Global equities in 2025: Balancing structural drivers with opportunistic exposures

Introduction

In January of 2024, we released our first Conviction Equities outlook where we introduced our key views for the year. Looking back, 2024 proved, as expected, to be a year of strong equity performance. Growth and quality stocks outperformed, albeit with some differences between regions. Some of our views were quite aligned with consensus and easy to extrapolate (semiconductors and IT equipment for instance), while others were much less shared by investors (utilities, which did very well until the end of the year before fading somewhat after the US elections). On the other hand, the strong performance we were expecting from large-cap Swiss equities, MedTech and biotech companies, or some selected South American consumer discretionary players did not persist in the second part of the year, despite a strong rally that lasted until the end of the summer.

The election of Donald Trump, and perhaps more importantly the unexpected red sweep over the US Presidency and Congress, have opened a period of much higher and wider uncertainty. The markets’ focus has rapidly moved to how far and how fast the Trump administration’s agenda could be implemented and what net impact it could have on the US, and also the world economy. These policies will be enforced at a time when US economic growth, while slowing, is still showing impressive signs of resilience. Implementing reflationary policies (through tax cuts) on top of an economy running close to full capacity or enforcing deflationary policies (through substantial federal expense cuts or rapid immigrants’ deportation) on top of a fast-weakening economy would have de-stabilizing, rather than stabilizing, effects on both GDP and the markets. We continue to bet on (moderate) additional growth in US nominal GDP, with positive contribution from real income and negative contribution from further disinflation, but we acknowledge this perspective has been seriously scrambled by the latest US political developments.

2024 was (another) year of US exceptionalism and, for the time being, we see very little reason to believe it could change significantly, not only because of the strength of the US economy and the aggressive agenda of the new US administration, but also due to the lack of responsiveness of policymakers in other large economies (Europe, China, Japan), each of whom face their own specific challenges. This US dominance is expected to remain on par with a still strong USD and large capital flows directed at US listed and unlisted assets. However, while US assets are priced for perfection, European and many emerging markets’ valuations already incorporate multiple negative expected developments. As demonstrated by the Chinese rally last year, any positive surprise could unleash rapid and spectacular rebounds in local equity markets, even if ultimately capped by poor long-term structural outlooks.

At a more thematic/local/industry level, this complex environment suggests prioritizing clusters supported by secular drivers, such as AI hyper-scalers and semiconductor manufacturers in the US and Taiwan but also selectively in China and Korea, electric grid infrastructures, data center cooling manufacturers and power management solutions providers, or industrials in India. These long-term positions could be completed by more opportunistic (and volatile) investments in sectors which may experience better macro, product cycle, or regulatory environments in 2025, such as Swiss real estate and wealth managers, consumer discretionary companies in Asean, Indian pharmaceuticals, Saudi Banks and some (very) selective Chinese industrials names which could ultimately benefit from a bottoming in their unusually long inventory/capex cycles (electric batteries, construction equipment) subject to policy developments in China. In contrast, it seems safe to steer clear of European capital goods and automotive manufacturers, solar energy companies, as well as consumer discretionary names in China but also in Brazil, which has been hit by inflation and rates dynamics.

1. What to expect from the macro environment in 2025?

Until last November and the US elections, market expectations regarding current and short-term future US growth conditions were oscillating between a no-landing and a soft-landing scenario, with a relatively narrow dispersion of outcomes regarding inflation and real growth. Even forecasters granting some probability to a US technical recession were anticipating it would be short-lived and limited enough to remain consistent with an overall goldilocks environment, where both growth and inflation would return to pre-Covid levels, supporting a rapid normalization of monetary conditions. The unexpected red sweep over the three branches of the US government, combined with more resilient economic data, quite spectacularly shifted those expectations towards significantly higher nominal growth, mostly through disruptive reflationary policies (from purple to red ranges in Figure 1, below).

