January 2025
Economic Outlook 2025
• Review
Trump’s comeback
• Outlook
Awaiting tariffs
• USA Make America Greater Than Ever Before
• Europe Headed south?
• China Continued rough sailing
• Monetary policy
Widening divergences
• Geopolitics
Hot spots set to cool down?
Investment Outlook 2025
• Equities Momentum, momentum,…
• Fixed income
A risky endeavor?
• Currencies
Expensive US dollar
• Alternative assets
To the moon
Page
In the economic outlook for the year ahead, there is no getting around Donald Trump. The new-old US president wants to make America even greater than before – with attendant risks and side effects for the rest of the world. But Trump’s natural disposition also has something good about it. The USA’s trade partners are anticipating the worst and may come away less scathed in the end than they currently fear. The threat of escalation could have a deescalating effect in geopolitical hot spots. There’s one thing the year 2025 certainly won’t be: boring.
Voters in over 70 countries went to the polls in “super election year” 2024, but no balloting stirred emotions more than the US presidential election did.
Voters in over 70 countries went to the polls in “super election year” 2024, but no balloting stirred emotions more than the US presidential election did. From last spring onward, if not before, the question of whether Donald Trump would claw his way back into the White House dominated media headlines. Joe Biden’s late withdrawal of his candidacy and a subsequent wave of euphoria for Kamala Harris temporarily injected some suspense into the race from August into autumn, but the betting markets were quick to predict a disruptive election outcome and a comeback by Trump, outshining the once again neck-and-neck electoral polls. This time it wasn’t a close call like it was in 2016. Trump scooped up 2.5 million more votes than Harris did, won over large swaths of the middle class, and scored points in almost every demographic group. The win of control of both chambers of the US Congress to boot gives the Republicans an opportunity to implement large parts of Trump’s policy agenda, at least for the next one-and-a-half years until the next midterm elections. The Democrats, meanwhile, need to go back to the drawing board and search for the root causes of their defeat. A directional and generational change appears
urgently necessary if the Democrats wish to regain the ability to act as a corrective in the Capitol from 2026 onward. In year five after the outbreak of COVID-19, the macroeconomic effects of the pandemic have now faded for the most part. Inflation turned out to be just as “transitory” as central banks contended it would be at the start of the price-surge shock. Although annual rates of inflation (a.k.a. Wall Street inflation) already are almost back in central bank officials’ comfort zone, the shock still sits deep among much of the public. Prices have stayed at a high level in absolute terms. Donald Trump’s good instincts about the importance of Main Street inflation to voters were what won him key votes. Economic growth differentials between industrialized countries stayed wide in 2024. While China maneuvered below its +5% target and growth in Europe was practically flat, the risk of a recession in the USA increasingly diminished over the course of the year. The knock-on effects of higher interest rates thus far have left marks only on some subsectors of the US economy (such as the housing market, for example), but have not halted the growth engine. In this sense, the proverbial frog is more in a whirlpool than in a pot set to boil over, and US economic activity remains on a narrow glide path to a soft landing on the cusp of the inauguration of the Trump 2.0 presidency.
In this sense, the proverbial frog is more in a whirlpool than in a pot set to boil over, and US economic activity remains on a narrow glide path to a soft landing on the cusp of the inauguration of the Trump 2.0 presidency.
Financial markets in 2024 were largely a reflection of economic developments. The US dollar was the strongest currency while US stocks gained more than 20% for the second straight year and substantially outperformed the rest of the world. The bull market was interrupted only by a spike in volatility in the summer. In early August, the Bank of Japan surprised the markets
with an unexpected policy rate hike that sparked an unwinding of the yen carry trade. The artificial intelligence theme continued to fuel investor speculation, causing semiconductor chip manufacturer Nvidia to become the world’s most valuable enterprise and pushing the combined weight of the seven largest US technology companies (a.k.a. the Magnificent Seven) to over 30% in the USA’s benchmark S&P 500 stock index. Finally, gold also ranked among the winners over the last 12 months, be it in the classic form of the precious metal (+30%) or in its digital alternative. The price of Bitcoin more than doubled, not just on the back of torrid inflows into Bitcoin ETFs launched at the start of 2024, but also on hopes of a crypto-friendly regulatory regime (and government) given Donald Trump’s election victory.
Tit for tat – will the year 2025 also bring a new round of tariffs and retaliatory tariffs? Economic growth next year will be significantly affected by the extent to which Donald Trump carries out his threats made in recent months or leaves it just at bluster. Trump calls “tariffs” the “most beautiful word in the dictionary.” Above all, they are an ideal lever for prying all kinds of concessions from the USA’s trade partners. The first Trumpian trade war that commenced in 2018 showed that tariffs are not a suitable means of correcting perceived unjust trade imbalances, and the incoming administration’s economic advisors are probably aware of that. Tariffs raise costs for consumers and businesses, and the threat alone of tariffs increases economic uncertainty. Another undesirable side effect of tariffs would be an even stronger US dollar, which is exactly the opposite of what the new US administration wants. Altogether, tariffs would do more to brake economic growth than they would to serve as a good source of revenue for reducing the federal budget deficit. However, threats lose credibility if they aren’t backed by action every now and then. China in particular is unlikely to come away unscathed. Targeted tariffs in the automotive sector appear conceivable against Europe. Officials in Brussels are already discussing behind closed doors what they can offer Trump as a deal to avert a larger escalation.
