What is in store for investors in 2025? A group of Newton’s research analysts and portfolio managers met to debate and discuss their top ten predictions for 2025 on key positions that oppose prevailing market trends. Could the ‘magnificent seven’ lose their luster and become the ‘meager seven,’ ushering in a period where small caps rally and outpace large caps? Could the new US administration break inflation, prompting a Federal Reserve (Fed) rate-cutting cycle that moves interest rates to levels last seen during President-elect Trump’s first term?
These ten debates illustrate Newton’s core ability to unlock opportunity by leveraging our multidimensional research capabilities, where all investors and analysts have a seat at the table to engage in spirited debate on their most out-of-consensus viewpoints.
1. The Trump Trade Head Fake: Will interest rates, inflation and the dollar all lower in 2025?
Point: Growth and inflation are expected to rise in 2025, which should lead to higher rates, a stronger dollar and an increase in equities. The Fed is more cautious regarding inflation risks and global growth is weaker. While these conditions may persist through the first quarter of 2025, it could be a potential contrarian opportunity to buy bonds, sell dollars and favor global ex-US equities. The fiscal impulse may remain flat next year, and tariffs could eventually lower both growth and inflation, thereby posing downside risks to both. Moreover, the US appears very attractive—whether in bonds, equities or currencies—relative to the rest of the world. Additionally, there is an expressed interest among some incoming administration members for a weaker dollar in the future. Efficiencies in reducing the budget deficit through the proposed Department of Government Efficiency (DOGE) could lower the term premium in bonds. Naturally, there are risks, primarily from the fiscal side, which could impose constraints via bond-market discipline.
Counterpoint: US economic activity remains strong. Consumer spending has recently risen, and corporate activity could also increase as we head into 2025. The recent election of a new pro-business, lighter regulation administration could further heighten inflation. Higher and more enduring inflation may result in structurally higher interest rates relative to recent history but not as restrictive as today.
2. AI Winter is Coming: Could overcapacity cause an unwind of the consensus AI trade?
Point: Investment in artificial intelligence (AI) is expected to continue growing, and concerns about oversupply may be overstated. The AI theme is still developing and early in its application. Companies are learning about this technology and experimenting with how it can optimize business functions, which could lead to higher future demand as enterprises further leverage AI. Additionally, agents (software applications capable of running tasks independently) and on-device AI might expand the investment opportunities in this space. AI has the potential to affect personal devices, work devices, cars, and homes, leading to a significant hardware upgrade cycle as AI chips are installed on devices for data analysis and decision-making. It is also important to note that AI influences investment beyond the technology sector, affecting areas such as infrastructure, utilities, industrials and nuclear power.
Counterpoint: Generative AI emerged in the technology industry two years ago, leading to a considerable rise in capital expenditure to construct data centers. Given that building data centers takes approximately three to four years, it is anticipated that significant capacity will become available in 2026-2027. However, there is a question as to whether there will be sufficient demand to utilize this capacity. While consumers are currently adopting AI technology, enterprises remain in the testing phase. An excess supply could affect tier 2 and tier 3 cloud companies and GPU-as-a-service (high-performance computing) providers that have smaller customer bases and/or are more exposed to AI training relative to inferencing. Companies with robust customer bases, complete AI computing stacks and greater capacity to generate inference revenue may be better positioned for success.
Given that building data centers takes approximately three to four years, it is anticipated that significant capacity will become available in 2026-2027. However, there is a question as to whether there will be sufficient demand to utilize this capacity.
3. America Second: Will Europe outperform the US in the coming year?
Point: The United States appears to have surpassed its peak. US equity valuations are exceptionally high, with the disparity between US and UK/Europe valuations reaching unprecedented levels. This gap is primarily driven by a select group of high-performing and influential companies in the US stock market, commonly referred to as the ‘magnificent seven.’ It is crucial to consider that any decline in AI demand would adversely affect these companies and consequently affect US valuations overall. In our assessment, European political conditions are anticipated to improve by 2025, which should positively influence European valuations. Furthermore, there is an acceleration in mergers and acquisitions in the UK, contributing to a more optimistic economic outlook. Finally, the US economy may be more vulnerable than generally perceived, with potential inflation on the horizon, thus positioning Europe to potentially outperform the US in the forthcoming years.
