Market Outlook 2025 : What we expect, where we see investment opportunities

The stock market year 2024 was eventful and unbalanced but delivered above-average returns. As a reference: the Swisscanto Portfolio Fund Responsible Balance has achieved a return of 12% since the beginning of 2024 before costs. This corresponds to an outperformance  of around 0.6% compared to the benchmark. Gold was particularly convincing with 33% (in CHF and EUR), followed by world equities with just under 27% in CHF and 29% in EUR. The latter were driven by the strong performance of US equities and their high weighting in the index. Emerging market equities lagged behind with a performance of around 14% (in CHF and EUR).

Constructive environment for the stock market year 2025

"The constructive economic environment that we have already seen this year is likely to continue next year," says Anja Hochberg in a video interview. This is because real GDP in the USA will grow by around 1.8% next year, consumption is expected to remain robust and investment in equipment is likely to pick up. In the eurozone, where real GDP is expected to grow by 1.2%, however, economic momentum continues to vary from region to region.

With an average inflation rate of around 2.1%, inflation in both the USA and the eurozone is gradually sliding back into the central banks' target range. Switzerland will probably see average inflation of around 1.0%. The US Federal Reserve is likely to cut key interest rates to a level of 3.5% (currently 5.5%) over the course of the year and the ECB to 2.0% (currently 3%) due to the weakening economy. With at least one further interest rate cut from the current 0.5 % to 0.25 %, the Swiss National Bank is once again approaching the zero interest rate limit.

Our three main beliefs for 2025

1. Moderate returns

However, the constructive macroeconomic outlook, including the prospect of a further fall in key interest rates, is offset by high valuations. "The performance bar will be relatively high for equities, especially for US large caps in the IT sector," says Hochberg.

Moreover, past experience shows that these valuation levels tended to be accompanied by moderate future returns. In contrast to the average 10 per cent return p.a. of the past decade, we are likely to return to an average nominal return of around 5 per cent p.a. at index level over the next few years (see chart 1).

2. Normalising yield curve

The central banks' falling interest rates will result in a steeper yield curve amid a robust global economy, stabilising inflation rates and persistent sovereign debt concerns. This development will take place in most western currencies and may be even more pronounced in the EUR area. This is because in view of the economic weakness in Europe, the reduction in key interest rates is likely to be more pronounced, although the long end will only partially benefit as a result of the difficult fiscal situation. This bull-steepening in the short end will help banks to widen their interest margins. On the other hand, it is to be expected that investors will increasingly look for returns in high-yield investments. Our preferences lie in the area of CoCos, secured high yield and emerging market bonds.

3. Increasing market breadth

The S&P500 has rushed from record to record in recent months. The main drivers have been the Magnificent Seven (MAG7), above all Nvidia. Since October 2022, they have been responsible for 60 per cent of earnings growth in the S&P500. However, we expect a temporary headwind for 2025: On the one hand, enormous investments in data centres, among other things, will reduce MAG7's earnings growth for the time being, namely from 90% in the first half of 2024 to an expected 15% in the second half of 2025. On the other hand, high forecasts regarding their profitability currently dominate. Accordingly, the gross margin of MAG7 is expected to rise to over 53% - a level that can quickly lead to disappointment. The bar is now probably too high for MAG 7. Another reason for growing uncertainty in the market could be the pending anti-trust measures taken by the US against Alphabet. We therefore expect a decrease in market concentration, measured by the share of stocks in % with an outperformance compared to MSCI World (see chart 2). In turn, this development opens up scope for added value through active management. In our opinion, more granularity is needed in the traditional asset classes on the one hand and the addition of alternative instruments on the other. In the equities sector, thematic investments such as digital economy, healthy longevity or circular economy are a good option. They reflect existing trends and invest across sectors and countries. In the area of alternative investments, private equity, property and insurance-linked securities, for example, come into consideration. We also see investment opportunities for the favourable small and mid-caps as well as for the Japanese market with its favourable geopolitical situation and sector distribution.