The tariffs issue is in no small part why the outlook for 2025 is fraught with a lot of uncertainty. Claiming the existence of uncertainty admittedly is a perennial standard assertion in outlooks for the year ahead – prognosticators seldom assert less-than-usual uncertainty. But Trump, in fact, does remain hard to gauge, as do the implementation and effect of the other items on his agenda.
Less immigration, lower taxes, and lighter regulation – whether the new policy mix fuels or brakes economic growth or has an inflationary effect will depend in part on the timing and the dosages.
Source: Bloomberg
Sources: policyuncertainty.com, matteoiacoviello.com
Political uncertainty will be unusually high at the start of 2025 also in Europe. The government of France is wobbling and risks angering either the French public or the financial market due to its disastrous budget situation. In Germany, where the “traffic light” governing coalition inelegantly imploded in November, new elections have been scheduled for February 23, giving the country a chance to embark on a political and eco-
nomic change of course a good seven months sooner than originally planned. This potential change of course is important particularly with regard to Germany’s federal budget. A complete repeal of Germany’s debt brake mechanism is highly improbable, but a revision that permits exemptions (such as for public-sector investment or defense spending, for example) seems possible under a potential new governing coalition led by the conservative CDU/CSU. Even the International Monetary Fund (IMF), which is normally concerned about budget discipline, would welcome it if Germany were to shed its fiscal policy corset.
Counterindicator? | Americans anticipate rising stock prices
Conference Board index of consumer sentiment (expectation of rising stock prices in following year)
However, it remains to seen how long the half-life of the latest “Trump trades” (tops: banks and energy; flops: healthcare and green technologies) will last. Eight years ago it was relatively short. Meanwhile, the sustainability theme passed its zenith in the USA long before the government handover. Efforts toward sustainability are no longer being communicated as overtly as before –instead of greenwashing, greenhushing is now on the rise. Survey findings indicate that a green veneer matters less to individual private investors today than it did two to three years ago. This shift in sentiment changes little for us as a conscientious asset manager. An embedded sustainability approach was and remains a vital element for reducing risk.
Bloomberg
After a bull market for more than two years and running, the air now slowly is getting thinner on the (US) equity market. Investors have been exuding more optimism than ever in the Conference Board’s survey about the future stock-market trend. At the same time, though, the majority of them consider the stock market overvalued. However, even larger capital inflows into the equities asset class and a revival of initial public offerings (IPOs) – and perhaps even hot stock tips from taxi or Uber drivers – are what’s missing still for a bona fide bubble. While a consolidation could occur at any time, there are no immediate grounds for a major stock-market correction in the absence of a recession.
Three unloved letters | “Hushing” instead of “Washing” Google search queries containing the term “ESG” (100 = maximum interest)
Donald Trump wants to make America great again, but the question not only is what that means exactly besides strengthening US industry, but also whether it is necessary and doable at all. America’s economic growth engine is still humming like clockwork at the moment – the USA has left all of the other major industrialized countries far behind it since the pandemic. Fiscally, however, Trump cannot start with a clean slate. Whereas the USA’s federal budget deficit stood at 3.1% of GDP when he first took office in 2017, today it amounts to over 6%. The federal debt load today is around 20 percentage points larger than it was eight years ago and will soon hit 100% of GDP. Meanwhile, annual interest expenses on the growing mountain of debt by now add up to 3.1% of GDP (instead of 1.8%) and account for an ever larger share of federal spending. Leeway for lowering taxes is constrained. The planned permanent extension of the tax reductions in the 2017 Tax Cuts and Jobs Act would already raise the federal budget deficit to more than 7% in the years ahead if there are no offsetting spending cuts. However, Trump is likely to insist on handing out at least this gift to voters even if it won’t deliver any economic growth stimulus (because it merely maintains the status quo).
But precisely because Donald Trump is the president, it is improbable that the new administration will bring about a boom followed by an inevitable bust caused by runaway public finances and inflation.
