As 2025 gets into full swing, it's important to consider the key themes likely to drive market movements throughout the year.
Major stock markets notched fresh record highs in 2024, with the S&P 500 (^GSPC) crossing the 6,000 points mark and the tech-focused Nasdaq (^IXIC) surpassing 20,000 points before easing back. The UK's FTSE 100 (^FTSE) also hit a new high in the early summer of 2024 and then retreated but has still been trading higher relative to previous years.
Despite this downbeat start to the year, Deutsche Bank (DBK.DE) macro strategist Henry Allen said in a note published on Monday that there are a number of reasons why 2025 could be "another great year".
He pointed out that the S&P 500 has only posted a negative total return for two of the 16 years since 2008, while Europe's Stoxx 600 (^STOXX) and Japan's Nikkei 225 (^N225) has done so four times in that period.
"So as we look forward to 2025, it’s worth remembering that there's the potential for a lot to go right," said Allen. "After all, many of the most obvious risks are already priced in. There’s no sign of an economic downturn."
"Even if we do get a downturn, central banks now have plenty of scope to cut rates," he added. "And whilst there are plenty of geopolitical risks right now, that hasn't been a factor that markets have traditionally reacted much to."
So what will be the catalysts for markets in 2025? Here are some of the themes highlighted by experts.
Stubborn inflation
One event in focus for investors is US president-elect Donald Trump's inauguration on 20 January, with concerns around what could happen after his return to the White House.
Trump has proposed universal trade tariffs on all imports to the US, as well as tax cuts, which have led to fears that this could stoke a resurgence in inflation.
Trump has proposed universal trade tariffs on all imports to the US, as well as tax cuts, which have led to fears that this could stoke a resurgence in inflation (AP Photo/Evan Vucci) ·ASSOCIATED PRESS
The latest reading of the US core personal consumption expenditure (PCE) — the Federal Reserve's preferred inflation gauge — showed that prices grew by 2.8% in the year to November. While this matched the growth seen in October and was lower than Wall Street's expectations, it remained above the Fed's 2% inflation target.
Allen said that this year "economists already expect US inflation to linger above target, even if the consensus isn't expecting a fresh spike."
In the UK, Deutsche Bank senior economist Sanjay Raja said in a separate note, released on Monday, that "consensus may be underestimating inflation" this year.
"A central hypothesis of ours is that headline CPI (consumer price index) will reverse course in 2025 — albeit temporarily," he said. "After averaging 2.6% [year-on-year], we see price momentum rising to around 3%."
Higher energy prices and food prices picking back up were among the factors Raja said had pushed Deutsche Bank's projections higher. In addition, he said the increase in the national living wage and employer national insurance contributions announced in the autumn budget were expected to add to retail prices.
"We also see rents inflation taking longer to unwind after rising by 8% in 2024," Raja added.
According to AJ Bell (AJB.L) investment director Russ Mould, countries' level of sovereign debt is another area investors should watch in 2025.
“The new Labour government in the UK is still taking brickbats as it seeks to address Britain’s fiscal deficit, a French administration is in tatters after just three months as its efforts to raise taxes and cut spending get the thumbs down and, all the while, America’s federal debt continues to mushroom," he explained.
The US Treasury secretary recently warned in a letter to Congress that her agency would need to start taking "extraordinary measures" to prevent the US defaulting on its debt. REUTERS/Andrew Kelly ·Reuters / Reuters
US Treasury secretary Janet Yellen recently warned in a letter to Congress that her agency would need to start taking "extraordinary measures" to prevent the US defaulting on its debt, with it expected to reach its debt limit as early as 14 January.
Mould highlighted that Trump's package of policies could accelerate growth in government borrowing from its current record of $36tn (£29tn), adding that the US annualised interest bill on that debt exceeds $1tn, which is bigger than its defence budget.
"There could be trouble ahead, unless Elon Musk and Vivek Ramaswamy really do cut spending in the new department of government efficiency (DOGE), or Trump’s tariffs raise income and boost domestic output," said Mould.
The cost of borrowing and the interest rate paid to investors, known as bond yields, have been on the rise in the UK, US and Europe, amid concerns around persistent inflation.
The 10-year US Treasury yield (^TNX) has risen to top 4.68%, which is its highest level in eight months.
Meanwhile, the yield on 10-year UK government bonds — known as gilts — has also risen to 4.68%, above the levels seen in the wake of former prime minister Liz Truss's mini-budget in September 2022.
The yield on 30-year gilts are hovering near their highest point since 1998, trading at 5.24%.
Accelerated AI spending
Tech companies have been ramping up their spending in AI, and Frédérique Carrier, head of investment strategy for RBC Wealth Management in the British Isles and Asia, believed this spending will "accelerate further from today’s already lofty levels".
Tech companies have been ramping up their spending in AI - Getty Images ·Andriy Onufriyenko via Getty Images
She highlighted in a note in December that Microsoft's (MSFT) annual spending on AI had tripled since 2020 to reach close to $60bn. Last week, Microsoft president Brad Smith said the tech giant planned to pour $80bn into AI-enbaled data centres in its 2025 fiscal year.
"At the same time, non-tech businesses are ramping up investment in AI applications to keep their cost structures competitive," said Carrier.
"So far, there has been little to no financial return on these investments, but most companies committed to this spending argue that there is already a high 'experiential' return which may prove vital in a business striving to remain competitive in the future," she said. "The possibility of being left behind makes under-spending a risky strategy, in our view."
So far, she said that AI equipment manufacturers had been the clear beneficiaries of this trend.
"We think investment portfolios would likely benefit from exposure to the infrastructure beneficiaries of generative AI (GenAI) — e.g., electricity production, transmission, and storage, as well as data centre/server farm construction, and data transmission — where the eventual spending may take a decade or more to arrive," Carrier said.
While shares of companies who adopt these solutions may also benefit, she said that "investors should assess how the new technology is being implemented — to increase sales, reduce costs, or improve productivity — and keep an eye on the competition."
Further upside for the Magnificent 7?
The buzz around the AI boom has led the group of tech stocks known as the Magnificent 7 higher and has also helped drive gains in broader markets.
The septet — made up of Alphabet (GOOGL, GOOG), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft, Nvidia (NVDA) and Tesla (TSLA) — had an average gain of 65% in 2024 as of mid-December, according to AJ Bell's Mould. This left them with an aggregate market capitalisation of $18tn, or 35% of the S&P 500.
"That powerful performance in turn means the S&P 500 represents 63% of the FTSE All-World’s market valuation, a level that exceeds even the high seen at the peak of the technology, media and telecoms bubble in 2000," he said.
Mould said share price and profit wobbles in 2022 showed that this group of stocks "are not entirely immune to the economic cycle, so an unexpected recession could be one challenge."
"Sustained inflation could be another if it keeps rates higher than expected and boosts nominal growth from downtrodden cyclicals and value stocks," he said.
"Again, only a perfect middle path may do to justify their lofty valuations, let alone sustained further upside."
Other areas that Mould suggested investors should watch, include world trade flows and movements in the dollar, as major themes for the coming year.
Download the Yahoo Finance app, available for Apple and Android.
