By Joel Kranc

This year started off with a bang. With the arrival of Donald Trump’s second non-consecutive term as president, markets saw a presidential bump. A slew of executive orders on immigration and trade policy were signed, and less than two weeks later, talk of trade wars began on both sides of the U.S. border.

But with inflation relatively stable, investors looking at equities within their portfolios are seeing central banks around the world looking towards easing monetary policies as growth stimulation becomes more feasible.

“We expect growth to continue to slow in the near term, followed by a reacceleration through 2025, which should foster a favourable environment for risk assets globally,” said Kristina Hooper, chief global market strategist with Invesco.

In a report, 2025 Investment Outlook: After the Landing, she also noted that, “In the U.S., we see the economy decelerating towards potential growth rates before reaccelerating later in the year, supported by a resilient labour market and easing financial conditions … Overall, we expect a conducive environment for risk assets, particularly in non-U.S. developed markets, small capitalization stocks and value sectors in the U.S., with European assets likely to outperform the U.S. due to favourable valuations and cyclical sector weightings.”

The report further states that rate-easing cycles, such as where we find ourselves in today, is generally good for risk assets including markets outside the U.S., especially when the U.S. avoids a hard landing.

Further, in terms of equities, “The same economic backdrop that results in a steepening of the yield curve (rate cuts, resilient growth, and stable inflation) may also provide a tailwind for value-oriented and smaller-cap stocks. Lower rates should reduce the interest burden faced by companies heavily financed with floating-rate debt or that have nearer-term refinancing needs. As growth strengthens in the US, this should result in potentially higher revenue growth, particularly for smaller-cap companies, where sales have been flat in recent years.”

In fact, long-term institutional investors have begun 2025 with their biggest overweight position in equities in 16.5 years, according to State Street Global Markets.

The latest State Street Institutional Investor Indicators saw the risk appetite index fall to -0.09 in December with institutional investors breaking four consecutive months of risk seeking activity. State Street Global Markets head of Macro Strategy, Michael Metcalf noted, “As optimistic investors are about equities, long-term investor pessimism toward sovereign fixed income markets remains entrenched. It is telling as risk was reduced into year-end it was allocations to fixed income, which fell. Concerns about holding duration come from fears of a resumption of both inflation and unsustainable fiscal deficits.”

Staying the Course — With Caution

2025 starts with market tailwinds and a good case for large-cap value stocks, according to Tony DeSpirito, managing director and global chief investment officer of Fundamental Equities with BlackRock.

“Investors have been generously rewarded by U.S. stocks over the past two years,” he said. “What next? We enter 2025 optimistic yet balanced in our outlook, cognizant that two years of big gains and a broadening market suggests a lot of good news is priced into a growing number of stocks. At the same time, we are still seeing enough appreciation potential across individual companies to maintain a constructive, risk-on stance.”

And what supports the bullish stance on stocks for 2025? DeSpirito explained that uncertainty has been eased by a decisive election, a favourable economic backdrop with low unemployment, and corporate change in the form of new products and leadership.

Another issue for investors to take note of is the 13-year streak of large-cap dominance, according to Janus Henderson Investors report, Market GPS: Investment Outlook 2025. In it, they say that a more supportive economic backdrop is causing investors to now look at smaller-cap companies and away from larger tech names. “Smaller companies are trading at lower valuations than large caps globally (as measured by price-to-earnings ratios), and the natural flow of leadership cycles suggests it’s time to reconsider allocations to this important part of the opportunity set.”

Overall, many in the industry, like Franklin Templeton’s chief market strategist Stephen Dover, believe that “positive fundamentals for growth, inflation and interest rates, as well as the absence of significant imbalances or credit misallocation, offer favourable preconditions for positive returns across most asset classes and regions.”