Thanks to his nose for the concerns of the average voter, Trump knows that the high cost of living is the public’s biggest worry right now. And as a businessman, the president measures his performance on the basis of how the financial markets perform. Trump doubtless doesn’t want to blow it with either the public or the financial markets. So, policymaking in the USA looks set to become unconventional again over the next four years, but is unlikely to be reckless. A significant signal along those lines was sent in late November with the announcement of the nomination Scott Bessent to serve as the future Secretary of the US Treasury. The hed-
ge fund manager possesses profound financial-market expertise and an excellent understanding of macroeconomics. Moreover, his “3-3-3” formula advocates for stepped-up US oil production (by 3 million barrels more per day), annual economic growth of +3%, and cutting the federal budget deficit in half to 3% of GDP. Whether the new Department of Government Efficiency (DOGE) is more than just a good PR gag and can likewise contribute to cutting the deficit remains to be seen in the months ahead. Hundreds of millions of dollars’ worth of cost savings would be impossible without drastic cuts to social and healthcare benefits and services and to military spending. But not only costs need to be optimized, so does the US administrative apparatus’s process efficiency. Disruptive but well-planned – the DOGE project may indeed deliver pleasing surprises thanks to the involvement of Elon Musk.
Precisely because the election campaign rhetoric in 2024 was so tough, potential for positive surprises now preponderates also in other policy areas in the quarters ahead. With regard to immigration, for instance, a cap at 0.5 to 1 million immigrants per year is more realistic than an even more drastic option that would have an inflationary impact. As for climate policy, there may be a headline-grabbing re-withdrawal of the USA from the Paris Agreement, but a complete rollback of the Inflation Reduction Act enacted by Joe Biden is unlikely to occur because the Republican states are the ones that benefit the most from it. Even if the Trump administration’s near-term priorities move back toward oil, natural gas, and atomic energy, the rapid proliferation of solar and wind energy in the USA can hardly be stopped in any case. The solar boom in particular will continue, driven by conservative states like Texas and Oklahoma. If there is no significant braking action by the White House, the US economy could substantially outgrow the rest of the industrialized countries in 2025 for the third consecutive year. However, a certain degree of caution is called for, not just because Trump is always unpredictable in the end, but also because there is no proof yet that the effects of the previous tightening of monetary policy won’t eventually stall the economic activity engine. The housing market is particularly vulnerable to a lasting increase in interest rates. The employment market has already cooled significantly in recent months. If that process continues, it could soon reach a tipping point at which increased unemployment irreversibly sparks the next recession.
The Eurozone economy will likely have grown by less than 1% in 2024 in the final reckoning. The quite restrained Bloomberg consensus estimate from a year ago (+0.8%) thus proved to be spot-on and much more accurate than the forecast by the European Central Bank (ECB), which frequently has been overoptimistic with its growth projections in recent years. Germany turned out to be a brake shoe again. The former locomotive of the currency area is still stuck in sawtooth-shaped
U-turn thanks to Trump? | US federal finances perhaps won’t spiral out of control after all US federal debt (as a percentage of annual economic output)
economic activity and barely avoided a recession again in 2024. Self-inflicted problems (including too little investment in infrastructure and digitalization), missing or misguided zeal for reforms, and political chaos only partly explain why talk about the “sick man of Europe” is back on people’s lips these days. The German economic model based on cheap energy and geared toward a strong export industry appears to be permanently obsolete. Germany’s automobile industry is struggling
However, not everything in the Eurozone is drab and gray.
to come to grips with electric mobility, China is increasingly evolving from a customer to a competitor and, lastly, the prospect of a renewed trade war has darkened business sentiment. A trade war, depending on the form it takes, could cost Europe 0.1 to 0.5 percentage points of growth in 2025 and would once again disproportionately affect Germany.
However, not everything in the Eurozone is drab and gray. The southern member states have significantly outperformed the north in recent quarters on the back of a strong services sector and robust employment growth. And money from the European recovery fund looks set to benefit them again in 2025. They would be less affected by trade policy tensions and by competitive pressure from China. But silver linings of that kind are not enough to fuel a region-wide burst of growth because bigger countries like France and Italy have to tighten their fiscal belts, which inevitably will exert a drag on growth. On the whole, downside risks predominate next year in the Eurozone with regard to both economic growth and inflation. The ECB is already behind the curve and will have to lower its policy interest rate faster than previously intended. But that is little more than an exercise in damage control. The Eurozone’s economic growth problem is structural in
nature and can only be redressed through a dismantling of bureaucracy, a further integration of services markets, massive investments, and – to the mortification of Germany and other northern countries – probably also collective financing, at least in certain subsectors like defense. Mario Draghi diagnosed the patient and prescribed the cure in his report on “The Future of European Competitiveness” presented in autumn. Hopefully, the report will be understood by European policymakers as it is meant to be – as a final warning to prevent Europe from permanently falling behind the USA and China.
Mario Draghi diagnosed the patient and prescribed the cure in his report on “The Future of European Competitiveness” presented in autumn. Hopefully, the report will be understood by European policymakers as it is meant to be – as a final warning to prevent Europe from permanently falling behind the USA and China.
