Market Matters

Four Investing Stories that will Shape 2025 Markets

12 February 2025

9 Minute Read

Inigo Fraser Jenkins Investment Strategist

Alla Harmsworth Investment Strategist

Investors are facing a historic year, driven by political change emanating from the US and shifting global macroeconomic forces. We survey four investing trends that will shape financial markets to help investors consider their strategic positioning in a rapidly changing world.

1 Preparing for the Effects of New US Policies

Donald Trump’s election as US President is a monumental political event with global implications for economies, sectors, industries and businesses. Big changes will affect fiscal policy, trade, immigration, energy, regulation and foreign policy.

Since his inauguration, President Trump has unveiled a slew of executive orders including measures to deregulate the energy industry, a withdrawal from the Paris climate agreement and a crackdown on illegal immigration.

But there’s still plenty of uncertainty on the timing and details of many policies. So how can investors prepare? We can already make several high-level projections based on the new government’s agenda.

Trump’s policy mix is likely to be inflationary.

Tax cuts will push up government deficits, meaning Treasury yields will probably rise over time as investors seek more compensation for the risk of holding government bonds.

US technology giants should benefit from a friendlier domestic regulatory environment.

Selective, active management will be vital to navigate the evolving variables that will be created by new policies.

1 Preparing for the Effects of New US Policies

In the near term, we expect the new administration’s expansionary and regulation-cutting policies to support growth. Over the medium to long term, Trump’s agenda may accelerate a shift to a regime of higher inflation and add to concerns about fiscal sustainability.

Tariffs

These are one of Trump’s keynote policy pledges. But nobody knows to what extent his tariff threats are bargaining tactics or a policy goal. New and higher tariffs would spur further deglobalization and economic fragmentation, which would also fuel inflation.

Taxes

Trump is likely to extend the expiring Tax Cuts and Jobs Act provisions and to propose new cuts. Corporate taxes may be reduced further. The upshot? Persistent budget deficits that will push up long-term Treasury yields.

Deregulation

This may include a rolling back of banking regulations and loosening the antitrust focus on Big Tech. Measures to boost energy production, expand energy infrastructure and scale back part of the Inflation Reduction Act are also on the agenda. Potential winners: energy, financials, technology.

2 Inflation is Steadying—but at a Higher Level

2 Inflation Is Steadying—but at a Higher Level

When you think about inflation, distinguish between cyclical and structural inflation.

Central banks have done a good job at dousing the cyclical inflation that exploded after the pandemic. But the forces driving structural inflation haven’t gone away. These include deglobalization and demographics, as a smaller labor force drives up wages. The global energy transition has progressed slower than planned, which implies severe weather shocks and increased inflation volatility.

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The new US policy agenda potentially strengthens the near-term case for higher inflation.

2 Inflation Is Steadying—but at a Higher Level

Since 2022, inflation has been a dominant factor in financial markets. Inflation has fallen back from extreme highs during 2024. But don’t be misled by the disinflationary trends. Inflation isn’t going away, it’s just changing. To understand why, you need to distinguish between cyclical inflation and structural inflation.

Cyclical inflation is driven by the ups and downs of the macroeconomic cycle. Central banks around the world have done a pretty good job bringing cyclical inflation down from 2022 peaks via aggressive monetary policy.

Structural inflation is driven by longer-term trends like deglobalization, demographics and the energy transition. Shocks to supply chains could make inflation more volatile. Despite Japan’s unique deflationary experience, aging populations in developed markets are inflationary because there are proportionally fewer workers and more retirees who consume but don’t produce.

Deflationary forces are also playing out, such as technology, in particular artificial intelligence, which could help companies reduce costs.

Structural Forces Driving Inflationary Trends

Source: AB. For illustrative purposes only.

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For all the fraught debate during 2024 about whether the US faces a hard landing, soft landing or no landing, the earnings growth outlook remains strong.

3 The Tactical Case for Equities

Global equities look attractive over the coming year, because the outlook for US economic growth remains strong. According to consensus estimates, global developed market earnings are expected to grow by a healthy 12.1% in 2025, while US earnings growth is projected at 14.7%*.

US stocks also benefit from high profit margins. Will this trend continue? At some point, we might have expected a social backlash against extraordinarily high profit margins in the US. That’s all changed.

We think a Trump administration that is bent on loosening regulation will enable profit margins to stay higher for longer. Expansionary fiscal policy will also support higher margins.

*Source: J.P. Morgan, MSCI and AB (see chart on next page).

3 The Tactical Case for Equities

What about valuations? True, the global equity market is expensive. But that doesn’t mean that stocks are poised to fall. We think high valuations might contribute to greater volatility of stock markets, but earnings will matter much more for equity performance than valuations.

Sentiment is another crucial point when it comes to a tactical take on equities. In 2024, global equities enjoyed $712 billion of fund inflows, according to data from EPFR. Inflows to the US were particularly strong, and only Europe saw outflows. After a period of exceptionally high inflows, we might expect some weakness for the asset class. Considering all factors together, our reading of sentiment suggests that investors can expect lots of volatility—though we still forecast a positive return for stocks in 2025.

Higher inflation also bolsters the case for allocating to equities. Our research shows that equities have a strong track record of delivering positive real returns—above the inflation rate—over the last century.

2025 Earnings Forecasts Remain Strong Despite Uncertainties

Consensus Earnings-per-Share Growth Forecasts (%)

Past performance and current analysis do not guarantee future results.

US represented by MSCI USA, Eurozone by MSCI Eurozone, Japan by MSCI Japan, developed markets by MSCI World and emerging marketsby MSCI Emerging Markets. Developed-market forecasts as of December 9, 2024. Emerging-markets forecast as of November 17, 2024. Sources: J.P. Morgan and AB

4 Private Credit Offers Diversification Benefits

Private assets are becoming an increasingly important component of a diversified allocation for investors.

What’s the appeal? Private assets offer diversification benefits via exposure to sectors not represented in public markets, as well as inflation protection. And today, an increasing amount of the capital raised in the overall economy comes in the form of private assets, bolstering the supply case for investors to allocate more of their portfolios to the asset class. Still, there are concerns, such as illiquidity—you can’t always cash in when you want—and fees.

Not all private assets are the same, however. We’re relatively negative on private equity because of high buyout multiples and the likelihood that higher debt costs will constrain returns over the next two decades.

4 Private Credit Offers Diversification Benefits

Private credit is more attractive in our opinion. There are still risks, such as the asset class not having been put to the test yet in a true default cycle.

However, private credit offers investors an illiquidity premium that can be observed ahead of time by gauging its yield relative to public markets prior to entering a position. Moreover, private credit’s floating rate nature provides an effective buffer against higher inflation. With private equity, by contrast, an investor is essentially buying into a relatively speculative story about why an investment will work over the subsequent decade.

In Summary…

Dramatic policy-driven change in 2025. This will affect financial markets and assets in complex ways. Investors should adjust their expectations accordingly, given our forecast that inflation will be a persistent feature of the global macroeconomic environment, along with lower real growth rates. This warrants a significant allocation to equities, as well as diversification via exposure to private credit.

Inigo Fraser Jenkins Investment Strategist

Alla Harmsworth Investment Strategist

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The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

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