A close look at this week’s trending topic

US stocks achieved their best returns over a two-year period in the last two years since the late 1990s, powering a rise in global equities. But with the Fed pointing to a slower pace of rate cuts in 2025, many investors are asking whether this run can continue. While we don't expect stocks to advance more than 20% like in 2024 and 2023, strong fundamentals suggest the rally can continue.

Markets ended the year in a more cautious mood, as investors scaled back expectations for the Federal Reserve's pace of rate cuts after a hawkish December policy meeting. The MSCI All Country World and the S&P 500 lost 1.6% and 2.4%, respectively, in the final month of the year. But most of the decline took place in the final three trading sessions of the year when liquidity was thin.

Despite the retreat in December, global stocks returned 20.7% for 2024 overall. The gains were led by the S&P 500, which climbed 25%. This was the second consecutive year in which the index advanced more than 20%, with US large-cap stocks delivering their best two-year performance this century. The S&P 500 also gained ground for the fifth consecutive quarter. Elsewhere, China delivered its first positive annual outcome since 2020 on hopes that more forceful stimulus would end a period of subpar growth, with the country's MSCI index returning close to 20%. Optimism in Japan fueled gains for the market. And while performance in Europe lagged, it was still positive.

Gold was another standout performer for 2024. The metal rose 27.8%, boosted by heavy central bank buying and a falling opportunity cost of holding the zero-yielding asset as US rates fell.

It was a more mixed year for fixed income. The 10-year US Treasury yield has now moved up for four consecutive years for the first time since the 1980s. And the return on the Bloomberg US Treasury index was just 0.6%, as unexpectedly resilient US growth dampened the outlook for rate cuts. The Bloomberg Pan European Aggregate returned 2.7%. Returns on investment grade were 2% on US dollar bonds and 4.7% on euro.

The key question for investors is what comes next. The main shift in December was that following the hawkish meeting that month, markets scaled back expectations for the pace of Fed easing in 2025. The median forecast from top Fed officials is now for just 50 basis points of cuts in 2025, half the level previously forecast.

We see several key implications for investor positioning in the new year:

In fixed income, we continue to believe that high grade and investment grade bonds, diversified fixed income, and equity income strategies are valuable in a portfolio context. Although our base case no longer expects much lower US or Swiss interest rates in 2025, we see absolute fixed income yields as appealing and believe that investors should consider diverse sources of income, since cash rates could still fall sharply if there are surprise weaknesses in economic data. Overall, while positioning for lower rates may no longer be as urgent, putting cash to work and seeking durable income should remain a strategic priority for investors.

In US equities, notwithstanding fewer likely rate cuts, we see a favorable backdrop ahead—driven by a mixture of lower borrowing costs, resilient US activity, a broadening of US earnings growth, further AI monetization, and the potential for greater capital market activity under a second Trump administration. We expect the S&P 500 to hit 6,600 by end-2025 and see scope for underallocated investors to use any near-term turbulence to add to US stocks, including through structured strategies.

In foreign exchange markets, we continue to advocate that investors should sell further dollar strength. Shifting expectations for Fed and US government policy have supported the US dollar in the weeks since we published our Year Ahead 2025 publication, and we continue to believe its valuation is stretched. While we do not expect significant near-term weakness, we think that investors should use further strength in the dollar to diversify into other preferred currencies, including the British pound and Australian dollar.

In commodity markets, if the Fed only delivers two rate cuts in 2025, we would likely need to moderate our expectations for gold demand from exchange-traded funds (ETFs), which could reduce the further gains we still expect in bullion prices. However, we note that gold prices have risen sharply over recent years despite a strong USD and higher US interest rates—in part due to central bank reserve diversification and in part due to investor demand for hedges. We believe these trends will continue as political and geopolitical uncertainties persist, supporting continued strong demand for gold.