The outlook for Switzerland is a bit more constructive, as it has so often been in recent years, not just in terms of competitiveness and innovative ability, but also with regard to absolute growth figures (Bloomberg consensus: +1.5%; Eurozone: +1.2%). However, the Swiss Confederation is not an island bastion of growth. The political uncertainty in Germany and the trade uncertainty emanating from the new US administration are both weighing on business sentiment in Switzerland, particularly in the country’s export sector. Given the mostly high complexity of Swiss exports and the low price elasticity of demand for them, Switzerland likely is comparatively better girded to face a harsher trade climate. However, the strong Swiss franc also remains an encumbrance. The Swiss National Bank (SNB), it has done in the past, will strive to steer the long-term appreciation pressure on the franc onto a path that is tolerable for the majority of Swiss businesses.
Western observers have lost more and more confidence in China’s economic statistics in recent years. But even if sometimes something gets omitted or sugarcoated here or there, the country will likely have fallen just shy of its official GDP growth target of +5% in 2024.
China has stayed stuck in a deflationary downward spiral in recent quarters. Beijing’s constant policy flip-flopping since the pandemic has battered business confidence. Consumers have also been showing little confidence as they have watched their savings vanish into thin air as a result of the slow-motion bursting of China’s real estate market bubble. The government’s efforts to turn the tide were long merely halfhearted. Instead of serving up stimulus with a giant ladle as it had done many times
in the past, Beijing prioritized keeping risks to the country’s financial stability at bay. Deleveraging makes sense in principle, but it is also painful, particularly if a government – like the leadership in Beijing – is not prepared to make the really tough cuts. The rapidly aging population in China, like elsewhere, doesn’t make things any easier. But the pressure evidently became so intense in 2024 that the word “growth” was reassigned more weight in the Communist Party’s messaging.
However, to this day it is not entirely clear whether a small-caliber stimulus bazooka was fired in autumn. The People’s Bank of China (PBoC) has lowered various benchmark interest rates several times since September. Financing terms and regulations were eased appreciably for buyers of real estate. A generous injection of liquidity stabilized China’s equity market. And targeted tools aimed at stimulating consumer spending have already been employed here and there. The actions taken thus far nonetheless have consistently fallen short of expectations and what actually would be needed to earnestly reaccelerate the pace of economic growth. The government of China has continued to the bitter end to focus on containing downside risks. Enough high-quality growth has been good enough. The USD 1.4 trillion debt swap program for local governments in China announced in November also must be viewed in this context. However, government officials in recent weeks haven’t tired of emphasizing that additional measures are waiting in the queue. They may be parked there to keep further options open for the prospective Trade War 2.0 with the USA. The maximum 60% penalty threatened by Trump probably won’t be imposed, but even a moderate tariff of 20% on average on all Chinese exports could shave 0.7 percentage points off economic growth in China in 2025. The Chinese renminbi, too, will likely serve as a relief valve like it did back in 2018. A devaluation of the currency by 5% to 10% would mitigate the adverse tariff effects somewhat.
The new official GDP growth target for 2025 to be disclosed at the National People’s Congress in March could provide an indication of whether the government of China will shift another gear higher. However, a “5” in front of the decimal point would only be credible if the numbers on paper are underpinned by measures aimed at strengthening a consumerist society in China in the long run. The Chinese people still save too much. Although China’s potential annual growth rate looks set to drop below +4% at the end of this decade in any event, strengthening a consuming middle class would be necessary to gird China for a future in which the old economic model no longer works. The infrastructure and real estate sector, once a key pillar of China’s economic growth, is in distress, and the exports pillar is also teetering. Headwinds are blowing not just from the USA, but also from Europe, where a looming flood of electric cars from China is causing tremendous concern. Europe has been viewing China as a rival for a long time now and today is increasingly resorting to tougher defensive measures.
A year ago it looked as though central banks wouldn’t want to budge much in 2024. “Higher for longer” was the phrase of the moment with regard to the expected trend in policy interest rates. In fact, though, over the course of the year it turned out that central bank officials are not facing a completely new “normal,” but are confronted with certain laws of economics that are still valid even in the post-pandemic order. Those “laws” in-
clude the fact that persistently elevated inflation requires corresponding fuel and that a restrictive monetary policy affects economic activity with oft-cited “long and variable lags.” The coronavirus shock and the resulting price distortions have been overcome in the meantime, supply and demand are largely back in balance, and inflation rates in most of the industrialized countries are close to or already back below the 2% mark. The interest-rate hikes since 2022 have exerted their intended effect and have slowed economic activity, more in some regions (Europe) and less in others (USA). The year 2024 thus followed a familiar script in the end. The major central banks initiated a monetary-policy pivot in the summer. And even the US Federal Reserve had to take its foot off the brakes and lower its policy rate in September after having kept it for 14 months at its highest level in more than 20 years.