This shift has been translated by a consistent re-assessment of EPS expectations for 2025, which – instead of being downgraded from their 2024 levels – are now increasingly at risk of being upgraded, at least for some sectors and especially for IT, industrials, consumer discretionary and healthcare. However, as nothing comes without a price, this upward revision in nominal growth and earnings also capped the prospects of rapid and significant policy rate cuts. This risk materialized as a result of the hawkish guidance from the Fed during its December meeting as well as the strong US employment report released on January 10, 2025. Markets had to digest the new FOMC dot plot quite brutally in the last sessions of 2024 and may have to digest further adjustments should the reflationary scenario translate into higher actual inflation in addition to higher real growth. But this is far from granted yet.

The precise nature, depth, and pace of implementation of the policy steps by the new Administration remain unclear. There is a reasonable and widely shared perception that the second Trump presidency will be different this time, with stronger legitimacy, a better skilled and prepared team, and fewer/weaker guardrails than in 2016. With the prospects of the next mid-term elections starting as early as in 12 months, the Republican congressmen will seek to deliver on their most popular commitments as fast as possible. This should, on paper at least, support the rapid implementation of a quite disruptive agenda.

There are, however, three limitations to this reasoning. First, Donald Trump’s agenda mixes multiple promises that are at odds with each other. It is the nature of populism to aggregate neo-liberal, conservative, and progressive promises in the same pot. But slashing USD two trillion of federal expenses in 18 months would annihilate the benefits of tax cuts, at least in the short term. Raising tariffs too fast and over a too large basket of goods while cutting small firms from cheap labor fueled by undocumented immigrants would spark a new round of inflation, far from disinflation promises. Pushing the USD higher would reduce the speed of America’s reindustrialization…

Once in power, the new Administration would have to define its short-term priorities. Our guess is that it would probably favor growth over government shrinkage, disinflation over inflation resumption risk, and try to contain USD appreciation, not to impose any risks on the job market and GDP figures ahead of the mid-term elections. Second, any policy decision, even the least demanding one from an institutional decision-making dimension, requires preliminary analysis and investigation. New or increased tariffs for instance, subject to their legal basis, might require consultations with industry leaders that could take months before reaching a conclusion. At the other end of the spectrum, deporting 20 million undocumented immigrants appears completely unrealistic from a simple logistic angle, not to mention, again, the dramatic destabilizing impact it would have on the economy¹.

Third, and more importantly, even if guardrails are obviously much fewer and weaker than eight years ago, some do still exist and may prove effective. In the US, most of the electorate, policing and economic power reside at a state level, and that power is widely dispersed between Democrats and Republicans. Reversing the Inflation Reduction Act, for instance, won’t prove easy as most of its subsidies are directed toward red states. The counterpart of a still very liberal economy is that most private companies do not react to signals other than prices or supply side bottleneck risks. Oil companies, especially shale oil, will not flood the market with more drills if it risks dumping the barrel price below USD 65. AI giants investing into data centers will continue to favor clean sources of energy to avoid long-term future vulnerability. And ultimately, the capital markets and the Fed would act as the last goalkeeper, whose mere presence is enough to avoid multiple own goals.

Overall, these considerations lead us to anticipate stimulative, yet not disruptive, policies over the next 12 months – with maybe a few exceptions such as financial or internet platform regulation – likely to marginally boost growth and maintain inflation at a slightly higher level than what could have been a baseline scenario in the case of a split government. But extreme outcomes – and in particular a stagflationary mix of lower growth and higher inflation (the left upper corner of Figure 1) - remain unlikely. From where they stand at the time of writing, in the early days of 2025, interest rate expectations present asymmetric risks to stay stable or be rebalanced (again) towards lower levels and a flatter curve, rather than spiraling significantly higher. However, it is also reasonable to say such a view is surrounded by a much higher level of uncertainty than the scenario we formulated one year ago.