Counterpoint: Europe has underperformed for over a decade. While some anticipate a cyclical rebound, this slower growth could be secular. In the US, GDP grew by 2.5% in 2023 and is expected to grow by 2.6% in 2024.1,2 The US also benefits from significant innovation, potentially boosting further GDP growth. Conversely, Europe saw 0.5% GDP growth in 2023 with an expected 1% growth in 2024.3,4 It is also important to recognize that Europe consists of diverse countries, each facing unique challenges. Input costs across Europe are higher than in the US with more expensive electricity costs and a more fixed labor market. Additionally, valuation should be considered, and on a price-to-earnings/return-on-equity basis, the US is far cheaper than Europe.
4. US Housing Bulls Become Homeless: Could US housing sink further still?
Point: Existing home sales are at nearly 30-year lows, and there is a strong possibility that they could fall further in 2025.5 Housing affordability remains a real issue and mortgage rates are not declining, which presents a huge roadblock for improving existing home sales in the US.
Counterpoint: While interest rates remain a headwind, the economy and job outlook could become a more important driver for home sales. There is a lot of pent-up demand for housing, and with current rates being similar to rates in the mid-1990s, pent-up demand may be ready to be released. Existing home sales are unsustainably low, and companies participating in fragmented markets exposed to housing may be market winners.
5. The Revenge of Environmental, Social and Governance (ESG): Will companies pick up the banner as regulations come under pressure?
Point: Companies should be motivated to enhance value. At the same time, many consumers are concerned with addressing the needs of future generations, necessitating that companies and politicians consider these interests. With this in mind, ESG will remain relevant, but we may observe a balance in language emphasizing value creation through ESG practices. For instance, many initiatives aimed at reducing emissions and environmental footprints are financially driven; the expansion of renewable energy has bolstered job creation and decreased foreign dependencies. Furthermore, the rise of AI and proliferation of data centers will require both supplemental power sources such as renewables, and more efficient power sources. On the social front, multiple studies indicate that diversity correlates with higher corporate returns, fosters innovation, enhances employee satisfaction and can reduce corporate costs. ESG is not merely a box-checking exercise; it is fundamentally about generating monetary value.
Counterpoint: ESG, as an acronym, has been politically charged for some time. The US has retreated from the concept while it has remained relevant in many parts of the world. This divergence highlights the varied standards for ESG across the globe. Additionally, regulators may heavily scrutinize any labelled claims of ESG and diversity, equity, and inclusion, which could lead to potential issues such as ‘greenhushing’ (when a company intentionally downplays information about its environmental efforts). The appointment of the next US Securities and Exchange Commission (SEC) chair will be critical, but it is anticipated that the new administration will be less supportive of shareholder proposals and resolutions compared to the current administration. There is also the possibility that the US may withdraw from United Nations climate initiatives, raising questions about whether China might take its place, and what that could mean geopolitically. Lastly, there is a belief that ESG could become a lesser priority as countries turn their focus to other pressing priorities such as security, reliability and affordability.
6. Executive in Peace: Could the Trump Administration usher in a period of global peace not seen since the Clinton era?
Point: Global peace is a very low probability outcome. Maybe somewhat counterintuitively, countries pursuing more isolationist policies should be a boon for defense spending globally. European countries in NATO have recognized the need to invest in their own defense owing to heightened aggression from Russia. As Trump has made clear, these countries cannot solely depend on the US for blanket defense against Russia, prompting many nations to begin the multi-year process of significantly increasing defense budgets. Additionally, China’s rise has led to heightened defense spending in Asia, which is expected to continue. The Ukraine/Russia conflict has also increased the use of battlefield drones, and there may be significant growth in this market.
