Beyond the United States, trade will be an important area of focus if Trump fully implements the tariffs he announced during the campaign. In practice, such broad-based tariffs might be difficult to implement into law, but the uncertainty will encourage U.S. companies to relocate in any case. This could boost US growth at the expense of its neighbors, but we would also expect more monetary stimulus outside the US to offset this.
Overall, stocks could generate positive returns in 2025, but investors may need to look beyond recent winners.
We must also recognize that risks increase as positive expectations are priced into market valuations. In particular, with the US 10-year bond yielding around 4.5% to 5%, we estimate that comparisons to bond valuations would limit the speed of stock returns (as higher bond yields can distract from money from the stock market and increase borrowing costs for businesses).
As mentioned above, we remain positioned for a soft landing which is a benign outcome, but when we think about the risks surrounding this scenario, we continue to worry that the US growth environment is “too hot” rather than ” too cold. Immigration restrictions and policies to stimulate the business sector could increase the risk of domestic inflation, limiting the Federal Reserve’s ability to make rate cuts.
Bonds offer attractive income
Which brings me to bonds. As I noted previously, we believe we are in a very different environment from the zero-rate deflationary regime of the 2010s. As a result, bonds do not offer the same negative correlation benefits as they did during the last decade.
However, the old-fashioned reason for holding bonds – to generate income – is back and we continue to make the case for their inclusion in portfolios. Divergent fiscal and monetary policies globally will also provide cross-market opportunities in fixed income and currencies. Strong corporate balance sheets support the performance offered by credit markets.
As investors look for diversifiers, we continue to like gold because it provides a hedge against recession risks like bonds. It is also a good store of value in the event of more stagflationary outcomes and geopolitical events.
Diversification is the key to portfolio resilience
And that brings me to the importance of portfolio resilience. While the economic backdrop appears generally favorable for returns, we cannot ignore the fact that there are many risks to the markets. We are facing disruption on an unprecedented scale and it takes many forms.
We’ve already mentioned potential disruption from tariffs and trade wars. There are also ongoing conflicts in the Middle East and Ukraine, where the risks of political miscalculations cannot be ignored.
The mechanism for transmitting geopolitical events to markets is generally through commodities. As an asset class, commodities have been out of favor due to global growth fears, but they have an important role to play in diversifying and building resilient portfolios. Energy is one way to play this, while gold remains the ultimate safe haven asset.
Private markets can also contribute to resilience through exposure to different types of assets that are generally more insulated from geopolitical events than listed stocks or bonds. These include, for example, real estate and infrastructure assets that provide resilient long-term cash flows, as well as assets such as insurance-linked securities, where weather conditions are the main driver of risk.
Overall, we believe conditions are favorable for good returns in 2025, but there will be challenges ahead. A diversified approach, which applies across regions and asset classes, can help make portfolios more resilient, no matter what the year ahead brings.
