2025 Global Market Outlook
Welcome to our 2025 global outlook. As we face another year of geopolitical, technological, and fiscal transformation, the ancient saying that ‘change is the only constant’ rings truer than ever.
In this year’s global outlook below, we look back at the last 12 months as well as consider the changing landscape facing investors in 2025.
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Anyway, without further a-do let’s get on with this year’s global market review. Whether the article inspires you to get in touch and get that much needed ISA or pension investment review or it gives you some insight in running your own portfolio, either way, we hope you find it useful!
Market Review of 2024
Despite all the headlines and noise, equity markets continued to climb higher in 2024 as most regions delivered double-digit returns.
A cautiously optimistic start to 2024
We started last year with both optimism and caution. The caution came from the knowledge that global equity markets had seen substantial gains in 2023. This had led to stretched valuations, particularly in the US. Elsewhere, inflation had decreased, but it remained high enough to prevent central banks from significantly normalising rates. Additionally, consumer debt levels and default rates were rising.
Conversely, optimism came from the knowledge that inflation was returning to more normal levels, the pivot by the US Federal Reserve ('the Fed') late in 2023 would be favourable for equities, and the resilience of the global economy suggested that recessions were not an immediate concern. As the year played out, the United States avoided a recession, the eurozone and the United Kingdom experienced only minor economic downturns, and China gained momentum. Although market volatility occasionally spiked, the predominant narrative of 2024 was one of growth, significantly driven by structural themes such as the rapid advancement of new technologies.
US equities drive returns
The US was the best performing region in 2024. The US economy remained resilient, with consumers continuing to spend, and the labour market holding tight. The enthusiasm for artificial intelligence (AI) sent tech valuations soaring with the Magnificent Seven dominating returns in the first half of the year. However, the second half of 2024 saw broader market participation. The latter part of 2024 was dominated by the US election with Trump winning a clean sweep of the presidency, the senate, and the house of representatives. This has given him, in his own words, an ‘unprecedented and powerful’ mandate to govern. Time will tell how his unique brand of politics will impact markets.
Political and economic challenges in Europe
As the world was processing Trump’s victory, an acrimonious breakup was happening 4,000 miles east of Washington DC. Germany's coalition government collapsed on the day Trump’s win was confirmed. Similar political instability was seen across the border in France, with four different prime ministers in one year, no budget, and a slew of unfinished bills. This upheaval, along with growth concerns, saw European ex UK equities return 2.8%.
Optimism in China
After a sluggish first half of the year, hope returned to China’s equity markets in September as Beijing revealed a coordinated stimulus plan. China’s policymakers announced a fiscal and monetary stimulus package, property sector support, and an easing of regulatory restrictions. This saw Chinese equities rise by 23.1% in September alone (source: FactSet as at 31 December 2024), and end the year up 21.8% overall.
Rate cuts continue
Following its pivot in late 2023, the Fed made three consecutive interest rate cuts in 2024. This reduced the effective Federal Funds Rate from 5.5% down to 4.5%. Elsewhere, the Bank of England held the base rate at 4.75% in December after two cuts earlier in the year. The ECB cut interest rates four times in a row, bringing the deposit rate down to 3%. Despite this rate cutting cycle, bond returns were disappointing in 2024. US Treasuries were broadly flat, UK gilts were down 4.1%, whilst global corporate bonds fared a little better returning 3.3%.
Investment lessons
Last year has shown us again that the noise that surrounds markets is often not reflective of the performance of the markets themselves. Our role as investors is to take a step back and consider the world from a purely economic and market perspective. We need to be focused on the economic environment, market sentiment, and corporate earnings – everything else is just noise.
A Changing Landscape – 2025 Outlook
As we enter 2025, the investment landscape has fundamentally changed compared to that which faced investors a year ago.
The White House is now re-occupied by Donald Trump, the Labour government in the UK is finding its feet, and growth issues in Europe and market volatility in China remain.
US: Looking good, but risks are appearing
Donald Trump inherits a strong economy with rising real wages, falling interest rates, and ongoing technological innovation. His policies of lowering taxes and cutting regulation are expected to support growth rates, which have already surprised investors with their resilience. The protectionist nature of his policies, shielding the domestic US economy by introducing tariffs, is also likely to help the US industrial heartland in the near term. This is something that is expected to support the broadening out of earnings growth away from the Magnificent Seven to the wider market over the coming year.
However, Trump’s increasingly isolationist policy, dominated by trade tariffs and tax giveaways, is not without risk. His policies will likely see US government debt levels rising, with longer-term risks for inflation. At the same time, the International Monetary Fund (IMF) expects lower real GDP growth of 2.2% in 2025, down from 2.8% in 2024. Against this backdrop, the US Federal Reserve ('the Fed') will want to proceed with caution, whilst investors must remain vigilant against inflationary risks.
Europe: Room for improvement
The election of Trump and his continued threats of US tariffs on goods exported from Europe has led to lowered expectations for European corporate profitability in 2025. Europe also faces other challenges. Germany is continuing to struggle with high energy costs and increased competition from China and the growth of its economy is almost stalling as it heads towards early elections. Elsewhere, France is dealing with ongoing political instability and the tightening shackles of reduced government spending. However, it is not all doom and gloom. The European Central Bank (ECB) is expected to make further cuts to interest rates as we move through the year. Also, inflation is now back at the target level. As a result, there is scope for an improving backdrop to appear later in 2025.
UK: Potential for growth
In a polarised world, the UK is seeking closer ties with the EU while also maintaining significant trade with the US, which is still its largest trading partner. Like in the EU and the US, tariffs on exports will be a serious risk to growth in the UK. However, government spending is frontloaded in Labour’s five-year term, so 2025 should benefit from a pick-up in investment. Whether this growth can be sustained will depend partly on the ability of corporates to follow suit and spend, but business confidence is low due to recent pressures from the Autumn Budget. However, earnings are expected to begin to recover in 2025, potentially aiding the UK equity market despite these ongoing challenges.
China: Reasons to be cheerful
Chinese equities performed well in 2024 but remain volatile. China policymakers have signalled they want to support the faltering and uneven economy. However, their actions have not reached the pockets of consumers. More targeted stimulus may be announced once there is better clarity on the expected impact of US tariffs. This is undoubtedly a challenging backdrop. However, the region’s advanced manufacturing is growing in strength. One example of this is Chinese automakers, which now account for half of the top 20 electric vehicle brands by global sales. Attractive investment opportunities are likely to remain, even if investors may have to wait a little longer for a broader, sustained market recovery.
Fixed income: Alternatives exist
The higher starting point for bond yields compared to much of the past decade offers scope for a fixed income rally. This may happen if growth falters, or geopolitical risks rise. However, because of the potential for further spikes in inflation and stretched government finances, investors must diversify beyond traditional fixed income. This could involve including real assets that can offer better protection. Alternatives offer a raft of potential candidates, such as property and infrastructure funds, and continue to present attractive prospects for investors.
Uncertainty creates opportunities
Overall, the outlook for markets in 2025 paints a picture of uncertainty. However, this uncertainty can present opportunities for active investors. We would recommend investors take advice so that their portfolios benefit from independent, strong research processes as part of their tax efficient financial plan.
As a reminder, definitely get in touch for a relaxed initial chat with us. To arrange a complimentary financial planning review, please call Laura on 0117 3636 212 or email her at office@haroldstephens.co.uk