What could be the consequences of this type of base case for the global economy and markets? All things being equal, it should be seen as a positive contribution, supporting growth at a time where it was at risk of decelerating globally. The elephant in the room is obviously the impact of new or additional US trade tariffs aiming at directing most of the additional US demand towards local manufacturers, away from Europe, China or other emerging competitors. Here again, we rather expect a phased implementation and limited, if any, disruptive impact on global trade, at least over most of 2025. The major risk is a prolonged wait-and-see attitude from multinational corporates, pushing back any investment project involving offshore production capacities. This could be at least partially offset if other countries or regions were to adopt fiscal stimulus, reflating their own domestic demand. This might be the case for China (see below), while India is expected to resume its public capital expenditures cycle after a prolonged pause in an electoral year. In this context, Europe could emerge as the designated victim, crippled by its weak institutional design, lack of leadership, and absence of consensus regarding the cyclical use of fiscal deficits and public borrowings.

2. How long will US and IT mega caps continue to outperform?

This leads us to one of the hottest debates among equity strategists in these early days of 2025: How much longer can the outrageous dominance of US stocks last, and more specifically the IT mega caps driven by AI capex and promises of productivity gains? While at the macro level, the factors supporting US economic outperformance – while excessively magnified after the US elections – are unlikely to be reversed anytime soon, the valuations and market cap reached by some of the Magnificent 7 names have prompted some investors to consider the opportunity of a rotation toward other regions or market segments.

First, it is fair to underscore that today’s situation presents many differences than the tech growth bubble of the late 1990s, when internet stock prices diverged very significantly from their underlying fundamentals. While performance concentration has been extreme in 2024, it was not fully disconnected from earnings and profitability distribution. US equities, and in particular large tech platforms, have been rewarded by markets in proportion to their rising share in earnings and superiority in return on capital. US IT giants are generating an ever-increasing share of their revenues from data center equipment or cloud solutions sales and continue to surf on the AI mania wave. Besides, in the context of rising and persistently elevated interest rates, cash-rich tech oligopolies were also logically favored over more indebted capital-intensive large caps or small and mid-cap companies. The recent repricing of the US yield curve has therefore unsurprisingly triggered a new round of IT mega-cap outperformance.

None of these factors are likely to dramatically reverse in 2025. Some services activities could start monetizing AI gains, for instance, in the field of fintech, communication services, new mobility, or future healthcare, especially in the case of material deregulation. Investors will have to wait much longer to witness generalized productivity gains from AI, as its wide-scale adoption will initially require a consistent global ecosystem (from legal liabilities clarifications to social safety net solutions for workers replaced by bots). It is possible to consider that at some point some investors may lose patience, but any correction is likely to remain short-lived and limited in size as the fear of missing out on such a key technology revolution should ultimately prevail. Therefore, US but also Asian high-end semiconductor manufacturers and hyperscalers are expected to continue to perform well, supported by persistent strong demand for GPU (especially in the context of new products launches) and ASIC. Some leading software companies could also begin to see substantial revenue contributions from AI this year, after lagging hardware manufacturers over the last two years.

Concentration of returns in these segments is, however, expected to be less dramatic than in 2024, for at least two reasons. First, previous US episodes characterized by a combination of a supply side deregulation agenda and tax cuts usually form a supportive environment for more cyclical domestic names and domestic-oriented small and mid-caps, which are less vulnerable to the strength of the USD and weaker demand in the rest of the world. This might be all the more the case since operating margins – outside the Magnificent 7 – are still relatively low at this stage of the cycle and have significant room for improvement. Second, the persistent need for further investments in data centers is starting to spread to other sectors or themes, especially to energy infrastructure, electricity grid modernization, and cooling and power management solution providers. Major tech companies are indeed vying to secure next-generation power sources—ranging from small modular reactors to fusion and geothermal—to meet the expected doubling electricity demand driven by AI workloads by 2026².

