What we will be watching over the holidays

In our Year Ahead outlook, we detailed how we believe investors should prepare for 2025, including positioning for lower interest rates and for more upside in US stocks and in gold, and selling the US dollar on further strength.

While we remain confident in our base case projections, with equity markets rallying against a backdrop of the new US administration taking shape, political turmoil in the core of Europe, and promises of increased economic stimulus in China, we should not lose sight of the wider range of outcomes.

In this letter, we will share what data points we will be watching and evaluating against our base case. In keeping with my tradition, I also include my annual list of New Year’s resolutions for your portfolio in 2025.

Trade is likely to be one of the fastest-moving areas of US policy. Since my last letter, President-elect Donald Trump has threatened tariffs on China, Mexico, Canada, and the BRICS countries. At the same time, the nomination of Scott Bessent as Treasury Secretary has raised optimism about a more transactional and pragmatic approach. In our base case, we expect selective (rather than universal) tariffs—enough to hurt individual countries and sectors, but not so large as to knock the US economy off track.

European political uncertainty is high following the respective collapses of the French government earlier this month and the German government in November. At the same time, market expectations for Europe are low, so we see scope for an upside surprise in Germany following its election in late February. Our base case is for a steady improvement in Eurozone consumer spending as inflation and interest rates fall and income growth stays solid.

Chinese markets have rallied again following recent announcements that suggest a greater commitment to fiscal policy easing. We will watch for more concrete details to assess whether stimulus measures will be sufficient to offset structural and external challenges. Following the conclusion of the Central Economic Work Conference, the next potential policy catalyst is the National People’s Congress in March.

We will also closely monitor the Federal Reserve’s last policy meeting of the year, where we expect another interest rate cut. Focus will be on how the Fed views political and economic developments and their potential effect on the path for rates. The Fed has so far signaled its commitment to bringing rates toward “neutral.”

Overall, we see upside for US and global equities in the year ahead. Falling interest rates, decent economic growth, and the structural AI trend remain positive drivers. We forecast the S&P 500 to reach 6,600 by the end of 2025 and see the US as an Attractive market. We are Neutral on European and Chinese equities, though we like the diversified Asia ex-Japan market.

Outside of equities, we like quality fixed income and expect the 10-year US Treasury yield to decline modestly. In currencies, we believe the US dollar’s valuation is stretched and recommend selling on further strength. We also expect gold to continue its rally.