The Year Ahead
It's an earnings driven market and my glass is still half full
Good evening,
2024 was a year of recalibration driven by macroeconomic shifts, tech dominance, and geopolitical challenges. As we move into 2025, the market landscape continues to evolve, presenting a mix of risks and opportunities. This year’s post focuses on the dominant themes, sector strategies, and actionable trade ideas to navigate the complexities of the year ahead.
Equities made steady progress in 2024, supported by technological advances and resilient consumer spending. The S&P 500 ended the year within reach of historical highs, with strong performances in key sectors like technology and healthcare. Bond markets remained volatile as central banks attempted to balance inflation control with economic stability.
Looking ahead, my base case for the S&P 500 in 2025 is 6500, reflecting robust earnings growth and consistent demand for quality names, alongside further sector rotation into cyclical and growth names.
My bull case targets 7000, driven by the previously mentioned catalyst behind my base case, faster-than-expected rate cuts, inflation remaining contained and geopolitical stability (though saying that… heightened geopolitical tensions aren’t necessarily bad for US stocks).
Conversely, my bear case of 5000 factors in risks such as inflation reigniting, a tariff shock (it’s likely to see more vol in Europe and China due to tariffs) and a hard landing. However, a hard landing risks the S&P, seeing 4800, or below...
Fun fact… when the Fed cut rates and the US did not enter recession, on average, US stocks rose 18% in the year after the first Fed rate cut.
Macroeconomic Overview
Global Growth and Inflation
The global economy is expected to grow at a moderate pace of around 3.2%, with notable regional disparities:
United States: Resilient consumer spending and corporate investments in AI underpin steady growth. A mild recession remains a possibility in H2 2025.
Europe: Struggling with energy prices and sluggish productivity, with Germany and the UK leading the slowdown.
China: Policy easing supports recovery, but structural challenges, including demographics and real estate fragility, persist.
Inflation continues to decelerate globally but remains sticky in core categories, prompting central banks to approach rate cuts cautiously. This was my expectation throughout the hiking crusade, and I still believe rates won’t come down as aggressively as people hope.
Monetary Policy
The Federal Reserve will likely cut rates by 100bps in 2025, contingent on labour market trends and inflation dynamics. The ECB are expected to follow suit with smaller, staggered cuts at 75bps. The BoE I expect to cut 125/150bps in 2025, though I am not sure how much of a drag the recent UK budget will have on the economy; considering the speed of transmission for fiscal and monetary policy in the UK, the BoE will find out quickly how much they need to cut. Monetary easing could continue to serve as a tailwind for risk assets in 2025, if not done for the wrong reasons that is…
Fiscal Policy
Fiscal policy in 2025 will play a critical role in shaping global growth trajectories, with key regional differences:
Europe: In Europe, fiscal constraints due to high debt levels limit large-scale stimulus. However, the EU's "Green Deal Industrial Plan" will continue to channel investments into renewable energy and digital transformation projects. Germany, in particular, is expected to ramp up spending on energy independence initiatives following its struggles with imported energy costs. European nations, constrained by fiscal rules, will face challenges balancing austerity with growth-oriented spending.
China: China’s fiscal policy remains proactive, focusing on stabilising the property market through subsidies and easing credit conditions. Additionally, Beijing is prioritising high-tech manufacturing and infrastructure development to counter weak private investment. Regional governments are expected to take on significant debt to fund these initiatives, with risks of inefficiencies and debt servicing challenges looming large.
Key Risks
Geopolitical Volatility: Rising tensions around Taiwan remain critical flashpoints.
Inflationary Pressures: Persistent core inflation could delay rate cuts.
Debt Concerns: Rising sovereign debt levels could pressure credit markets and trigger volatility.
Sector Analysis and Trade Ideas
Technology
After a standout year driven by low volatility and Mag7 dominance in the S&P 500, I believe we will see continued gains for U.S. equities in 2025. The AI “revolution” continues to dominate, attracting capital into Mag7 names, semiconductors, cloud computing, and AI applications. Valuations remain rich yet robust, driven by both earnings visibility and secular growth tailwinds. Demand for AI infrastructure remains strong, and key semiconductor components required for AI applications are expected to face supply constraints in 2025, supporting favourable pricing dynamics.