3. Is it premature to invest in European and environmental stocks again?

In the last weeks of 2024 and the aftermath of the US elections, sentiment towards the European economy and stock markets had reached an extreme low point. The rationale for such a distrust was, and still remains today, strong: European business, and in particular the manufacturing cycle, appeared to be in a free fall, core EU member states were facing political crisis or periods of instability, the drift in public expenses during and immediately after the pandemic combined with higher borrowing costs forced governments to consider significant fiscal tightening at times of an economic slowdown or recession. More fundamentally, Europe continued to appear crippled with a weak institutional framework and an apparent inability to rapidly implement the counter-measures necessary to absorb its excess savings and lower its vulnerability to reduced US imports in the case of dramatic hikes in tariffs.

Since the end of last year, some developments may have opened the door to more positive market action. Latest services and composite PMIs surveys for France and Germany stabilized or slightly rebounded, albeit at low levels, in December. An emergency law was passed in France to prevent a fiscal shutdown and a new Cabinet was appointed, even if it remains unclear whether it would survive the negotiations of a new Budget. The German chancellor called for snap elections, likely to lead to a conservative coalition this Spring. These developments appear however fragile (the latest polls in Germany do not exclude a “French scenario” of an unstable majority) and – in the absence of solid catalysts for European domestic demand – may not resist the shock(s) of significantly US higher tariffs or even fiercer competition from Chinese automakers. However, given the extreme negative positioning of investors related to European stocks and their relative valuation, any additional sign that the situation could be bottoming or any unexpected positive news on the geopolitical front may help trigger a short-term rally, as was the case in China in late summer 2024.

We continue to see Swiss equities as an efficient way to keep some indirect exposure to core European markets, while offering a different underlying exposure than the concentrated US and global equity benchmarks. With more than 90% of their revenues generated outside Switzerland, including 25% in other European countries, Swiss listed companies would benefit from any short-term relief in European economies. More importantly, due to their strong industry positioning and key leadership in their respective sectors, most of those companies are price makers and should suffer less from potential additional US tariffs than their European counterparts. The same quality characteristics, combined with the stability of Swiss institutions and the Swiss franc’s status of “safe haven”, would also allow this proxy to be more resilient, especially if unhedged for non-Swiss investors, in the event of renewed weakness in European stocks.

Like European stocks, clean energy and climate-transition related equities have been abandoned by investors over the last 15 months. Over-capacities and inventories accumulated in some segments (EV, batteries, solar panels, wind turbines) had weighed on profitability while persistently high interest rates increased funding costs for many still fragile new players. Moreover, it seems obvious that the possibility of a re-election of Donald Trump, with a clear hostile agenda to fight against climate change and renewable energies seen as competing with US oil production and export capacities, had also influenced investors’ cold feet towards environmentally sustainable equities. Now that this risk has materialized, could there be additional (negative) consequences for this segment of the stock market?

Here again, it seems important to make a clear distinction between rhetoric and facts. As mentioned earlier, the extraordinary current and projected growth for electricity demand is already directed today, in majority, to non-fossil energy capacities and it is highly likely this market penetration would only continue to increase over the next quarters and years, regardless of the official stance of the White House³. Energy infrastructure is becoming a highly competitive arena for data center operators. Major tech companies are vying to secure next-generation power sources—ranging from small modular reactors to fusion and geothermal—to meet the expected doubling electricity demand driven by AI workloads by 2026. We would be (very) surprised if the pace of growth of US clean energy capacity in megawatts (MW) experienced during Trump’s first term (+50% in 4 years) would not accelerate (significantly) further during his second term. Even the cut in subsidies, not granted yet, would hardly slow down a market segment where many players have reached critical scale and competitive production costs, if not lower, than those of fossil energy producers. The same trend should also benefit broader industrial segments as well as materials and resources, including industrial commodities, which are key to an energy transition that remains a physical necessity.

