- US soft-landing in focus as we head into the new year
- Broadening of market likely
- AI and Healthcare sectors potentially primed to benefit next year
Market outlook – Daniel Morris, Chief Market Strategist at BNPP AM:
“The Republican sweep of the US election is likely to boost equity markets, particularly those in the US, if the pattern of the first Trump administration is any guide. The risks are that either growth accelerates too much and the US economy overheats, or that large tax cuts prompt a negative reaction from the bond market. We will have to wait until there is more clarity, not only on policy proposals but also on what can actually be implemented.
Aside from political developments, developed market central banks are cutting policy rates. This should boost both equities – as shorter-term financing costs fall – and fixed income, as the policy rate component of bond yields declines. Of course, anticipating the reaction of markets is not so simple as that because the other, arguably more important, factor driving asset prices is economic growth.
Investors should initially be circumspect in anticipating positive equity returns during a rate-cutting cycle given that four out of the last five such cycles in the US coincided with a recession. Not surprisingly, the onset of a recession led to negative returns in equities.
The critical consideration in anticipating returns for next year is whether or not 2025 will be exceptional in not having a recession.
The consensus view has been that the US will indeed see a soft landing – that growth will slow but remain positive as inflation moves back towards the Fed’s 2% target. Europe has already had a slowdown, but we believe 2025 should see a very modest rebound. Positive economic growth would be supportive for equity markets and earnings, leading to price gains in the year ahead.
Our regional preference remains the US. Next year, the returns distribution is expected to be more balanced, even if NASDAQ growth earnings are still superior.”
2025 geopolitical landscape outlook - Richard Barwell, Head of Macro Research at BNPP AM:
“Everyone has a laser-like focus on what the incoming White House occupant will do. But we are interested in a broader picture - the secular geopolitical trend – the multi-faceted, cross-country negation of many aspects of the neo-liberal order, with the retreat from globalisation, the return of tariffs and industrial policy and the looming political challenge to the unelected power of technocrats and market power of massive corporations. As well as the decline of multilateralism and a comeback for great power competition.”
Is now the time to consider US Small Caps? Geoff Dailey – Head of US Equities, Senior Portfolio Manager at BNPP AM:
“US Small Cap stocks are poised to benefit from continued US economic strength. The new administration is pro-growth. In particular, pro-domestic policies should be an additional tailwind to these US oriented companies. US Small cap stocks are also prime beneficiaries of the expected revival of mergers and acquisitions activity in ’25 and beyond.
Another element to consider is that US Small cap stocks are highly levered to the domestic capital spending generated by reshoring, AI growth, and electrification.
Ultimately, US small caps are an inefficient, diverse asset class, ripe for alpha generation from rigorous fundamental analysis by sector experts.”
Broader exposure will be key in asset allocation - Claire Mehu, Head of Balanced Solutions at BNPP AM:
“The combination of moderate growth (without recession) and central banks rate cutting cycle remains positive for risky assets. However, divergences are emerging between regions in terms of growth/ inflation/central banks and will increase in 2025. So will dispersion. 2025 will probably be more a cross-sectional market more than a directional market. Broadening of our exposures within asset classes will be key as well as diversification.
We remain long US technology stocks but have started to broaden our exposures towards S&P 500 Equally weighted index, resulting in more exposure to cyclicals and industrials stocks.
Gold should keep on shining, benefiting from steady demand of emerging countries’ central banks.”
Healthcare a compelling sector next year – Jon Stephenson, Senior Portfolio Manager at BNPP AM:
“The setup for healthcare equities is highly compelling. Robust innovation is resulting in a steady stream of new drug and device approvals, while M&A activity seems poised to remain strong as the largest companies seek to prevent revenue growth deceleration. With the sector valuations depressed due in part to post-election regulatory concerns, which we believe are overblown, the outlook for healthcare stocks is compelling.”
AI momentum to continue - Pamela Hegarty, Senior Portfolio Manager at BNPP AM:
“Artificial Intelligence is becoming pervasive. There will continue to be momentum behind the theme, with a broadening of the ‘winners’.”
Mag 7 leadership may lose edge - Christian Fay, Lead Manager of the BNP Paribas US Growth Fund at BNPP AM:
“We believe growth as an asset class will continue to work into 2025 as these companies are among the best in the world, with innovative and disruptive products and services, best-in-class management teams and tremendous cash flow generation and capital allocation. We believe leadership will likely change away from Mag 7 and mega-cap tech to some degree and will shift towards high quality beneficiaries of AI and astounding cap ex spending in other sectors like healthcare, industrials and areas of consumer.”