However, in contrast to the prior rate-hiking cycle, which proceeded very synchronously around the world, the current interest paths downward have been diverging more and more in recent months. The US Federal Reserve and the Bank of England have been showing comparative restraint in recent months. Although they do not necessarily foresee a second wave of inflation, the most likely risk they do see is that of inflation stay-
ing above the magic 2% mark for a longer time. So, market expectations about further rate-cutting potential in the USA and the UK are accordingly subdued. If there is no recession in the USA, further interest-rate cutting there could already come to an end at the 3.5%–4% level. That then, in fact, would be something of a “new normal,” the likes of which younger financial analysts (and central bank officials) have not yet experienced in their careers. And, of course, Donald Trump mustn’t be forgotten at this juncture of the outlook for the year ahead. An interest-rate level of that kind might feel too high to him because it wouldn’t foster economic growth. However, it seems doubtful that this would prompt him to kick Jerome Powell off the Federal Reserve Board. That’s because, for one thing, the Fed chairman has publicly vowed resistance and, moreover, Trump would have more subtle options at his disposal. He, for instance, could replace the vice chairman of the Fed with one of his loyalists or could nominate a successor to Powell before his chairmanship ends in May 2026. That person could then act as a kind of shadow council and initiate a creeping shift of power.
The European Central Bank, meanwhile, ought to be moving at a different speed. The feeble economic state of the Eurozone would call for rapid interest-rate cuts, but some ECB Governing Council members evidently still prefer to look in the rearview mirror, for instance at wage growth that has still been robust lately. But instead of inflation risks, sudden disinflation could loom in the months ahead. The ECB may soon see itself forced to loosen the interest-rate screw more vigorously after all. A policy rate of 2% or lower already by summer seems realistic. Meanwhile, the Swiss National Bank is facing its own set of challenges. Although a strong franc is practically daily fare for the SNB, it routinely got caught on the wrong foot in 2024 and had to revise down its inflation forecast several times.
Further disinflation in Switzerland is already in the pipeline. So, it’s possible that the policy interest rate in the Swiss Confederation will move back close to 0% in 2025.
New SNB President Martin Schlegel recently again called negative interest rates a disliked tool, but said that instrument nonetheless remains in the central bank’s toolbox. There is also one good well-known monetary-policy outlier in the new year: the Bank of Japan always does the opposite of everyone else and looks set to continue trudging along the obstacle-strewn path out of its decades-long ultralow interest-rate policy.
Hot spots set to cool down?
With regard to geopolitics, future developments in the most inflamed hot spots are likely to be shaped in 2025 by the foreign policy course taken by the Trump administration. This assessment is not astonishing.
However, the many critics of Trump who fear unbridled geopolitical chaos and an even more dangerous world due to his sometimes erratic behavior could be in for a pleasant surprise.
The Trump 1.0 presidency provides enough evidentiary material to give reason to hope for the better. Trump knows how game theory works, and he particularly knows how to make credible threats and to use them to his advantage. In the positive scenario, Trump might succeed in establishing new equilibriums in the three largest founts of global risk. In the rivalry with China, threatened tariffs are the loudest, but not the only means at Trump’s disposal. The “small yard, high fence” approach employed by the Biden administration to selectively decouple from China in strategic sectors (e.g. advanced technology, manufacturing) will probably broaden in typical Trump fashion into a “bigger yard, taller fence” model in the future.
Trump’s plan for ending the armed conflict in Ukraine could consist of applying a carrot-and-stick policy to both Ukraine and Russia. If Russia insists on continuing the war, Trump would threaten to massively increase aid to Ukraine. If Ukraine refuses to cede territory to Russia, Trump could threaten to end US support altogether. This way Trump could force a solution under which Ukraine cedes some areas to Russia but largely stays intact as a nation. Although that technically would mean a defeat for Ukraine, in the long term it possibly could turn into a victory against the country’s overpowering neighbor. A truce would spur efforts to arm Ukraine against future Russian aggression. Europe is likely to play a leading role here. However, Ukraine for now is unlikely to gain NATO membership for at least the next 20 years. The Ukraine conflict already ceased to be an issue on financial markets two-and-a-half years ago, so a (provisional) end to the hostilities wouldn’t spark any major asset-price movements.
With regard to Iran, Trump might pursue a policy of “maximum pressure” like he did during his first term in office. He might even threaten Teheran with military action to curb Iran’s nuclear ambitions and regional influence. The International Atomic Energy Agency (IAEA) wants Iran to reduce its stockpile of uranium enriched to up to 60% purity and to allow more extensive inspec-
tions of its nuclear sites. As long as Iran doesn’t change course, risks remain in place – either Iran takes the final steps to the atomic bomb, or Israel (and possibly the USA) attacks the country’s nuclear facilities preemptively. Israel might even strike Iran before Trump’s inauguration in defiance of outgoing President Biden’s efforts to avert an escalation. A major escalation would cause a near-term spike in oil prices. But if there is no escalation, the current downward trend in the price of petroleum is likely to level off at best. Weak Chinese demand for oil and the prospect of an increase in supply portend continued lowish prices. Oil production in the USA is expected to grow even further in line with the motto “drill, baby, drill.” But petroleum output is also increasing further in other non-OPEC countries, in part due to advancements in deep-sea drilling techniques. And finally, if Saudi Arabia loses its patience and abandons its production discipline in a fight for market share, that could put additional downward pressure on the price of oil.
