2025 equity outlook: Policy clarity brings fundamentals to the fore
Resolution of the US election in particular has mitigated a key source of uncertainty that caused many companies to put capital expenditures on hold in much of 2024
MACRO conversations dominated equity markets in the second half of 2024, with headlines surrounding the US Federal Reserve, China policy, Japanese interest rates, as well as the US and other global elections making for volatile markets.
We expect a reversal of this trend in 2025. The resolution of the US election in particular has mitigated a key source of uncertainty that caused many companies to put capital expenditures on hold in much of 2024 and confounded investments among institutions and individuals.
Companies postponed or scaled back capex plans
Greater policy certainty has created a baseline from which companies can start to make decisions again, potentially launching a new cycle of capex and investment.
US president-elect Donald Trump has been clear about his policy priorities, which include a mix of widespread tariffs on imports to the US and more severe tariffs on Chinese imports (with the possibility that tariff threats could be used as a bargaining tool), along with mass deportations of immigrants believed to be in the US illegally; these are balanced with prospects for lower corporate tax rates and deregulation, and the extension of individual tax cuts.
While certain policies could have an inflationary impact and potentially affect the arc of Fed rate cuts, we believe the global easing cycle will continue.
A clearer view into policy, paired with the resolution of the trailing effects of Covid on supply chains, could also signal a return to focus on fundamentals. The near-shoring/friend-shoring trend has permanently altered many supply chains, and continued innovation is reshaping industries across the globe. Here, we discuss what we see coming for equity investors in the year ahead, including areas of opportunity and risks we’re watching.
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Developed-market equities are trending up again
After bouts of volatility leading up to the US election, developed-market equities have rallied strongly, with the S&P500 reaching new highs and the Stoxx Europe 600 also registering a bounce-back. US labour markets have been holding up well, and inflation has been coming down (for now). Meanwhile, European equity investors continue to digest what Trump’s presidential win will mean for stock markets – most notably, his across-the-board tariff proposals and the indirect hit from higher tariffs on China – though markets appear more focused on central bank policy in the region.
Looking out over the next year, we expect certain sectors to be more affected by the shifts in policy:
Financial companies may feel the strongest tailwinds: Under Trump, we would expect deregulation, lower taxes and a potential relaxing of antitrust regulation to offer clear benefits to banks. Indeed, bank stocks have already rallied strongly since the news of Trump’s win.
Industrials could be headed for a golden era: US industrials in particular will likely benefit from Trump’s “Made in America” policy leanings. Given weak purchasing managers’ indices over the past two years and the chilling impact of election uncertainty on capex, it’s not unreasonable to expect a spring-loaded rebound among industrials as the fog clears.
Will Big Tech remain on the “naughty list”? Trump has generally been unfriendly towards Big Tech (with at least one notable exception). While he is likely to take a much more hands-off and deregulatory stance than President Joe Biden has, Trump could very well remain wary of consolidation in the tech industry.
Emerging-market equities face headwinds under a second Trump term
As noted, while Trump’s win is supportive of US industrials, it is a net negative for industrials in the rest of the world – and his clear protectionist stance on tariffs and trade will likely pose particular challenges for companies in China and Mexico.
A 60 per cent tariff on Chinese exports would have a material impact on the country’s gross domestic product, though the impact on Chinese equity markets could be limited, given that only a small percentage of corporate revenue for listed Chinese stocks is tied to exports to the US.
Beyond China, risk premiums are likely to rise across emerging markets (EM) and particularly Mexico under Trump’s trade policies. Some Mexican consumer goods, commodities and cement companies could pass tariff costs on to consumers (potentially hurting sales) while others may try to absorb the costs (thus tightening margins).
In Taiwan, upbeat guidance and a strong third quarter boosted sentiment in its semiconductors and eased concerns about demand. In India, we’ve seen cooling in high-ticket discretionary purchases such as cars as well as and travel and lodging. At the same time, global demand for IT services seems to have reached a bottom, and management commentary has now turned cautiously optimistic. We believe EM financials still look attractive.
Spotlight on key secular trends driving global equities
We believe companies that are forwarding or benefiting from innovations in technology, automation and healthcare along with rising net-zero and green spending will continue to drive the global equity markets.
The AI era: Artificial intelligence (AI) remains a powerful driver for quality businesses and products, though concerns have emerged about concentration risk and overheated valuations, along with the potential for a turn in sentiment. These worries are amplified by the lack of AI revenue in recent software earnings, which could signal a potential overbuild of AI infrastructure. Despite these challenges, increased spending by cloud service providers indicates ongoing investment in AI capabilities. While the lack of recovery in IT spending is disappointing, we view this as a temporary phase associated with the evaluation and development stages of AI implementation.
Our 2025 outlook for AI-related semiconductor and hardware spending has become more optimistic following third-quarter earnings results, driven by raised capex forecasts from hyperscale companies and rising demand from enterprise and government verticals.
Healthier returns? In healthcare, advances in the treatment for obesity, diabetes, cancer and rare diseases remain a key source of growth. We maintain exposure to the innovators in drugs and devices treating unmet needs, as well as the life sciences companies that supply them with cutting-edge new technologies.
Green is still a “go”: Net-zero and green energy spending remains a key theme, and we are maintaining exposure to companies that benefit from these trends. In the US, we generally have not seen companies retreating from their net-zero commitments despite red state/blue state divides. In Europe, we have seen headlines about a potential pullback, though this is more a function of budget constraints bumping up against ambitious plans. Companies are still spending significantly on the implementation of net-zero and green initiatives, by our analysis. We still believe in the longevity of this theme, but the discussion has become more nuanced.
Electric vehicles make inroads: China has taken a strategic stance that electric vehicles (EVs) are an area where it can essentially leapfrog everyone else – as the rest of the world pulls back a bit, China is moving at full tilt on producing both the vehicles and the batteries that power them. That theme is also reflected in companies globally that provide the connectivity inside of EVs – these businesses are going strong because of their proportional exposure to China, with Korea another notable player in EV battery production. The market has noted concerns about EV penetration slowing as automakers in Europe and the US pull back on ambitious plans. But we believe this has affected sentiment more than reality, since Asia is the dominant market for EVs and developed market EV penetration is still growing, just not as robustly as expected.
Towards equity market clarity in 2025
All told, we expect to move from what has been a highly macro-focused story in 2024 to a more nuanced and fundamental-driven backdrop for global equity markets in 2025. We believe that the new post-Covid normal, characterised by ongoing innovations and supply chain changes, brings with it a ripe hunting ground for global equities – one in which longer-term secular trends will drive the success of companies over time, and where short-term fluctuations in a given sector will create opportunities to acquire quality names.
The writer is portfolio manager, head of Global Sector Cluster Research, PineBridge Investments
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