4. Can emerging markets surprise investors amid accelerating re-onshoring trends?

If you stick to the book, the combined prospect of a strong dollar, higher tariffs, lower trade intensity and possible downward pressures on commodity prices does not bode very well for strong performance of emerging markets. Relative valuations have never been so cheap, but they have also not stopped becoming cheaper, year after year, over the past 12 years, with little effect so far on investors’ appetite. However, here again, there is some space for opportunities and, maybe, positive surprises.

First, it is worth highlighting most emerging economies have reduced their dependency on international trade, especially with developed economies. China’s share of US imports has fallen to a bit more than 10%, significantly lower than Europe. Many of its exports have been redirected to other markets, including for a large proportion other emerging economies. Today’s emerging countries that combine the highest dependency on global trade and largest surplus with the US are Malaysia, Thailand, and Taiwan as well as a few Eastern European economies. In the case of Taiwan, this surplus is mostly explained by high-end semiconductors that might be complex to penalize through higher tariffs, at least in the short term.

If the shock to emerging exports to the US might be on average contained, stalling global growth, at least outside the US, would still leave emerging markets mostly dependent on the strength of their domestic demand and the actual revenue growth generated by their companies. On the second point, earnings growth forecasts are, for the time being, holding up well for emerging markets for 2025 and 2026, just slightly below US companies, and significantly above expectations for other developed regions (see Figure 2).

Regarding domestic demand, 2025 – just as 2024 – could be a tale of two contrasting dynamics between economies supported by strong secular tailwinds but facing a cyclical soft patch (India) and economies struggling with structural deflation but likely to boost consumption and investment to meet very short-term objectives (China). Investors have now fully incorporated the view that China’s fiscal policy would only react to limit an excessive deterioration of business conditions and the risk for GDP growth to slide too far from its official target. There is for the time being, no “great plan” aiming at extracting the Chinese economy from the strong deflationary forces it has been facing for multiple years. With its economy weakening again in nominal terms at the end of 2024, the Chinese government is expected to release, earlier than it did last year, a new round of measures aiming at maintaining its GDP growth close to 5%. It might help giving again some colors to the local stock market, albeit with a lower magnitude and even shorter life span than the rally experienced last year. It would then form another window of opportunity to further rebalance a global emerging portfolio away from China.

This does not mean there are not opportunities to exploit in the Chinese stock market. Some local businesses, more domestically focused, are indeed likely to respond positively to policy catalysts, even if limited, and – beyond – to the potential bottoming of an unusually long downward inventory cycle. While solar should continue to be crippled with other capacities, demand for batteries might stabilize and construction equipment, while super volatile, may surprise on the upside.

At the opposite end of the cyclical and geopolitical front, India might gradually recover from the soft patch that followed the unexpected outcome of general elections in 2024. While Indian secular sources of appeal have not changed – one of the only large economies (with the US!) to add labor, capital, total factor productivity growth at the same time, while being much less vulnerable to global trade and Trump’s threats - it remains subject to the pace of public capital expenditures and domestic inflation. As we expect some progress on both fronts in 2025, Indian stock markets could progressively catch up. However, symmetric to a limited downrating of Indian relative valuations in 2024, we do not expect the return of local assets r to significantly overshoot over the next few months. Indian industrials stocks might be a better way than local consumer discretionary names to play the progressive recovery in the capital expenditures cycle.

In conclusion, 2025 should mark another positive year for equities, however much more complex and ultimately not as spectacular as last year, more volatile but also less concentrated in returns across sectors and market segments in spite (or because) of more chaotic gaps between policy communications and actual delivery. The cyclical and value rally, briefly experienced at the end of 2024, should not overshoot and growth and quality should prevail again. Investors will have to stay nimble and agile enough to navigate across these segments or alternatively to stick to high quality businesses driven by secular forces. An asymmetric barbell between core positions in such businesses (IT semiconductors, AI hyper-scalers, energy transition related industries, transition resources, India industrials…) and more opportunistic satellite exposures to segments possibly benefiting from cyclical or policy-induced rebounds in emerging or European/Swiss markets could help investors muddle through this more challenging environment.