A major escalation would cause a near-term spike in oil prices.
In the wake of two consecutive stellar years for stocks, sentiment among market participants is exuberantly bullish. However, leaving the party early on the grounds of frothy investor optimism and rich valuations would entail (opportunity) costs. Investors would be better advised, and at the same time better girded for potential rotations and changes in investor preferences, to approach the year ahead with a well-diversified investment strategy. Private-market assets should be included again in 2025 because they are a valuable addition to a balanced portfolio.
After equity markets around the world did very well again in 2024 and US stocks even posted a stellar performance, one thing above all is crystal clear at the turning of the year: stocks today definitely are no longer cheaply valued. In the last 50 years, there has only been
one episode when American stocks were even more “expensive” than they are today, and that was during the 1998–2000 internet bubble. Even if one strips out the lavishly valued technology giants, the broad US market’s current price-to-earnings multiple is still far above its historical average. However, this realization is of little use for a 12-month outlook because the P/E valuation metric explains only 20% of the performance of stocks over such a short period. As if to prove this very loose correlation, a constantly expensive US equity market has consistently delivered above-average annual returns over the last decade. Other popular valuation metrics like equity risk premiums or the Buffett Indicator, for instance, are just as unhelpful for the relatively short time frame of an outlook for the year ahead. And the fact that US stocks have posted annual gains north of 20% for two consecutive years now doesn’t fundamentally preclude them from continuing to soar higher again next year. In an identical scenario involving the big bull market of the 1990s, an already strong performance in 1995/96 was followed by three more years of double-digit percent annual returns.
The lofty valuation by itself does not imply a negative return expectation for either technology stocks or the broad market. That’s why analysts will probably be forecasting – as they so often do – a gain of around 10% for the S&P 500 index once more for 2025, not just due to a lack of knowledge, but also based on experience.
However, even if stock prices continue to climb higher in 2025, there is reason to assume that their trajectory will be a bit less linear than before. Although many items on the Trump administration’s agenda are beneficial for stocks in principle, a lot of advance praise is already priced into them. Moreover, the timing and impact of the possible initiatives could end up this time being the exact opposite of what happened eight years ago. At that time, speculative visions of forthcoming
tax cuts caused the S&P 500 to rise by 37% from the moment of Trump’s election victory until the start of the trade war in early 2018. This time, the tariffs issue could dominate right at the start of the Trump 2.0 presidency while further tax cuts would not only be uncertain, but probably would also come only in homeopathic doses. The year 2025 could unfold differently on the stock market than the prior two years did in other ways as well. For instance, the market concentration of the Magnificent Seven may reach its peak. The foreseeable deceleration in Big Tech earnings growth and/or a less industry-friendly Federal Trade Commission than hoped could be the catalyst that makes that happen.
A change of that kind in investor favorites could be accompanied by a continued rotation into small caps. After a two-year earnings recession, the consensus estimate for the Russell 2000 index projects profit growth of around +50% until 2026. If small-cap companies largely live up to that promise, they really could stage a share-price performance comeback because the other parameters are in proper alignment: small caps currently are trading at record-cheap valuations, they usually perform better than average during rate-cutting cycles, and they stand to benefit disproportionately from the coming wave of deregulation. And last but not least, trade uncertainties and a stronger US dollar would have less of an impact on predominantly domestic-oriented US small caps.
Equity valuations outside the USA are also comparatively cheaper, but it’s doubtful whether that alone is enough to enable European stocks to outperform for longer than just a few months. The economic activity outlook in Europe remains bleak at the start of 2025 while earnings growth expectations for the year (+10%) tend to appear overly ambitious. A tactical window of opportunity could at least open if the ECB lowers interest rates faster than currently anticipated, if China stimulates its economy more vigorously, if the trade war turns out to be only a minor commotion, and if the US economy loses steam relative to other countries. Speaking of China, retail investors there are already back in the grip of speculative fever again. The government of China, through its extensive September package of support measures if not before then, has demonstrated that it wants to stabilize not just economic activity, but also the country’s equity market. In December, it adjusted its monetary policy from “prudent” to “moderately accommodative” for the first time since the financial crisis, sending another positive signal to the financial market. In the first half of 2025, only time will tell whether investors’ hopes will also be nourished by additional fiscal stimulus measures and whether corporate earnings ultimately will pick up in China. If that does happen, Chinese stocks still have a lot of upside potential left.
