The global equity markets have experienced a rally over the past two years, and RBC Wealth Management suggests that this trend may continue into 2025. However, it requires positive economic growth and strong corporate earnings to sustain the momentum, according to their Global Insight 2025 Outlook released on Thursday.
Investors in U.S. equities are advised to remain flexible and manage their return expectations due to a complex investment environment and potential geopolitical risks. The U.S. Federal Reserve is expected to continue its rate-cut cycle into the first quarter of 2025 before pausing at a policy rate around 4.25%, which would keep yields across fixed income well above historical averages.
Although Washington policies have not historically been key drivers for market returns, tariff uncertainties from the Trump administration and Republican-controlled Congress could complicate industry and stock selections. "The market will potentially need to contend with the most aggressive tariff policies in almost 100 years," said Kelly Bogdanova, vice president and portfolio analyst at RBC Wealth Management–U.S. She added that this complicates the Fed's task of forecasting inflation and GDP growth.
The S&P 500 has risen by 68% over the past 25 months, driven by AI optimism and monetary easing. However, stretched valuations now necessitate careful portfolio positioning. Tariff policy changes could impact equity performance in 2025 but also present opportunities. RBC Wealth Management believes that achieving a consensus earnings growth estimate of 14.6% year-over-year seems too optimistic without robust GDP growth beyond tech stocks alone.
"We recommend starting the year without major sector overweights," Bogdanova advised, suggesting that market opportunities will arise from sector dislocations in 2025.
Yields across fixed income are likely to stay above historical averages as economic optimism pushes credit market valuations higher. With fewer rate cuts expected, cash and short-duration securities may offer attractive income opportunities despite increased duration strategies being recommended for reduced credit risk exposure.
"While we expect rate reductions through the first quarter of 2025 and then a pause, the pro-growth policies being proposed risk overheating the economy," noted Tom Garretson, fixed income senior portfolio strategist at RBC Wealth Management – U.S., adding there is a remote chance of renewed rate hikes if inflationary pressures rise again.
RBC identifies four transformative forces termed "Unstoppables" set to redefine investments: increasing AI spending across sectors; rising eldercare costs driving demand for biotech solutions; renewables overtaking traditional energy sources; and advancements in utility-scale storage enhancing energy resilience.
Entering 2025 amidst geopolitical tensions and stretched equity valuations highlights secular trends like AI as pivotal influences on investor strategies following favorable conditions in 2024.
For more information on RBC Wealth Management’s outlook for next year's investment landscape globally or regionally visit their Global Insight page online.
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