Executive summary:
- We expect that the U.S. will achieve a soft-landing in 2025, with the economy growing at a trend-like pace of 2.0%. Outside the U.S., we think growth will likely remain under pressure, with trade-policy uncertainty and tariffs weighing on Europe and the Asia-Pacific region.
- We believe that post-U.S. election dynamics, improving earnings, and attractive valuations may create compelling opportunities for U.S. small caps in the year ahead. We also see a steepening yield curve offering opportunities in short-term bonds, as short-term rates are expected to decline faster than long-term yields.
- We expect private markets to continue playing an increasingly vital role in the evolving landscape of capital flows, as the shift away from public markets accelerates with fewer IPOs (initial public offerings) and later-stage listings. In this environment, we believe a multi-manager approach is crucial. By diversifying across specialized managers, particularly in real assets, we believe investors can access a broader range of opportunities that blend public and private market investments
- We think that the new U.S. administration’s focus on deregulation and tariff-based policies could reduce market concentration, potentially supporting active-manager outperformance. We and our active managers are focused on sectors where AI adoption is accelerating, such as industrials, healthcare, and consumer goods.
An enduring image from 2024 will be the capture of the SpaceX booster rocket by the Mechazilla robot arms on its return to Earth. This achievement served as a powerful metaphor for the year: the improbable not only became possible but redefined expectations.
We expect 2025 to be another year of overcoming challenges and redefining limits against a backdrop of high U.S. equity market valuations, mega cap dominance, and uncertainty surrounding the policy agenda of U.S. President-elect Donald Trump. Our focus is on building resilient portfolios that can adapt to a wide range of scenarios.
Key economic themes for 2025
Looking into 2025, we anticipate a soft landing for the U.S. economy. Our assumption is that the new administration will ease its more aggressive stances on tariffs and immigration. With these dynamics in mind, here are our key economic views for 2025:
1. U.S. growth and policy trade-offs
The U.S. economy is expected to grow at a trend-like pace of 2.0% in 2025 in response to the lagged impact of tight Federal Reserve (Fed) monetary policy. The Trump administration’s policies present a delicate balancing act. Tax reforms and deregulation are likely to stimulate growth, particularly in domestic and cyclical sectors. Tariffs and immigration restrictions, however, could trigger a stagflationary shock that might have the Fed contemplating a rate hike as the economy weakens.
2. Global headwinds and policy divergences
Outside the U.S., growth will likely remain under pressure. Trade policy uncertainty and tariffs will weigh heavily on Europe. China will face headwinds from U.S. tariffs, a struggling property market, and deflation pressures. Japan remains an outlier, supported by a virtuous wage-price spiral that will anchor inflation expectations near 2%.
3. Market sentiment and valuations
Elevated equity valuations make the U.S. market vulnerable to negative surprises, and further dollar strength will challenge emerging markets. Sustained U.S. Treasury yields above 4.5% could challenge equities, diminishing the earnings yield advantage stocks have enjoyed over bonds since 2002.
Key portfolio themes for 2025
As we navigate 2025, the interplay between the shifting policy landscapes and evolving market conditions calls for thoughtful portfolio construction. Building on the macroeconomic backdrop—defined by resilience in U.S. growth, potential disruptions from trade and immigration policies, emerging opportunities in AI (artificial intelligence)-driven productivity, and growth in private markets—three strategic themes guide our approach:
1. Balancing U.S. growth amid policy shifts
The U.S. economy is resilient as it enters 2025, but the road ahead will be shaped by shifting policy dynamics.
Asset class implications:
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Equity
We are focused on U.S. small caps, where post-election dynamics, improving earnings, and attractive valuations may create compelling opportunities. We also see growth managers targeting high-growth cyclicals like software, while value managers identify M&A (mergers and acquisitions) potential in financials and healthcare. Core managers are balancing cyclical exposure and managing risks in rate-sensitive sectors.
In addition, we expect increased market volatility from U.S. foreign policy actions to create opportunities for active managers to find quality companies temporarily impacted by headline risks.
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Fixed income
We see a steepening yield curve offering opportunities in short-term bonds, as short-term rates are expected to decline faster than long-term yields. Credit markets may have limited upside due to tight spreads, particularly in U.S. high-yield and investment-grade bonds. This creates an opportunity to expand fixed income exposure into areas with more attractive risk/return trade-offs, such as emerging-market U.S. dollar bonds and private credit.
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Currencies
The U.S. dollar is expected to face upward pressure from tariffs, the strength of the U.S. economy, and a less dovish Fed compared to other central banks. However, its valuation remains high, and emerging-market currencies have already been under pressure. Given this, we are keeping currency bets in portfolios limited for 2025, while staying alert to any opportunities and risks that may arise throughout the year.
2. Private markets: The new growth engine
Private markets continue to play an increasingly vital role in the evolving landscape of capital flows, as the shift away from public markets accelerates with fewer IPOs (initial public offerings) and later-stage listings.
3. The broadening out of market leadership
While mega cap AI stocks have driven market returns in recent years, leadership is shifting to companies using AI to create real-world efficiencies. The new U.S. administration's focus on deregulation and tariff-based policies may provide an added boost to smaller, domestically oriented companies, which are less exposed to international trade disruptions than mega caps with significant foreign revenue, such as Apple. We see this shift reducing market concentration and opening the door for alpha opportunities.
Market implications:
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Equity
Active equity managers have been challenged by the recent severe market concentration. Our research indicates that even a flattening out of these trends—which could be driven by policy shifts, or changing sentiment around earnings growth and valuations for mega caps—can be quite supportive for active manager outperformance. We and our active managers are focused on sectors where AI adoption is accelerating, such as industrials, healthcare, and consumer goods. We believe companies leveraging AI for productivity improvements are well-positioned to gain a lasting competitive edge and generate strong returns. Skilled active managers can seek out these companies, especially those in less-covered segments of the market.
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Real assets
We see attractive investment opportunities in real estate and infrastructure, particularly in areas benefiting from stabilizing long-term interest rates and favorable relative valuations compared to other growth assets. AI applications in real estate, such as data centers and healthcare facilities, are emerging as key growth areas. Additionally, infrastructure investments are gaining momentum from energy utilities and pipeline exposures, especially with the U.S. administration's focus on expanding LNG (liquified natural gas) production.
Disclosures
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
This material is not an offer, solicitation or recommendation to purchase any security.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.
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2025 Annual Global Market Outlook
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