At a glance: What you need to know from last week

Why the AI rally is likely to continue in 2025
2025 began with tech equities on a roll, driven by an AI rally that has propelled two consecutive years of strong returns for the Nasdaq Composite, including a 28% rally last year. The Magnificent 7 group of large-cap tech stocks accounted for over half of the S&P 500’s gains in 2024. The Nasdaq's market capitalization now exceeds USD 32 trillion, with more than USD 13.5 trillion added in the last two years alone.

Some investors are contemplating whether to lock in gains given the strong performance and potential headline risks in 2025. While the easy gains in AI may be behind us, we believe this rally is far from over.

We expect more upward revisions from large-cap tech on AI capex spending, with estimates for combined capex growth reaching USD 224 billion in 2024 (+51% y/y) and USD 280 billion in 2025 (+25% y/y). Moreover, big tech firms are likely to make significant progress in monetizing their AI spending this year, with evidence suggesting that AI monetization will improve sharply in 2025. The gap between AI capex and revenues is expected to narrow as companies adopt AI to increase revenue and reduce costs. Lastly, AI valuations are not as stretched as they may seem. Most gains in AI stocks have stemmed from impressive earnings performance rather than significant price-to-earnings ratio expansions. As we expect earnings to grow 25% in 2025, we remain bullish on the AI theme, particularly on quality large-cap AI stocks.

Takeaway: We advise underallocated investors to consider using volatility to buy quality AI stocks on dips, rating the information technology sector as Attractive.

How to position in fixed income for the year ahead
Treasury markets faced headwinds in December after the Fed indicated a slower pace of easing for 2025 during its final policy meeting. This capped a volatile year for US government bonds, with shifting market expectations regarding the speed and extent of Fed rate cuts. The yield on the 10-year US Treasury, which began the year at 3.86%, ended at 4.57%, having fluctuated between a high of 4.7% in April and a low of 3.62% in September. This marks the first time since the 1980s that the 10-year yield has increased for four consecutive years.

The Bloomberg US Treasury index lost 1.5% in December and 3.1% for the final quarter, notching a modest annual return of 0.6%. In contrast, the Bloomberg Pan-European Aggregate lost 0.7% in December and dropped 0.1% for the fourth quarter. Notably, US and euro high yield credit delivered the highest returns for 2024, at 8.2% and 8.6%, respectively. Investment grade bonds also produced positive returns, with the Bloomberg US Credit index returning 2% and its euro counterpart 4.7%.

Looking ahead, we maintain a Neutral recommendation on fixed income overall. The trajectory of yields will depend on Fed rate cuts and the implementation of President Trump's policy proposals. We have adjusted our base case for 2025 rate cuts from 100 basis points to 50 basis points.

Takeaway: Within fixed income, we find investment grade bonds Attractive due to robust corporate fundamentals and strong investor demand. We also upgraded high grade government bonds to Attractive, anticipating a favorable risk-return profile, especially if economic growth slows more sharply than expected.

Despite slower rate cuts, the outlook for gold remains bright
Gold delivered one of its biggest annual gains in more than a decade last year, rising 27.6%—beating even the S&P 500. But the precious metal lost some momentum in December, especially after a hawkish tone from the Fed at its policy meeting. Fewer rate cuts would mean that the opportunity cost of holding gold— which is a zero-yielding asset—will not decline as fast as previously expected. The potential for a stronger US dollar in the near term, based on higher relative US rates, is also a potential headwind, since it increases the price of gold and dents demand for the metal for non-US dollar investors.

But despite this disappointment, we believe gold can build on its 2024 gains. Although US rates may fall less than expected, they are still on track to decline. And the case for holding gold rests on more than rates. We expect central bank demand to remain solid—we forecast purchases of around 900 metric tons in 2025—driven by diversification and dedollarization trends. Moreover, an increasing US federal deficit and the worsening of it debt profile over the long run should underpin gold's attractiveness versus the US dollar.

Takeaway: Based on the Fed's latest guidance, we recently trimmed our forecast for gold by USD 50 an ounce for 2025. We now expect the metal to end the year at USD 2,850 an ounce, compared to USD 2,639/oz as of the end of last week.