Source: Bloomberg
The fixed-income risk scenario actually envisaged for the outlook for 2025 appears to have moderated significantly on the (US) bond market ahead of the turning of the year, though it hasn’t completely vanished. That scenario would have seen yields on long-term government bonds rise swiftly to new highs above 5%, driven by inflation fears (punitive tariffs, mass deportations, booming economic activity) and reckless fiscal policies with even bigger budget deficits. However, recent weeks have given reason to hope that it won’t get as bad as that either because the Trump administration ultimately is wise enough to refrain from applying higher doses of inflation- and deficit-fueling measures or because there is not enough unity in the US Congress after all to endorse such measures. The November nomination of Scott Bessent to serve as the future Secretary of the US Treasury has at least acted as an effective chill pill and has soothed market participants’ worries for the time being. The concept of a new Department of Government Efficiency (DOGE) was likewise received as a positive signal and gives reason to presume that Trump and his advisors are well aware of the financial
Speaking of China, retail investors there are already back in the grip of speculative fever again.
market’s vulnerability to a further, and especially a rapid, uncontrolled deterioration of US federal finances.
But even if it turns out that the last few weeks were merely a staged “Trump show” and the risk scenario really does come true (probability: less than 20%), a bond selloff would quite quickly become self-restraining.
That’s because if the yield on 10-year US Treasury notes were to lastingly rise above the 4.75%–5.00% range, that would surely spark panic in the White House. The stock market – Donald Trump’s personal feedback indicator – would likely then also be adversely affected and would force a course correction.
Yields around or above the 4.3%–4.5% level thus present investors with a good opportunity to return any underweight in government bonds to neutral and to place a small hedge against the current equally low probability of a recession occurring. In the baseline scenario, meanwhile, (US) bond yields neither rise sharply nor fall steeply. If US economic activity stays robust and the Fed cuts its policy interest rate only to a level of 3.5%–4%, the current US Treasury yield level would be practically at its fair value. In that event, substantial price gains wouldn’t be realistic unless the US economy cools down more severely against expectations. Meanwhile, a somewhat more sobering situation is presented by government bonds in Europe, where yields are already at lower and even less attractive levels than before. Increased exposure to European sovereign bonds is warranted only for those investors who either are compelled to be invested in this asset class or would like to place certain bets on, for example, a strong currency (Swiss Confederation bonds) or a recession in Europe (German Bunds).
Opportunities will be rather scarce in 2025 also in riskier segments of the fixed-income asset class. Credit spreads on investment-grade and high-yield corporate bonds and on emerging-market bonds are so tight by now that it is hard to justify stepping up exposure to them. We advise against going to great lengths to proverbially pick up pennies in front of a steamroller just to earn a slightly higher return. Anyone in the fixed-income space who is seeking a higher return, and one that is largely uncorrelated to boot, is better off with insurance-linked (cat) bonds again in 2025. The (re)insurance industry continues to exhibit a structural imbalance between the supply of and the demand for insurance coverage. In the wake of another intense US hurricane season that nonetheless resulted in a relatively low amount of claims expenditures, premiums in this asset class remain at an attractively high level.
Donald Trump doesn’t like a strong dollar – that was already the case eight years ago (when he said, “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me.”), and his view hasn’t changed since then. But even though Trump wields enormous presidential powers, not even he can devalue the greenback at the press of a button. Various theoretically conceivable ways of doing that
would probably prove impracticable. An attempt, for example, to arrange a modern Plaza Accord-style coordinated intervention to devalue the dollar in cooperation with the ECB, the Bank of England, and the Bank of Japan would probably find those actors unwilling to play along. Meanwhile, a unilateral intervention by the Fed would quickly run out of the money needed to sustain it. Capital controls or similar restrictions would diminish the attractiveness of the US financial market and would undermine the US dollar’s role as the world’s reserve currency (a status that Trump wishes to maintain). The only other options left are either actions that would be questionable (demanding interest-rate cuts by the Fed) or would have only a short half-life (talking down the dollar), or would be to simply come to terms with existing realities. Those realities at the moment – comparatively higher interest rates, stronger economic growth, the prospect of punitive tariffs (which are synonymous with decreasing demand for the currencies of US trade partners) and, last but not least, the attractiveness of US stocks (to which there is currently no alternative in investors’ minds) coupled with corresponding inflows of capital into the USA – all argue in favor of the US dollar.
In the end, though, Trump may actually get what he wants because an even stronger US dollar is the consensus view, which is rarely 100% accurate, and because the action on the currency market is always based on relative developments between different currencies starting from what’s already priced in at the moment. Viewed from this angle, it can only get worse for the dollar going forward. Above all, though, the situation could get better than currently expected in the other large currency area – the Eurozone – in 2025 because interest-rate and economic growth differentials may move in favor of the euro, which would wrong-foot market participants who are predominantly positioned long the dollar by now. A surprise of that kind would also fit with the picture from an overarching perspective because the dollar has been lavishly valued for quite a while now, which gives reason to expect a substantial reversion toward the mean sooner or later once the necessary impetus is present. If that happens, that could provide grist for a currently hardly-talked-about theory that a major dollar trend reversal has long been underway and that the high hit in autumn 2022 marked the greenback’s peak.
