We don’t go in for New Year’s resolutions at Magnus: if something needs changing, it should be done today. With that in mind, it’s no surprise that our mantra for 2025 is to keep invested and carry on!
We’ve highlighted 5 key themes that we believe will drive markets over this year and beyond, but the crux for us is that today’s stock market strength remains underpinned by rising corporate profits, a resilient consumer and Central Banks that are in a strong position to cut interest rates.
Whilst returns will likely moderate from the fast-paced gains of the last 2 years (as expectations have now caught up with reality), we don’t see evidence of the traditional “overs” that one would normally associate with an exhausted market. Stocks, whilst fully priced in certain areas, do not appear overvalued, we see little risk of economies over-heating and, finally, we see the risk of over-zealous Central banks making an overly restrictive policy error as being low.
The 5 key themes that shape our thinking for this year and beyond are:
1. Growth: slowing but solid
2. Room for rate cuts
3. Corporates to deliver on profitability
4. Debt, Deficits, the Dollar and the Donald: 4 D’s to keep an eye on in ‘25
5. Cash on the side
Growth: slowing but solid
To this end (and focusing on the World’s biggest economy), we see the US consumer as being the key to driving US growth, with Global growth being kept intact by a slowing – but still growing – China.
A resilient US consumer has continued to generate upside surprises in growth, with the recent 3rd quarter growth number being revised up to 3.1% (from 2.8%). A strong consumer has been the backbone of this growth, with Personal Consumption Expenditure (which represents around two thirds of US GDP) growing at 3.7%. Behind this strong growth are a bank of consumers that are somewhat immune from high interest rates (by virtue of having locked in their mortgages at lower rates and / or having enjoyed the wealth effect of rising house prices and rising stock markets) and a group of consumers that remain confident in their jobs.
Homeowners, are fairly well immunised from higher interest rates:
US Personal Consumption has driven economic growth in the US. So long as workers can remain employed, we expect this trend to continue
Whilst the US jobs market is undoubtedly tight, it is still growing and is still providing wage growth in excess of inflation whilst workers retain the confidence that they won’t lose their job for economic reasons.
It’s a tough job environment, but there are jobs out there:
Layoffs aren’t showing signs of picking up, which helps promote confidence within the US consumer.
Wages are growing faster than inflation:
Hence, whilst a tough environment for the US worker, they are still seeing real growth in their incomes and don’t live in fear of being laid-off. Against this backdrop, strong growth can remain.
China, the World’s second-largest economy and biggest contributor to global economic growth is taking measures to stimulate. Whilst we are skeptical on the efficacy of such measures, we would note that China is still growing and is much less reliant on the US (key if tariffs start to bite) than it once was.
China is exporting much less to the US than it did 10 years ago
Chinese property prices have started to bottom, which will help repair confidence in a Chinese consumer that is running a gross domestic savings rate of circa 45%!
Although just a very small piece of the global growth jigsaw, we would note that the UK consumer, with their savings rate of near 10% has potential to boost growth should confidence return (it is trending upwards from low levels!).
Room for rate cuts
Even having made cuts in 2024 of 1% in the US and Europe and of 0.5% in the UK, Central Banks are in a strong position to cut interest rates further from here should growth stall.
Despite the recent interest rate projections from the US Federal Reserve signaling just 2 interest rate cuts in 2025 (as opposed to the 4 that they signposted at their September meeting), the fact that they made a bumper 0.5% cut in September (following some weak market price action and a couple of underwhelming economic data points) to us suggests that they are keen to err on the side of accommodation. We take the same view for other developed Central banks, where interest rates are high enough to stimulate growth should a kick-start be needed.
Corporates to deliver on profitability:
Corporate profitability is the number one driver of long-run stock returns and US company profits, notably within the technology and consumer discretionary sectors, have powered much of the recent gains in stock markets. These companies (which comprise Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta and Tesla) are affectionately known as “The Magnificent 7”, owing largely to the “Magnificent” circa 100% growth in profits that they’ve generated (as a whole) in the 1-Year period to the end of September 2024.
These companies are by no means cheap, but they have backed up their gains with superior earnings growth. Having generated circa 100% earnings growth in the 1-year period to end September 2024, the bar of expectation for this coming year is a more modest 21%. Furthermore, the bar for other companies is much lower still but we believe it is one that is attainable with a resilient consumer confident in their job security.
Sectors such as utilities, industrials and financials have expected earnings growth targets of sub 6% (according to Factset data) and all have greater than 60% of their revenues based in the US (which would favour them if there is a more protectionist tack taken by the new US President!).
Looking further afield than the US, markets such as the UK and Emerging markets stand out as ones that are trading on undemanding valuations and with undemanding earnings expectations.
A core exposure to US stocks (given that the US now makes up circa 74% of the global developed benchmark) makes sense, but we’re mindful of the concentration risk (the top 7 stocks in the US make up nearly 33% of the US equity benchmark at end December 2024) and do believe that it makes sense to complement this with a holding in other, cheaper markets such as the UK and emerging markets.
Debt, Deficits, the Dollar and the Donald: 4 D’s to keep an eye on in ‘25
With approximately $36 trn of total public debt outstanding, debt interest payments of approaching $1trn for 2025 (according to the US Congressional Budget Office) and a budget deficit of just over 6%, faith in the Dollar is going to be key if the US wants to keep spending money!
Time will tell how this plays out for President-Elect Trump, but the establishment of the Department of Government Efficiency (DOGE) under the helm of Elon Musk and Vivek Ramaswamy combined with his nomination of a hugely successful currency trader (Scott Bessent) as Treasury Secretary auger well for the time being. Doubtless President Trump will throw up some uncertainty and may even fall out with his newfound friends, but in identifying these risks as the key issues he does, at the very least, demonstrate that they need careful consideration and management.
Cash on the side
Central Bankers have room to cut interest rates. We believe this would be their inclination were we to see a growth wobble or increased uncertainty start to derail momentum.
As interest rates decrease, so does the relative attractiveness of holding cash and it would be reasonable to assume that we’d see some of the c$7trn that is currently sat in US money market funds move back into investment markets.
Source: St. Louis Fed economic data
Concluding thoughts
In summary, whilst there is a lot to look out for in 2025, we don’t believe the long-term investor should be unsettled.
2025 could well be a year where appropriate diversification and rebalancing are an investor’s best friend against a backdrop of increased uncertainty.
Source for all data: Bloomberg unless stated otherwise.
The value of investments and the income from them can go down as well as up and you could get back less than you invested. Past performance is not a reliable indicator of future performance.
The content of this article is not intended to be or does not constitute investment research as defined by the Financial Conduct Authority. Retail investors should always seek advice before making any investment decisions. The content should not be relied upon when making investment decisions, and at no point should the information be treated as specific advice. The article has no regard for the specific investment objectives, financial situation or needs of any specific client, person, or entity.
