Equity market 2025: three sectors to watch

First the good news: there is a good chance that 2025 will also close with positive equity returns. This is always assuming that the following expectations are met – namely moderate economic growth, lower inflation rates, a looser fiscal policy and falling key interest rates. At the same time, there are also dangers lurking and thus potential triggers for price setbacks. These include a return of inflation, trade conflicts and high national debt in the major economies. Consequently, we expect to see greater volatility on the financial markets again in the coming year.

We also anticipate the following developments for 2025: 

Moderate economic growth

The fitness levels of key economic nations differ greatly in some respects.

• USA: The US economy is showing robust growth thanks to solid private consumption. The economic policy of the new administration under President-elect Donald Trump, with its focus on deregulation, tax cuts and further high government spending, supports these expectations.
• Europe: We expect weak growth, although the second half of the year could be slightly better. France and Germany, which are causing concern, are showing little momentum and appear to be politically blocked. However, the German elections next February should pave the way for substantial and economically supportive measures.
• China: The outlook for China is subject to a great deal of uncertainty given the trade conflict with the US and the problems in the domestic property market. However, the government is likely to continue to support the economy with monetary and fiscal policy measures. However, this year's growth rates are likely to be barely reached.

Falling inflation allows interest rates to be cut

The fact is that inflation figures in most industrialised countries are approaching the target value of 2%. However, further developments vary from country to country. 

• USA: In the United States, inflation is likely to remain slightly elevated due to the Trump administration's expansionary fiscal policy and new trade conflicts.
• Eurozone and Switzerland: Here, the markets have priced in moderate inflation rates.
• Japan: Rising wages and a depreciation of the JPY are lifting inflation slightly.
• China: In our view, inflation in the People's Republic is too low and is even showing deflationary tendencies. 

Overall, the inflation outlook gives most central banks scope for further interest rate cuts in 2025.

Chances of price increases remain intact despite strong performance in 2024

With the exception of the US stock markets, equity market valuations are moderate and still offer upside potential. However, the valuation premium of US stocks is justified by stronger earnings growth, greater innovative strength and business-friendly conditions.

We see investment opportunities in the following three sectors: 

1. Falling key rates favour small & mid caps
   The American leading index S&P 500 has recorded several record highs this year, mainly driven by the so-called Magnificent 7 in the IT sector. We believe that the global interest-rate cuts should now lead to broader market participation. In the US in particular, small and mid-caps could benefit from economic policy. Valuations have lagged well behind the US market as a whole.
   
   
2. Normalisation of the yield curve supports US bank stocks
   Falling key interest rates, solid growth rates and continued high borrowing suggest a steeper yield curve, particularly in the US. The resulting widening of interest margins and the deregulation offensive announced by the Trump administration make US bank stocks an attractive investment option.
   
   
3. Artificial Intelligence (AI): From semiconductors and data centres to products
   Investments in AI data centres have boosted numerous companies in the semiconductor, network equipment, cooling and power supply solutions and software sectors. In the coming year, the focus is expected to shift increasingly to AI applications. This development marks the beginning of a second growth phase for companies that are able to combine investments in AI with a profitable business model. The first growth phase was mainly focused on research and development of AI technologies, as well as initial implementations and pilot projects. Companies concentrated on understanding the fundamentals of AI and gaining initial experience with its application. The second phase of growth is now characterised by increased integration and use of AI technologies across the board. This offers companies the opportunity not only to increase efficiency and productivity, but also to exploit new business opportunities. Companies that succeed here are also likely to be among the winners on the stock market.

Find out about our views on the Market Outlook 2025 in general and the bond market in particular.