The Swiss franc was strong once again in 2024. It is starting off the new year close to its all-time high against the euro. But despite the franc’s high nominal price, it – unlike the US dollar – is not overvalued, but actually is fairly valued or even mildly undervalued, depending on which model one goes by, due to Switzerland’s comparatively lower inflation and higher productivity.
Most currency analysts in their forecasts for 2025 once again appear to be ignoring the fundamental forces of gravity pulling on the EUR/CHF cross. Only one-fourth of analysts see the EUR/CHF exchange rate below 93 centimes at the end of 2025, and almost no one (two out of 36 analysts) foresees a price below 90 centimes.
But that’s exactly the direction in which it may be headed over the next 12 to 18 months. Since the franc, objectively speaking, is not overvalued, the Swiss National Bank is unlikely to fiercely combat a further appreciation of the currency, but probably will seek only to moderate its speed by using tools including verbal interventions, forward guidance via inflation forecasts and, in case of an emergency, temporary interventions on the currency market. New SNB President Martin Schlegel says that negative interest rates also remain part of the national bank’s toolbox. Although his comment to that effect in November was an obvious attempt to scare speculators who are betting on a stronger franc, we wouldn’t entirely rule out the possibility that the policy interest rate in Switzerland could drop back below the 0% line once more in the years ahead.
Upward trend… | …in classical and digital versions Gold price and Bitcoin price Source: Bloomberg
The price of Bitcoin more than doubled in 2024 and vaulted over the psychologically important USD 100,000 mark in December.
Alternative assets: To the moon
The price of Bitcoin more than doubled in 2024 and vaulted over the psychologically important USD 100,000 mark in December. While this signal validated the bullishness of crypto enthusiasts, it arguably snapped the increasingly thinning threads of patience among many of the last remaining crypto skeptics and die-hard crypto bears for good.
FOMO (the fear of missing out) can be distinctly heard and felt by now in the cryptocurrency space.
It’s questionable whether an easing of regulation by the US Securities and Exchange Commission under Paul Atkins, with an assist from David Sacks as the new “crypto czar” in the White House, will send cryptocurrency valuations straight to the moon in 2025 – a pause for breath wouldn’t be astonishing on the heels of the recent dizzying gains. However, if it perhaps wasn’t evident before, the performance in 2024 and the successful founding of Bitcoin ETFs demonstrated that cryptocurrencies are here to stay. Their suitability as a portfolio component for an individual private investor depends on that person’s risk appetite and investment goals. If enjoyment of speculating doesn’t stand in the foreground and one’s aim is to participate in a young asset class, to hedge against the debasement of paper currencies, or to forestall headaches caused by missing out on a rally (a not entirely irrelevant motive), an allocation to crypto should amount to only 5% of one’s total portfolio and shouldn’t exceed 10%.
The outlook for classic, non-digital gold likewise remains fundamentally bullish. But in the wake of bullion’s 30%plus price gain in 2024, the air is gradually thinning out here as well. However, the velocity of the further trend upward matters less for investors than the uptrend’s strategic underpinning does. Its undergirding support is still strong given the continued high demand for gold on the part of central banks and as a hedge against geopolitical risks. Last but not least, the prospect of a downward drift in market interest rates also makes a case for the precious metal. Meanwhile, the monetary-policy pivot in 2024 and the ongoing rate-cutting cycle have consequences also for real estate assets. The medicine has already exerted an impact on daily tradable, liquid vehicles like REITs (real estate investment trusts) and Swiss real estate funds, for which further upside potential appears constrained in the wake of their substantial gains in recent quarters. The picture looks different for illiquid real estate vehicles, which look set to finish bottoming out soon. That market has found an equilibrium at a lower level and has potential to rally.
Just like illiquid real estate assets, other private-market asset categories also were unable to keep pace with publicly traded stocks and gold in 2024. But that doesn’t diminish their value for a diversified investment portfolio. On the contrary, their comparatively lower volatility on the upside and especially on the downside is a desired feature of the private markets asset class. The chances are good that an allocation to private markets will pay off in 2025 in terms of both absolute and relative performance. Private equity and infrastructure assets particularly look set to get a boost in 2025. The private-equity carousel has already started to spin faster lately and looks destined to pick up even more speed on the back of an increase in M&A activity under the Trump 2.0 presidency and due to a looming revival of IPOs, which will also be beneficial to investment performance. Meanwhile, thanks to the AI boom, the infrastructure segment is benefiting from enormous demand for data centers and from their voracious hunger for energy. Finally, private credit is the asset category where investors’ sights will have to be lowered a bit in the near future. A drop in benchmark interest rates and a tightening of credit spreads due to tougher competition from the syndicated loans market lead to lower expected returns here as a result. However, they are still more attractive than the returns that investors can expect to earn in the liquid bond market.
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