What could go right in 2025?

The adage of ‘time in the market’ over ‘timing the market’ rang true in 2024. Investors were worried about a recession, inflation, the U.S. election and geopolitics all year. By early December, S&P 500 earnings grew +12%¹, valuations grew from 18x to 21x, and US large cap equities gained +25%. Portfolios are closing out 2024 in a position of strength. This shows the importance of considering the potential for positive outcomes alongside risks. Here we outline some of the things that could go right for markets in 2025. 

Our view is not that all these things will happen, however we’d be very surprised if the future is all risk and no reward.

AI adoption

Nvidia’s ‘Hopper’ chips--used in data centres to power the first wave of the Artificial Intelligence (AI) market--continue to have strong demand. The rollout is real but what has been limited until now is how companies are using the technology. This is now increasing. For example, about 30% of large American companies say they are investing at least $10 million in AI next year, up from 16% in 2024². Also, a lot of people are using it – 1 in 3 employees in the US say they are using AI for their work. Nearly 80% of software engineers are using AI, up from 40% in 2023³. 2025 may be the year businesses start to rollout AI technology more widely. For example, in drug development, the first AI developed drugs will likely go through stage-three clinical trials next year.  

Peace talks with Vladimir Putin

US President elect Donald Trump has said he will end the war in Ukraine in a single day. The type of deal achieved will be a test of his foreign policy. The worry is Trump will impose a bad deal for Ukraine and cede to Putin’s current demands. This could embolden Russia and push allies closer to China’s sphere of influence if they lose confidence in the US. Trump’s international focus seems to be squarely on China which would be one reason why he’d want to get a ceasefire that favours Ukraine and bats back Putin’s demands. In this scenario we think European stocks would rally. Having Russia return to selling energy freely in international markets could lower gas and oil prices. Western governments would also welcome removing the cost of funding Ukraine’s war effort.

China could do more stimulus

China faces economic challenges. Property prices are falling, households don’t want to spend and banks don’t want to lend. For fear of missing their 5% GDP growth target China has unveiled some policy measures that focus on local debt restructuring to free up money for investment in services and infrastructure as well as encouraging banks to lend. It’s not aiming for quick results though, and quick results are what the market wants. 

If the trade war is as serious as Trump has threatened with 60% tariffs on all Chinese goods, we think Beijing will take measures to encourage consumption. The next step would be for China to give funds directly to households. The current package leaves the door open to more spending should the economic malaise worsen. 

An industrial strategy for Europe

We’re seeing a roll back of unchecked free trade and a more multi-polar world which has led countries to prioritise their own strategic industries. This is led by the US with big spending packages for domestic industries. In Europe there aren’t many new companies rising up to disrupt existing industries. For example, the top three investors in research and development have been automotive companies for the last 20 years. Part of the solution would be, as former Italian Prime Minister Mario Draghi has put it, to create a “new industrial strategy for Europe” and invest more public funds in key strategic industries. Historically 80% of investment in Europe has been financed by the private sector and only 20% by the public sector⁴.  

The problem for Europe is countries are operating under strict spending rules. Trump’s victory and the America first agenda poses problems for Europe but at the same time it could be the trigger they need to push their own industrial agenda. Germany, the largest European economy, certainly has more headroom to spend than other EU member states with its deficit at 1.6% of GDP this year – well within the 3% limit.  

Healthcare spending starts to change 

Demand for obesity drugs surged in 2024 and the forecast is that as much as 9% of the US population will be taking the drugs by 2035. We think obesity drugs will impact the healthcare industry as obesity is linked to 200 other chronic diseases. For example, in the US obese people spend as much as $3,000⁵ more per year on health care than the general population. In the UK the cost to the NHS and social care is about 1% of GDP⁶. The flipside is people may live longer so spending could be redirected towards elderly care. 

We think there will be investment opportunities for industries as consumer preferences for people taking these drugs changes for example in food and drink, sportwear, and the fitness industry. 

US equity returns broaden

This year US mega-cap technology companies accounted for about 70% of the growth in profits of the US equity market⁷. Next year its forecast to be 50% - still high but a narrowing difference which is encouraging for the rest of the stock market. We think Central Banks will lower interest rates which will bring shorter-term rates down. We think longer-term rates could stay higher as inflation stays sticky. This type of interest rate environment should be good for banks. Other sectors such as infrastructure companies and energy related companies will benefit from AI rollout. There’s talk of building data centres large enough to require 100 mega-watt hours of electricity – that’s roughly the same power it takes to power a city or town of 100,000 people! Also Trump should be good for America Inc. Having more companies produce goods in America will likely benefit mid-sized US domestically focussed businesses. 

Are we past the peak in global greenhouse emissions?

The world may have past the peak in global greenhouse gas emissions. China is the largest producer of global greenhouse gas emissions (30% of the total). Emissions rose sharply in 2023 when China lifted Covid-19 restrictions but analysis suggests they have fallen in 2024 – we’ll find out next year whether 2023 was the peak in global emissions. The Intergovernmental Panel on Climate Change, the UN body that monitors climate science, said 2025 was the year by which greenhouse-gas emissions must peak if the world is to have a good chance of keeping global temperature rises within the 1.5-2°C limits specified by the Paris climate agreement.

¹ FactSet earnings insight, November 2024,
² Ernst and Young AI Pulse Survey, July 2024,
³ The state of AI in 2024m McKinsey, May 2024,
⁴ The future of European competitiveness: Report by Mario Draghi, September 2024,
⁵ Scaling up the impact of obesity drugs, Morgan Stanley, May 2024,
⁶ The costs of obesity, Economic and Social Research Council, July 2023,
⁷ LSEG DataStream earnings estimates using S&P500 sectors, 20/11/2024