US stocks have been a standout, with equity markets rising 25 per cent in 2023 and climbing to new highs in Q3 2024. This rally has been underpinned by solid economic growth in the US, at around 3 per cent year-on-year, and falling inflation from 9 per cent to 3 per cent at the start of 2024.
Looking forward, Columbia Threadneedle’s 2025 Macro Outlook is quite optimistic about the earnings growth outlook for US equities in 2025, putting it at around 15 per cent.
However, the firm noted that this resilience is “to some extent a little surprising”, given the anticipated risks to the global economy in 2025.
While 2024 has not yet seen a slowdown, ongoing geopolitical tensions present a significant risk, the firm warned.
The war in Ukraine continues with no resolution in sight, it said, while the situation in the Middle East is escalating despite calls for a ceasefire.
“Both of these are human tragedies first and foremost, but it is our job to look beyond this at the economic consequence. Short-term volatility is a real concern, and in the long-term the possible re-emergence of inflationary pressures, both of which will impact companies directly,” Columbia Threadneedle said.
Moreover, it highlighted recent political shifts in the US, including Donald Trump’s victory in the presidential race and Republicans regaining control of Congress, noting that these could bring about changes in tax policy, regulations, and international trade.
“Economic nationalism is increasingly baked in,” the firm said. “Tariffs and sanctions tend to elicit reprisals and have the potential to spiral. This will likely be an important theme in coming years.”
Columbia Threadneedle also expressed uncertainties regarding inflation moving forward, noting that interest rate cuts next year are unlikely to be as deep as in the 2010s, with underlying inflation in the US currently at around 2.5 per cent and core inflation closer to 3 per cent.
“This will have implications for investors and how they position portfolios,” the firm said.
Equities, particularly in a falling rate environment, remain attractive, it said, but the likelihood that rates won’t return to their historical lows means that companies’ capital allocation decisions will be crucial in navigating the coming period.
The US remains the most expensive equity market globally, trading at more than 25 times forward earnings. In comparison, the MSCI All-Country World Index (excluding the US) trades at just 16.3 times forward earnings – representing the widest gap in over two decades.
However, according to Columbia Threadneedle, the US market’s dynamism, driven by sectors such as semiconductor equipment and artificial intelligence, offers strong growth potential.
That said, it noted, the US market could become too expensive, with underperformance likely when other regions experience faster growth.
“If, for example, Europe grows faster, it will look attractive because it is that much cheaper. Do we expect it to do so? No. Elsewhere, China disappointed in 2024 and although we are now seeing that stimulus come through, will it be sufficient to drive sustainable higher economic growth?
“Coupled with challenges around its demographics and uncertainties over tariffs and global trade, there is some risk there.”
Looking further ahead and beyond 2025, the firm expects continued investments in alternative energy as part of the energy transition, but political and pragmatic considerations might dilute targets beyond the 2030 deadline, it warned.
A New Year concern
Another concern for 2025 is the rising budget deficit in major economies, including the US, Japan, the UK, and much of Europe, all of which are running deficits between 5 per cent and 6 per cent.
Although it deemed these deficits “manageable” in the low rate environment, the combination of rising deficits and elevated interest rates could become “increasingly problematic”.
“When this eventually becomes a focus, it will become a market-moving factor,” the firm said.
Overall, the firm stated, for global equities to sustain exceptional performance it would require geopolitical risks to stabilise, moderate growth, and steady but low inflation combined with a supportive rate environment.
“So, although we expect gains, we wouldn’t expect a continuation of the 20 per cent–25 per cent growth in the US stock market,” the firm said.
