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2025 Equity Outlook: Policy clarity brings fundamentals to the fore
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With the US election results in and policy uncertainties largely resolved, we expect a return to fundamentals in 2025 with ongoing innovations and supply chain changes create a ripe hunting ground for global equities, particularly for companies poised to benefit from longer-term secular trends
Macro conversations dominated equity markets in the second half of 2024. Headlines surrounding the Federal Reserve, China policy, Japanese interest rates, and elections in the US and other countries made for volatile markets. We expect a reversal in 2025.
Companies postponed or scaled back capex plans due to election uncertainty
The resolution of the US election has mitigated a key source of uncertainty that caused many companies to put capex on hold in much of 2024. Around 40% of firms surveyed in the third quarter reported postponing, scaling down, canceling, or delaying investment plans indefinitely due to uncertainty around the election. Firms listed regulatory and monetary policy as most important to their firms.
Source: Duke University, FRB Richmond, and FRB Atlanta. The CFO Survey – Q3 2024 (19 August-6 September 2024). Q2 results provided for comparison.
Greater policy certainty has created a baseline for companies to make decisions, potentially launching a new cycle of capex and investment. US President-elect Donald Trump has been clear about his policy priorities: widespread tariffs on imports and more severe tariffs on Chinese imports (with the possibility that tariff threats could be used as a bargaining tool), along with mass deportations of immigrants believed to be in the US illegally. These are balanced with prospects for lower corporate tax rates and deregulation, and an extension of individual tax cuts. Certain policies could have an inflationary impact but we believe the global easing cycle will continue.
Paired with the resolution of the trailing effects of Covid on supply chains, this could signal a return to focus on fundamentals: a version of normal, with “good” companies being recognisably good, “poor” companies demonstrably poor, and clearer distinctions between the two.
However, we are not expecting a pre-Covid status quo to return. The near-shoring/friend-shoring trend has permanently altered many supply chains, and continued innovation is reshaping industries across the globe.
We present trends that are likely to impact equity investors in the year ahead, including areas of opportunity and risks.
Developed market (DM) equities are trending up again
DM equities have rallied strongly with the S&P 500 reaching new highs and the STOXX Europe 600 also registering a bounce-back. US labour markets have been holding up well, and inflation has been declining (for now). Meanwhile, European equity investors continue to digest what Trump’s presidential win will mean for stock markets — most notably, his tariff proposals — though markets appear more focused on central bank policy in the region.
If the broad economic and policy backdrop boosts equities over next year, positioning discussions could shift from sectors to the quality of individual companies and their ability to pass on potential inflationary pressures. That said, we expect certain sectors to be more affected by policy shifts:
Financial companies may feel the strongest tailwinds. Under Trump we can expect deregulation, lower taxes, and a potential relaxing of anti-trust regulation to offer clear benefits to banks.
Industrials could be headed for a golden era. US industrials will likely benefit from Trump’s “Made in America” policy leanings, and the overweight to industrials that we had already favored could provide a rare opportunity over the next year. It’s reasonable to expect a spring-loaded rebound as the fog clears. A potential bottoming of interest rates could encourage companies to borrow – and to spend those borrowings to enhance their businesses and operations.
Will Big Tech remain on the ‘naughty list’? Trump has generally been unfriendly toward Big Tech (with at least one notable exception). He is likely to take a more hands-off and deregulatory stance than President Biden, but could remain wary of tech consolidation.
Emerging market (EM) equities face headwinds under a second Trump term
Trump’s win is a net negative for industrials in the rest of the world.
A 60% tariff on Chinese exports would have a material impact on China’s GDP, though the impact on its equity markets could be limited. Only a small percentage of corporate revenue for listed Chinese stocks is tied to exports to the US. After reacting positively to China’s first stimulus announcement, local equities have been trailing off, with the second stimulus proving disappointing. Taken in conjunction with potential US trade challenges, investors should focus on companies whose business models are resilient to a low-stimulus outcome.
Risk premiums are likely to rise across EM and particularly Mexico. Some Mexican consumer goods, commodities, and cement companies could pass tariff costs on to consumers (potentially hurting sales) while others may absorb the costs (thus tightening margins). Tariff-related uncertainties could cause some EM companies to delay investments, potentially slowing the near-shoring trend.
In Taiwan, upbeat guidance and a strong third quarter boosted sentiment in semiconductors and eased concerns about demand. In India, we have seen cooling in high-ticket discretionary purchases such as cars, travel, and lodging. Global demand for IT services seems to have reached a bottom, and management commentary has now turned cautiously optimistic. EM financials still look attractive.
Key secular trends that are driving global equities
The AI era: AI remains a powerful driver for quality businesses and products, though concerns have emerged about concentration risk and overheated valuations, along with a potential turn in sentiment. The lack of AI revenue in recent software earnings could signal a potential overbuild of infrastructure. Despite these challenges, increased spending by cloud service providers indicates ongoing investment in AI capabilities.
Our 2025 outlook for AI-related semiconductor and hardware spending has become more optimistic following Q3 results, driven by raised capex forecasts from hyperscale companies and rising demand from enterprise and government verticals. However, we continue to approach these investments with a careful eye toward each company’s stage in our Lifecycle Categorisation Research (LCR) model, which helps to determine our view of its prospects over the medium to long term. We remain positive on other more cyclical semiconductor firms but believe companies that benefit from these longer-term themes can help balance a portfolio’s risk profile while enhancing return potential.
Healthier returns: Treatments for obesity, diabetes, cancer, and rare diseases remain a key source of growth for healthcare. We maintain exposure to innovators in drugs and devices treating unmet needs as well as life sciences companies that supply them with cutting-edge new technologies.
The US Inflation Reduction and Jobs Act (IRA)’s clampdown on prescription drug pricing is set to continue, putting a damper on some healthcare stocks with older drugs. A more pro-business administration might spur investment as well as provide a backdrop for increased capital funding and M&A activity in healthcare.
Green is still a “go”: In the US, we have not seen companies retreating from net-zero commitments despite red state/blue state divides. In Europe, we have seen headlines about a potential pullback, though this is a function of budget constraints bumping up against ambitious plans. We still believe in the longevity of this theme, but the discussion has become more nuanced.
Electric vehicles make inroads: China has taken a strategic stance on leapfrogging everyone else with electric vehicles (EVs) and is moving full tilt on producing both vehicles and batteries. The market has noted concerns about EV penetration slowing as automakers in Europe and the US pull back on ambitious plans. But we believe this has affected sentiment more than reality since Asia is the dominant market for EVs. Developed market EV penetration is still growing, but not as robustly as expected.
Toward equity market clarity in 2025
We expect a more nuanced and fundamental-driven backdrop for global equity markets in 2025. Longer-term secular trends will drive the success of companies, and short-term fluctuations will create opportunities to acquire quality names.
With greater policy clarity, market watchers may be tempted to breathe a sigh of relief. But change is of course constant, and with corporate spending ramping back up, industrials rebounding, and inflationary policies in the offing, we may find ourselves running too hot again.
Click here to discover other viewpoints from PineBridge Investments’ 2025 Investment Outlook: Finding Alpha as the Cycle Turns.
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