Most fund houses believe the US stock market offers the best opportunities for high returns next year, despite already high valuations. In contrast, the outlook for Europe is bleak.
This emerges from a survey conducted by Investment Officer among a dozen major fund houses.
America First
Most experts agree that Donald Trump’s policy plans, including tax cuts and deregulation, will benefit US stock markets. “The relatively higher margins and profit growth in the US will be further bolstered by Trump’s ‘America First’ policy,” says Vincent Juvyns, strategist at J.P. Morgan Asset Management. “While this policy could stoke inflation and potentially deter the Federal Reserve from cutting rates as aggressively as financial markets currently anticipate, we expect the Fed to maintain an easing stance in 2025. This should support US and financial markets.”
Many foresee a soft landing for the US economy. “US economic growth remains robust, with little indication of short-term corporate earnings weakness,” says Chris Teschmacher, fund manager at LGIM.
“The economy will likely cool somewhat due to reduced savings and restrictive interest rates,” adds Jacob Vijverberg, portfolio manager at Aegon Asset Management.
Large-cap stocks are expected to retain their leading position. Vijverberg notes, “Several of the Magnificent Seven have particularly strong market positions and significant innovative capacity. This leads us to expect US stocks to outperform those in other markets.”
Marco Willner, chief strategist at Goldman Sachs Asset Management, concurs: “Valuations of large caps in the US are very high, but this is justifiable. We find the broader market reasonably priced.”
Paul Jackson, head of asset allocation research at Invesco, takes a different view: “US stocks are truly expensive; there’s too much market exuberance.”
Divided opinions on Europe
Invesco sees more opportunities in European stocks. According to the firm, valuations in the region are more attractive, meaning stocks are likely to benefit more from an economic rebound than those in the US. “Especially if macroeconomic and political challenges in Europe ease,” adds Willner from Goldman Sachs.
Roelof Salomons, chief investment strategist at BlackRock Netherlands, acknowledges that Europe’s growth outlook is more challenging but notes that the central bank has more room to stimulate. “This supports European stocks, which are relatively attractively valued.”
However, few other parties are optimistic about European equities. Weak consumer spending, disappointing domestic demand, and limited economic growth are expected to weigh on eurozone stocks, with potential US import tariffs looming over the market. Earnings forecasts for European companies have already been revised downward ahead of 2025, observes Altaf Kassam, managing director at State Street Global Advisors.
Corporate bonds over sovereign debt
The experts surveyed are also divided on the prospects for bonds. Several investment specialists are concerned that Trump’s policies could have an inflationary effect. Persistent higher inflation would make sovereign bonds less attractive. “And government debt levels are already high,” notes Salomons of BlackRock. “Within this segment, we prefer European government bonds.”
AXA Investment Managers anticipates a stable climate for government bonds but warns that tensions could escalate in the eurozone due to current fiscal policy concerns and political unrest.
Corporate bonds are seen as more appealing by several parties, given their shorter durations and lower sensitivity to higher interest rates. Furthermore, a global recession is not expected, nor is a significant rise in credit spreads likely.
“Well-managed corporate bond strategies can yield 6 to 7 percent in the worst case, comparable to the historical average return on equities but with less volatility,” says Kevin Thozet, portfolio adviser at Carmignac. His advice: keep maturities short.
LGIM is less optimistic about corporate bonds. “The risk-return profile for investment-grade bonds remains unattractive, with spreads rarely being this low. This creates asymmetry and unfavourable return prospects for bonds,” says Teschmacher of LGIM.
Conclusion: a focus on equities
Overall, many parties conclude that investors should focus primarily on stock markets. “2025 is the year following the US elections, which has historically been a good time to invest in equities,” says Jackson of Invesco. “Central banks appear capable of lowering interest rates without triggering a recession, and the global economy is expected to keep growing. These are the ingredients for a strong year for equities.”