The US seems to have put fears of a recession behind it. Despite surges in volatility, the S&P 500 is up around 30% this year and proved a favourite market for investors across the globe.
This time last year, investors had expressed some uncertainty about the fate of the ‘Magnificent Seven’ but they continued to impress in 2024, with Apple and Nvidia competing for the title of the most valuable company in the world throughout the year.
As we look to 2025, the elephant in the room is Donald Trump’s second term as US president, with a campaign marked by promises of aggressive tariffs, which could have impacts domestically and globally.
AXA IM’s Page – A new chapter for the US
David Page, head of macro research at AXA Investment Managers, said 2025 will be defined by policy uncertainty. Trump, he explained, campaigned for growth policies such as fiscal easing but also for more restrictive policies such as reduced migration and tariffs.
“For now, there is significant uncertainty about the scale of implementation, with the immediate market reaction playing down some of the more growth-restricting policies,” he said.
While AXA IM remains cautious on the outlook for 2025, strong fundamentals and improved economic conditions led Page to conclude that the US should grow by 2.3% in 2025, which will decline to 1.5% in 2026.
Meanwhile, he predicted inflation would drop to 2.8% next year before rising again to 3.2% in 2026, as the impact of the more restrictive fiscal policies was felt.
BNY Investment's Dent – The soft-landing
For George Dent, part of the team on the £2.1bn BNY Mellon Long-term Global Equity fund, the future for the US in 2025 was relatively benign.
He argued that the market had demonstrated real consumer resilience post-pandemic and circumstances this year, such as central banks entering a rate easing cycle, good bond yields and potential for stabilisation in markets such as China, may encourage further consumer spending.
“A ‘soft-landing’ has become a favoured market narrative, with ‘no-landing’ being an outside bet,” he added.
However, he admitted that there was reason for caution, with the potential for higher inflation, particularly in the face of some of his more aggressive policy decisions that may lead to an uptick in inflation.
JP Morgan’s Gimber – AI investing: more broadening than bubble
Meanwhile, JP Morgan Asset Management urged investors not to be swept up by politics when making investment decisions in 2025. Market trends, they argued, will continue to exist independent of Trump’s policies.
For Hugh Gimber, global market strategist at the asset management house, artificial intelligence (AI) will remain the key trend in 2025, represented by the dominance of the Magnificent Seven.
The question on all investors’ minds was what will happen when the valuation gap between the rest of the market and these tech darlings ends. Either the broader AI ecosystem begins to catch up to these seven leading companies or AI technology fails to deliver and creates a "catch-down" scenario in which the mega-caps’ valuations become increasingly difficult to justify.
While mega-cap fundamentals make the latter scenario unlikely, all investors should be placing greater scrutiny on these companies' ability to deliver continued results.
Gimber said: “Cheaper valuations and less demanding earnings expectations outside of mega-cap tech suggest that even AI bulls should position for further broadening across sectors in 2025.”
Fidelity International’s Ahmed & Brodie-Machura – US poised to reflate
Salman Ahmed, global head of macro and asset allocation at Fidelity, concluded that the decisive victory of the Republicans had shifted the outlook for the US meaningfully, with the possibility that it may cause the US economy to look inward, causing implications for the global economy.
The US economy was in a strong place with good consumer and private sector balance sheets and a solid labour market, with the soft landing poised to give way to reflation next year.
Indeed, for Niamh Brodie-Machura, co-chief investment officer at Fidelity, the market is hesitating too much when it comes to the US. After two years of remarkable performance, she admitted that it is understandable why investors might ask: “How can this possibly continue?”
She answered: “But the question I would add to that is why ‘should this stop?’”
However, with more expensive fiscal policy and proposed high tariffs, Ahmed argued that a second Trump presidency could “meaningfully increase the odds of outright rises in US inflation from the second quarter”.
“We believe public finances are fast reaching their limits and that above-target inflation is likely to become the least costly option for an orderly resolution to the problem of debt sustainability,” he said.
Jupiter’s Alentorn – Walking blindly into risk
For Amadeo Alentorn, manager of the £551m Jupiter Merian Global Equity fund, psychological biases will remain the key in US investment next year: “Equity markets, especially in the US, are currently highly sentiment-driven, suffer from concentration risk and are at risk of stretching reasonable valuations, in our view.”
He added that it is a “typical behavioural bias” of investors when faced with new technologies such as AI to overestimate its “short-term fruition”.
Indeed, due to sentiment-driven investing, the S&P 500 is highly concentrated, with almost a third of investment in an S&P 500 tracker now going to the ‘Magnificent Seven’.
Alentorn said: “Such an investor is therefore taking a bet on technology stocks and a growth investment style. That is fine if they have made an informed decision and accept the concentration risk.”
Consequently, Alentorn advised investors to remember that the market is multi-faceted and even purchasing a passive index tracker should be an active decision rather than a result of following the herd and investing in what is currently popular.
He concluded: “Investors should think carefully before walking blindly and passively into 2025.”