Will Trump and US deliver another mega-sized hit for investors in 2025?

It’s that time of the year when we look back at 2024 to objectively assess the relevance of our views and identify the key lessons for the best possible start to 2025.

We had three calls for last year: modest positive returns, with differentiated behaviors between asset classes, and elevated volatility.

Let me start with where we were a bit wrong, especially as it doesn’t hurt too much. The 2024 performance of our diversified portfolios were actually better than our initial forecast.

First, gold rallied 27%, with central banks’ purchases and a fluid geopolitical picture. We were almost constantly overweight during the year.

Second was the also spectacular returns of stocks from developed markets, especially in the US, between continuous economic strength and the massive outperformance of everything AI-related.

It’s also worth noting that the Dubai DFM index delivered a 30%+ total return, outperforming all peers. On the negative side, we carried an overweight on US Treasuries during most of 2024. There were opportunities to generate value by actively adjusting duration, but still, government bonds had a negative return, expressed in (a very strong) dollar.

This means that our second call for asset-class divergence was not wrong. We also had, as expected, elevated volatility, with extreme gyrations in market expectations for the Fed.

The first-half of 2024 was all about markets acknowledging the strength of the US economy, and pricing out unrealistic rate cuts expectations. Stocks gained; interest rates rose. We then had a tough summer, and a turbulent Q3.

Doubts on the US economy combined with geopolitical escalation and a brutal unwinding of the Japanese Yen carry-trade to trigger risk aversion. It didn’t last long. Following a massive revision of past US job creations, the Fed cut its policy rates by 50 basis points and issued a dovish guidance in September.

All asset classes rallied, and emerging markets joined the party as China also announced a massive stimulus plan. Finally, a very clear result from US elections triggered optimism for US stocks, concerns for others, and a difficult Q4 for bonds.

US Treasuries saw a ‘bear steepening’, and the December Fed meeting concluded with a small rate cut and a big hawkish guidance.

So how does it shape the investment landscape for 2025? We see three interesting features.

First, the yield curve, which associates the level of high-quality bond yields with their maturity, is not inverted anymore. The 1-year lost 60 basis points to 4.1% as we write, the 5-year gained the same to 4.4%.

With the 10 and 30-year respectively above 4.6% and 4.8%, it means that markets are confident in future growth, and maybe also a bit concerned about future inflation. Pragmatically, if term premium is back, duration is worth considering again.

Second, rising long-term term yields did not compress the valuation multiple of US stocks, as it usually, and quite logically does. Multiples expanded, so that equities are as expansive as when rates were much lower.

This indicates that markets are extremely confident in future earnings growth.

Third and finally, let me explain why my two previous points are all about the US. The dominance of America over the investment landscape is as high as ever. The relative valuation of US stocks over all others is at an all-time high.

The spread between US high yield and emerging markets debt of similar risk and duration is also historically very low. Like it or not, the US is hegemonic for your global portfolio.

This brings me to how we start 2025. First, the just released December PMIs confirm that the global economy is in good shape. This is led by services, as manufacturing remains weak, but they are strong enough to postpone cyclical anxiety.

With Europe struggling and China still in the early days of their stimulus measures, the US is the main growth engine of the world – at least in size, as the UAE or India are also doing fine.

Second, the fact that we didn’t have a year-end rally, but a mixed December 2024 is good news for January. Despite a very strong consensus of economists for a happy late cycle economic backdrop, and an even stronger unanimity from strategists for positive equity returns ahead, most retail investors and a number of hedge funds have actually reduced their exposure.

The Q4 corporate earnings season will start soon, the new US administration will take office in two weeks, and the Fed will hopefully provide some clarity during their policy committee in late January. Markets usually enjoy facts, we will get some.

This is why we start the year fully invested – neutral on stocks, slightly overweight on bonds, underweight in hedge funds.

Still, we believe that 2025 will not be a replay of 2024.

Last year was all about burning questions on the current state of growth, inflation, and monetary policies. 2025 is about the medium-term impact of a number of emerging changes, which start at the political level before percolating to activity, international relations, inflation and growth.

We need details on the first policy moves of the new US administration. Will they support domestic growth at the expense of other countries, and take the risk of inflation? Will the US Department of Government Efficiency (DOGE) reduce government spending, a potential with immediate and long-term consequences? Is the optimistic consensus overlooking risks?

We will soon issue our 2025 Global Investment Outlook and get prepared for a fascinating year, where regional and national agendas will probably prevail over global topics, creating divergences and investment opportunities for the medium term.

Happy New Year…