Our base case reflects optimism about the prospects for US stocks and high-quality bonds. (UBS)
All that despite unprecedented global lockdowns, the outbreak of wars in Eastern Europe and the Middle East, and the largest spike in interest rates and inflation in decades.
The market and economic developments have led some to term the decade so far as the “Roaring 20s,” marked by high economic growth, strong market returns, and improving productivity. We are now approaching the midpoint of the decade, and the implications of the US election result are a focal point. A key question is whether US political change might extend or end the Roaring 20s.
The upside scenario would see lower taxes, deregulation, and trade deals adding to a positive market narrative built on solid growth and continued investment in artificial intelligence (AI). The risk scenario is that trade tariffs, excessive fiscal deficits, and geopolitical strife will contribute to higher inflation, weaker growth, and market volatility.
While we are monitoring the potential risk scenarios closely, our base case is optimistic about the prospects for US stocks and high-quality bonds. We are more cautious about the US dollar’s medium-term prospects but continue to like gold.
Specifically, our high conviction investment ideas for 2025 are as follows:
- Position for lower rates. In our base case, major central banks will cut rates as inflation normalizes and jobs markets cool. Investors should therefore diversify into high grade, investment grade bonds, diversified fixed income, and equity income strategies to bolster yields.
- More to go in stocks. Falling rates and solid growth make the US market Attractive––we expect the S&P 500 to reach 6,600 by end-2025. We also like select markets in Asia ex-Japan, Eurozone small- and mid-caps, and Swiss high-quality dividend stocks.
- Seize the AI opportunity. AI will likely prove to be one of the biggest investment opportunities of the decade, with potential revenues of more than USD 1.1tr across the segment by 2027. We recommend that investors focus on megacap tech and private companies in the enabling layer for now.
- Invest in power and resources. AI power usage, industrial electrification, and decarbonization will all spur electricity demand––we recommend investing in transmission, distribution, data centers, transport, and energy storage.
- Sell further dollar strength. While the US dollar may stay well bid in the near term, we advocate hedging it, selling it on strength, or generating yield through options as it falls back in line with declining yields and as twin deficit concerns look set to rise.
- Go for gold. Gold looks poised to gain on lower rates, persistent geopolitical risks, and government debt concerns. We also like transition metals as rising demand for them to generate power likely meets constrained supply.
- Time for real estate. The global real estate outlook is promising. With limited supply and growing demand, sectors like logistics, data centers, and multi-family housing present opportunities. We recommend focusing on quality assets and strategic diversification.
Taking a step back, while these investment ideas present compelling cases for immediate action, they must be considered within the broader context of your financial goals. Our Liquidity. Longevity. Legacy.* framework is designed to help you integrate these opportunities into a strategic plan by linking your financial goals to your investments. We recommend putting cash to work and building a core diversified portfolio, including exposure to alternatives. Subject to careful planning and risk management, borrowing may help improve portfolio diversification, while mixing index-tracking and more active approaches provides the potential to generate alpha in a risk-controlled way. Finally, sustainable options are available across all major asset classes, including equities, bonds, hedge funds, and private markets, offering similar risk and return profiles to traditional investments.
Read more in our Year Ahead 2025 outlook, “Roaring 20s: The next stage.”
*Time frames may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.
Main contributors: Solita Marcelli, Mark Haefele, Kiran Ganesh, Vincent Heaney, Sundeep Gantori, Daisy Tseng
Original report: Year Ahead 2025: Roaring 20s: The next stage, 21 November 2024.
