2025 investment outlook

In our 2025 outlook, we explore our key themes for the year ahead

• America First: why we expect the US to continue to dominate the economy and the stock market
• Debt (in)digestion: government borrowing in the US and UK is reaching new highs.  It looks sustainable, but is in fine balance.
• Zombie inflation: inflation is down, but not dead.  What are the drivers that could keep it above target weight.

Please join Henry Cobbe and Hoshang Daroga from Elston for this Outlook webinar or read the summary version below.
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[5 min, read as pdf]

Our 2024 Investment Review covers how the 2024 turned out relative to our Outlook.
In our 2025 Investment Outlook we do not attempt to set target levels for market indices: level-specific forecasts are unhelpful and impossible to predict with certainty.  Instead, we focus on the key themes that could characterise investment trends within and across asset classes and hence inform the decision-making for advisers’ investment committees we serve.

The summary of our key themes for 2025 is set out below.

America First: US exceptionalism to continue
America First policy making will underpin US economic, earnings and market exceptionalism.  US economic growth is outpacing the UK and EU.  It benefits from higher energy prices and defence spending.  American dominance of technology sector means its corporate earnings in aggregate have been more resilient, relative to the rest of world and the UK.  Higher earnings growth has been rewarded with higher valuation multiples.  Given the levels of market concentration, selectivity and balance within US equities remains key.

US political and economic policy, and the performance of both its economy and its markets continue to define the global landscape. The newly-elected Republican government brings with it a strong mandate, emphasizing economic nationalism and trade protectionism. With a renewed "America First" policy framework, the outlook for US economic growth, corporate earnings and equity markets remain robust.
The U.S. economy is expected to perform well in 2025, bolstered by domestic-focused policies and the competitive advantage it is afforded by an international trade environment that will be increasingly contested with Trump’s threatened tariff policy. The divergence between US and UK/European economic trajectories underscores this exceptionalism, with US economic and earnings growth accelerating while UK/European growth lags.
Whilst the Russia-Ukraine war and related sanctions is bolstering the US Energy and Defence sectors, the remapping of European energy supply chains and resulting inflation for manufacturers is hollowing out European industry.
The much-debated focus around lower UK equity market valuations is a function of lower UK corporate earnings growth, in our view.  This has been the case both over the past decade, and looking forward.  Without an accelerating growth trajectory or reason for a valuation re-rating, there is a risk that the relatively lower valuations for UK equities persists.  We nonetheless recommend a low-moderate UK allocation as a useful diversifier, given the UK’s declining correlation with global markets.
Dominance in technology has underpinned healthy corporate earnings in the US, relative to other regions. This earnings strength has supported higher valuation multiples for US equities.  Combined with favourable interest rate dynamics, this has propelled market outperformance. Over the past decade, cumulative returns for US equities have materially outpaced global and UK markets, a trend likely to persist.  We have to remain alert to anything that dislocate a richly-valued US equity market: agility from a sector and factor positioning perspective can be helpful in this respect.

Debt indigestion: government debt is in fine balance
Government debt is spiralling in the US and the UK.  But with projected economic growth, aggregate debt levels remain (just) digestible.  But any upgrade to borrowing or downgrade to growth could destabilise this fine balance and rattle the bonds market.  Lower bond yields (higher bond values) mean more confidence in the bond market.  Higher bond yields (lower bond values) mean less confidence in the bond market.

The sustainability of government debt levels poses a significant challenge for both the US and UK.  This combined, with new Governments and spending priorities increasing uncertainties.  Rising interest rates have meant increased borrowing costs, putting pressure on fiscal balances. In both the UK and the US debt levels appear high in absolute times, but just manageable relative to GDP.  However, any weakening in economic growth or fiscal indiscipline could destabilise this fine balance. These concerns have supported demand for gold and precious metals as Emerging Market Central Banks reduce exposure to the Dollar/US Treasury holdings.
We will be monitoring new debt issuance carefully to see if the amount of government debt remains digestible without dislocating yields.

Inflation: down but not dead
“Zombie” inflation means it is down but not dead.  Inflation is past its peak and settling at or above the 2% target which is now a “floor,” not a “cap”.  Wage growth pressure, trade friction and energy market volatility means that inflation is down but not dead.

Inflation has moderated from its peaks, but we believe it remains a very real risk. The 2% inflation target increasingly functions as a floor rather than a ceiling. Wage growth, energy volatility and geopolitical tensions could drive renewed inflationary pressures.
To address this risk, portfolios should incorporate inflation-resilient asset classes, such as a tilt to yield within equities, and moderate exposure to liquid real assets, as well as short- to medium-term inflation-linked bonds.

Asset Class Perspectives for 2025

• Equities: U.S. equities are poised to continue to perform, supported by strong economic and earnings growth. Growth sectors, particularly technology, remain key drivers.  But we should remain alert to potential dislocations – so diversification and volatility control are key.  Within the US, we recommend broadening exposure to balance, not remove, concentration risk.  For the UK, we recommend being underweight on low growth outlook, a position nonetheless makes sense as a diversification function.
• Bonds: Duration positioning will depend on the expected path for inflation and interest rates. We start the year remaining neutral duration as a balance between rate cuts and inflation.  We are recommending to tilt away from GBP as “gap” in relative rates has closed, with no change to strategic allocations.
• Alternatives: Gold has had strong run.  Consider broadening with diversified alternatives.  We focus on risk-based diversification (low correlations to equities and bonds).  Whilst we hope that geopolitical risk could potentially improve (post-inauguration), trade friction could increase, creating another set of risks for equities and currency.

Conclusion
The three themes outlined above illustrate the forces shaping the investment landscape and asset class trends in 2025. As always, our approach emphasises an adaptive approach to navigate market risks.  This does categorically mean trying to time the markets.  But it does mean trying to avoid foreseeable harms along the way.  Our granular asset-class recommendations are available to our clients. 
Henry Cobbe, CFA
Head of Research, Elston Consulting