Counterpoint: The past sets a precedent, and global peace might prevail once more. We saw how Trump governed from 2017-2020, and he ran his campaign on a very similar strategy this election season. During his first presidential term, the US refrained from entering any new or expanded conflicts. President Trump maintained diplomatic relationships with both North Korean President Kim Jong Un and Russian President Vladimir Putin, and he was committed to the US withdrawal from Afghanistan. Market trends suggest confidence in Trump’s potential to bring about a period of peace, as evidenced by the underperformance of defense stocks following the election. Additionally, Trump has expressed his dedication to mediating an end to the ongoing conflicts in Ukraine and Gaza.
The past sets a precedent, and global peace might prevail once more. We saw how Trump governed from 2017-2020, and he ran his campaign on a very similar strategy this election season.
7. David versus Goliath: Will small caps finally find their footing and start a long-term run of beating the ‘magnificent seven’?
Point: Over the last 100 years, US small-cap versus large-cap relative performance is consistently cyclical. We are now in the midst of cycle year 14 of large caps outperforming small caps. Earnings expectations for the Russell 2000 are poised to rise in 2025, and cash flows are improving. It should not take much capital to buoy the index given the low amount of market capitalization in this arena. Additionally, private equity has been staying private for longer, creating a backlog of companies about to go public and join their small-cap brethren. Current large-cap dominators may be past their prime as these once traditionally capital-light businesses are now capital-intensive, translating to lower multiples.
Counterpoint: The bigger the better. Large-cap companies have outperformed because they have experienced better growth, and small-cap companies will need serious earnings improvement if they are to surpass these giant companies. When looking at the investable universe with an innovation lens, small-cap companies are cheap for a reason. Much of the true market innovation around AI and obesity drugs has been driven by large-cap companies despite the fact that small-cap companies are traditionally the most innovative. Historically, small caps have benefitted from the complacency of large caps, but this is no longer the case. Finally, companies are staying private for longer now, creating an IPO vacuum and minimizing the universe of small-cap companies.
8. Make America Healthy Again: Will health care be the worst sector in 2025?
Point: Between Trump’s nominations for high-level positions, tariffs, further pricing pressure in the sector and subsidy cuts that many believe could come through, it appears every part of health care may be negatively affected. Overwhelming focus has been on the nominations for Trump’s administration, especially the choice of Robert F. Kennedy Jr (RFK) as health secretary. Given RFK’s past statements, there is a worry that his personal agenda will override evidence-based policy, detracting from health-care and funding priorities. Beyond RFK, it does seem like the upcoming administration is comfortable ratcheting up pricing pressure on drugs, pressuring pharmaceutical companies and all the vendors that support them. Tariffs could also have an impact, to varying degrees, on the medical technology space. Some companies may shift manufacturing or pass this pressure on to consumers. Finally, Republican wins at the federal and state level could influence exchange subsidies and Medicaid rosters as well.
Counterpoint: While there is fear that RFK could upend the health-care system, the health-care sector is at its lowest percentage of the S&P 500® in 20 years while innovation is at an all-time high owing to obesity, immunology, genetic and oncology drug advancements. Kennedy’s rhetoric may be stronger than his eventual policies and, if confirmed, he may have a narrow focus on ingredients in the food supply chain, and the risk/rewards of vaccines. Other appointees for heads of the Food and Drug Administration (FDA), Centers for Disease Control and Prevention (CDC), and the National Institutes of Health (NIH), are all dedicated scientists with no polarizing agendas. Overall, there could be some changes ahead surrounding food and some vaccines, but pricing worries and FDA/NIH disruption fears are likely overblown.
9. China in a Bull Shop: Could China come roaring back and benefit from the Trump administration?
Point: China has significantly reduced its dependency on exporting to the US with the Belt and Road initiative. Exports to the global south now represent roughly half of Chinese exports, while exports to the G7 have nearly halved. There is a misconception that China cannot catch up with Western peers; there are 3.6 million graduates in China each year in STEM subjects (Science, Technology, Engineering and Mathematics) versus less than one million in the US.6 These are the skills required for the industries of the future. Additionally, China is increasingly catching up in the semiconductor and AI space, opening many new technology companies. Innovation is especially important, with China filing a significant number of patents compared to the US.
