On the equity front, we favor the United States and growth markets. Bond strategies should focus on risk management, through high yield bonds.
Despite high valuations in the United States, the year 2025 should still prove to be a good year for the stock markets. US stocks are expected to post the biggest gains, and we remain less convinced by the potential of European stocks. If the outlook for equity and credit markets remains positive over a twelve-month horizon, customs duties, geopolitical risks and inflationary pressures will define the investment climate. As we enter 2025, asset allocation must balance these factors to optimize risk-adjusted returns.
Favorable outlook for stocks
US equity valuations are certainly historically high, but the market should benefit from the policies of the incoming Trump administration. Tax cuts and deregulation are expected to support corporate profits and boost M&A activity. We believe that the technology sector will drive the market. Financial stocks should also produce positive performances, but, after the recent rise in prices, you will have to choose your timing carefully.
Regionally, US stocks are expected to repeat their good results over the next twelve months as domestic policies create conditions conducive to growth. European values will remain less interesting.
Steepening of yield curves
We continue to believe that the disinflationary trend will continue in 2025. That said, the American bond market will have to manage an acceleration in growth and potential inflationary risks, fueled by customs duties and the tightening of migration policy. An acceleration in growth could make short-term bonds a crucial tool in any U.S. bond-focused strategy, and maturities of three to five years look attractive.
In Europe and the United Kingdom, upward risks to inflation seem more limited and continued monetary easing should lead to a steepening of the yield curve (the yields on short-term bonds falling more quickly than those on bonds long term). Inflation-indexed bonds could prove attractive, especially if fiscal policies cause prices to rise more sharply in the coming months. However, we judge their upside potential to be limited compared to that of traditional nominal bonds.
Towards a new appreciation of the dollar?
We expect significant fluctuations in the foreign exchange markets. The US dollar may soon appreciate, reflecting positive market sentiment and higher interest rates than in other developed markets. With growth forecasts improving in the United States and the Federal Reserve’s terminal rate remaining higher than that of other major central banks, the euro should gradually weaken against the dollar. However, the landscape could be less clear-cut within six to twelve months, as inflationary risks recede and budgetary and commercial risks materialize. The Swiss franc could show greater resilience towards the end of 2025.
Gold and oil take center stage
Higher-than-expected real interest rates and an appreciation of the US dollar could limit gold’s upside potential in the near term. However, with the continuation of the disinflationary trend and the cycle of lower interest rates in major economies, investor demand is expected to strengthen, supporting the price of gold. Central bank demand is expected to remain at high levels. An allocation dedicated to gold will therefore constitute an effective diversification tool in portfolios in 2025 again.
Oil markets will remain sensitive to production in the United States and Middle Eastern countries. Production increases are likely in 2025 and should keep oil prices under pressure over the next twelve months. Portfolio exposure to oil and energy-related assets could provide protection against inflationary risks.
Positioning and risks in 2025
Market conditions are expected to provide investment opportunities in 2025, particularly in the equity and corporate credit segments.
In terms of equity exposure, we favor the United States and growth markets. Bond strategies should focus on risk management, through high-yield bonds.
On the foreign exchange markets, the short-term appreciation of the US dollar could be offset by better opportunities for other safe-haven currencies during 2025, if budgetary risks resurface. Commodities will remain essential to protect against inflationary risks and to exploit opportunities, with gold in particular making it possible to anchor portfolios in uncertain conditions.
