with the US, fuelled by Trump’s return to the presidency, could dampen economic progress.

This brings us to a topic that many economists are not overly cheerful about: the prospect of a second Trump term. Yet, we can hardly ignore this ‘elephant in the room.’ Let’s consider it a coincidence that the elephant is traditionally a symbol for the American Republican Party – what matters more is the fact that the Republicans did exceptionally well during the November elections.

Trump plans to lower tax rates for businesses and households. This benefits the profitability of companies and the disposable income of consumers. Yet, these moves risk further inflating the US budget deficit. Additionally, Trump made it very clear that he wants to introduce significantly higher import tariffs, especially on products from China.

Equity markets initially reacted positively to the election results. But in the longer term, investors may change their minds. If Trump turns his plans into policy, there will be economic consequences – and not all of them are positive. You can read more about this in the article Challenges.

At the moment, it is too early to know what Trump’s policy will actually look like. He may adopt a hard-line approach consistent with his campaign. But even in that case, it could take several quarters before the US economy, which is still growing considerably, starts to feel the impact of Trump 2.0. Alternatively, Trump might take a more moderate stance to secure deals with key trade partners.

Meanwhile, from an investment perspective, we should focus on what we know. The economy continues to grow at a modest pace. We expect this growth to translate into healthy corporate profits in the coming year. Inflation is declining, allowing central banks to continue lowering interest rates for the time being.

These fundamental factors are favourable for equities. Therefore, we enter the new year moderately positive, with a slight overweight in equities. Bonds also stand to benefit from lower interest rates: when bond yields fall, prices rise. Therefore, we are also slightly overweight in bonds, with a preference for high-quality European government and corporate bonds. While inflation in the US might rise again under the new Trump administration, that risk is smaller in Europe. The European Central Bank has therefore more room to continue lowering interest rates than the US Federal Reserve, which is favourable for European bonds.

A new year is around the corner. And a (re)elected president is getting ready to enter the White House. The second Trump term comes with economic risks – which is why investors should stay alert. All in all, 2025 is likely to be a less exuberant year for equity markets than 2024. But, as you can read in the article Opportunities, there are solid returns in sight.