Market outlook: Tech giants, AI trends, and investment opportunities in 2025
By Boring Money
9 Dec, 2024
In spite of elections, geopolitical upheaval, and the usual sprinkle of economic uncertainty, 2024 has been a bumper year for investors. The MSCI World index is up over 22% for the year to date and may pip 2023’s performance of 24% by the end of the year. However, markets have been led by a handful of stocks and it was only at the end of the year that this has started to broaden out.
The technology giants were the story of the year once again, led by semiconductor group Nvidia, where triple-digit earnings continued to drive its share price higher. The artificial intelligence trend built momentum. This has led to unprecedented concentration in the S&P 500 index, with the top 10 stocks now forming 35%.[1]
The continuance, or otherwise, of this US large-cap dominance will be a key issue for 2025. There are tentative signs of a change. Other sectors have started to emerge. Financials have done well, for example, and US smaller companies have seen a boost since the election of Donald Trump.[2]
There are arguments for the mega-caps on both sides. On the one hand, they are expensive, even given their strong growth trajectory. Apple, for example, has seen its price-to-earnings ratio move from 30x to 40x over the past year.[3] The assumption is that the expansion of AI will lead to rising profits, but this is not assured.
Equally, the concentration in these names is significant. Previous episodes of high concentration have tended to end badly. The Nifty Fifty in the 1970s, for example, had a long run of success followed by a lengthy run of weakness. These trends can unwind as quickly as they have built up, and that can be painful for investors.
On the other hand, these are good companies, with strong earnings, tapping into fast-growing markets. Chris Iggo, chair of the AXA IM Investment Institute, says that while earnings growth is broadening out, the technology giants still dominate:
The consensus forecast for 2025 is for around 13% growth in earnings per share for the S&P 500. Much of this will continue to be driven by the technology sector with there being no evidence of any softening in demand for artificial intelligence-related technologies. In 2024, close to half the growth in the entire market’s earnings per share came from the US’s information technology and communications sectors.
Nevertheless, he believes opportunities will emerge elsewhere:
Policy may stimulate stronger earnings growth in areas such as financials and energy although the impact of potential tariffs is unknown for other industries…Small-cap equities could also benefit from lower taxes and interest rates with upgrades to earnings expectations already having been seen.
Beyond the US
The UK
Outside the US, there generally aren’t the same problems of over-valuation. In particular, areas such as the UK have attractive valuations after a long run of relative weakness. The AIC’s annual fund manager poll found that while more managers think the US will outperform next year than any other region (28%), 24%, the second highest figure, are still backing the UK.
Adrian Gosden, manager on the Jupiter UK Multi Cap Income fund, believes the stars may finally start to align for the UK in 2025:
Corporate activity in the form of mergers and acquisitions can maintain a healthy pace. This reflects the low valuations of good companies as well as a stable economy and government…The pace of share buybacks in our market also is likely to remain robust. We expect 2024 to be the third consecutive year with buybacks in total of around £50 billion, well above the historic run rate. Premier Inn owner Whitbread (£100 million buyback) and HSBC ($3 billion program) are among those recently announced.
Finally, he points to the favourable interest rate environment:
The BoE signalled that rates would continue to move lower. As stock pickers, we leave the economic forecasts to others, but slow and steady growth suits us. We think the UK consumer is in a fairly good place, with healthy levels of savings and rising wages.
Emerging markets
Another area to watch may be emerging markets. China has been out of favour for some time and this has weighed on the overall emerging market sector. But it has a shiny new stimulus package in place, which should start to feed through into economic growth in the new year. This would support the Asian region more generally, and other emerging markets such as Brazil. The Chinese markets have started to lift off their lows, pulling broader emerging markets indices higher.
Fixed income
The big question for 2025 will be whether central banks continue the path of lower interest rates. In the US, following the election of Donald Trump, this is not clear-cut. Julien Houdain, head of global unconstrained fixed income at Schroders, says:
There’s a high level of uncertainty about policy as we approach 2025. The key issues on the US political agenda, including stricter immigration controls, more relaxed fiscal policy, fewer regulations on businesses, and tariffs on international goods, suggest a growing risk.
These factors may halt any improvement in the core inflation figures and could cause the US Federal Reserve to cease easing monetary policy earlier than expected. In other words, we see a no-landing risk rising, a scenario in which inflation remains sticky and interest rates may be required to be kept higher for longer.
Elsewhere, the chances of buoyant growth and reviving inflation are far lower. Europe appears to be stuck in a pattern of low economic growth, and the UK economy is also sluggish. They may also see a hit if Donald Trump aims to impose tariffs on companies importing to the US. Equally, while European government bond yields look low, UK government bond yields are still relatively high and could have room to fall. Ben Edwards, manager of the BlackRock Corporate Bond fund, believes UK gilts could be an area to watch in the year ahead.
On corporate bonds, the additional yield they provide over government bonds (the ‘spread’) is as low as it has been in more than a decade.[4] This gives investors little wiggle room if the global economy has a significant slowdown. Nevertheless, corporate bond fund managers point to opportunities in selected sectors. It is a market that is likely to require careful navigation from a skilled manager in the year ahead.
Other areas
There are opportunities emerging elsewhere. The real estate market, for example, has seen a tentative revival in 2024 and this could continue into 2025 if interest rates start to come down and investors have more certainty on valuations. Private equity investment trusts remain on large discounts to the value of their underlying assets and could benefit from rising investor confidence. It has also been a rocky period for the renewables sector, and investors may start to take a renewed interest if fears over Trump’s potential actions subside.
Overall, investors may be hoping for a more peaceful and predictable year in 2025, with less political turmoil and uncertainty. However, this feels optimistic. The usual rules around diversification, regular investment and holding on through periods of volatility will apply.
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[1] S&P Global, December 2024
[2] Market Watch, December 2024
[3] Apple PE Ratio, December 2024
[4] Federal Reserve Bank, December 2024