Counterpoint: There are two gravitational forces that may pose concerns for China: a large growth problem and a lack of equity returns. China has trillions of dollars of unsold housing and sells only a fraction of that housing annually. Property still accounts for a high percentage of GDP and home ownership is nearly 100%. This indicates the need for a monumental rebalancing, and a transition from investment-driven growth without affecting other potential growth drivers presents difficulties. Remember, this occurs amid demographic headwinds and high total system leverage. The Chinese Communist Party faces both ideological and practical barriers to aggressive stimulus measures. It appears unlikely to replicate 2008 stimulus levels, and while pension or ‘hukou’ (household registration) reform is possible, it may only stabilize short-term growth. Chinese equities tend to be idiosyncratic and do not provide compound returns owing to significant equity dilution.
There are two gravitational forces that may pose concerns for China: a large growth problem and a lack of equity returns.
10. Tariffs, No Biggie: Will a new wave of Trump tariffs be disastrous for the US consumer?
Point: In Trump’s previous presidency, tariffs had little impact on consumers. Tariffs may not always be passed on to the consumer. It is important to consider the competitive dynamics on the industry to which tariffs are being applied. While tariffs could fall heavily on consumers in instances where producers have pricing power, tariffs on undifferentiated products with competitive dynamics could fall heavily on the producer by way of lower margins. It is unlikely that the new administration will implement tariffs in industries where the producers hold pricing power. If aggregate nominal demand grows strongly, corporations could more easily pass on the cost of tariffs to consumers; however, this is not currently the case, and the current economic cycle is mature. Corporations may struggle to pass on tariffs to consumers, with profit pools through the value chain likely taking the bulk of the hit.
Counterpoint: The president elect has said he believes the current trade system does not benefit American businesses and consumers, so tariffs are a credible threat to both US companies and consumers. Other countries could retaliate, potentially creating a full-blown trade war. Most importantly, tariffs are a headwind for the consumer, the global economy and equities, as they reduce real purchasing power and profit margins. A resulting stronger dollar is also an issue for US profits, and the inflationary effect of higher import prices could lead to a more hawkish Fed given rising inflation expectations. It is expected that these tariffs would be enacted at a time when equity valuations are rich, and do not offer much margin of safety. The transmission mechanism of these costs to the consumer could be through higher borrowing costs, lower asset prices, higher unemployment and higher inflation, lower real wages and a reduction in purchasing power.
Sources:
1 Statista, Annual growth of the real gross domestic product of the United States from 1990 to 2023, January 2024, https://www.statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/#:~:text=In%202023%20the%20real%20gross,and%20high%20growth%20in%202021
2 Federal Reserve Bank Philadelphia, Third Quarter 2024 Survey of Professional Forecasters, August 9, 2024, https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q3-2024#:~:text=Overall%2C%20the%20forecasters%20revised%20upward,compared%20with%20the%20previous%20survey
3 Statista, Gross domestic product (GDP) growth in Central and Eastern European countries compared to the European Union region from 1991 to 2023, November 2024, https://www.statista.com/statistics/1187041/cee-gdp-change/
4 European Commission, Autumn 2024 Economic Forecast: A gradual rebound in an adverse environment, November 2024, https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/economic-forecasts/autumn-2024-economic-forecast-gradual-rebound-adverse-environment_en#:~:text=This%20Autumn%20Forecast%20projects%20real,unchanged%20for%20the%20euro%20area
5 Fannie Mae, Recent Rate Run-Up Expected to Keep Existing Home Sales Near Historic Lows Through 2025, November 2024, https://www.fanniemae.com/newsroom/fannie-mae-news/recent-rate-run-expected-keep-existing-home-sales-near-historic-lows-through-2025#:~:text=WASHINGTON%2C%20DC%20%E2%80%93%20Existing%20home%20sales,Strategic%20Research%20(ESR)%20Group
6 CSET, The Global Distribution of STEM Graduates: Which Countries Lead the Way?, November 2023, https://cset.georgetown.edu/article/the-global-distribution-of-stem-graduates-which-countries-lead-the-way/#:~:text=The%20WEF%20report%20identified%20China,of%20graduates%20in%20STEM%20fields
Authors
Brock Campbell
Head of global equity research
Newton secular research team
Insights from the Newton secular research team
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