Will global markets continue to rally in 2025? Below we provide some thoughts on how things could play out.
Easing monetary policy cycle should benefit non-U.S. stocks
The recently published December edition of the Blue Chip Financial Forecasts survey highlighted that there is an expectation that the U.S. election results will now see a slower pace of Federal Fund Rate (FFR) cuts going forward. However, forecasters are still fully expecting a 0.25% cut at the December FOMC meeting but for 2025, consensus now looks for 1.03% of cuts versus 1.26% of cuts in the November survey. On the other hand, forecasters don’t expect the U.S. election result to have an impact on Europe’s policy path and expect further cuts from the European Central Bank (ECB) in the year ahead.
The consensus specifically now looks for 1.14% of ECB cuts over the next 12 months and 1.0% from the Bank of England (BoE). The implication for global equity markets is that investors may start to look at attractive valuations outside of the U.S. as fundamentals and earnings growth outlook improve as global central banks ease monetary policy in 2025. Keep in mind, equity markets outside of the U.S. tend to be more cyclical, hence an easing cycle should benefit them more in theory.
U.S. tariffs are likely to be more negative for non-U.S. stocks
President Trump’s first tariffs resulted in margins for companies globally, but interestingly the shares of those with the highest revenue exposure to the U.S. did end up outperforming. Thus, suggesting that management teams of these firms managed to navigate the tariff impacts.
However, Trump 2.0’s tariffs could be a harder proposition because most global companies’ exposure to the U.S. has increased since Trump 1.0 imposed tariffs, particularly in health care. Further, what the Fed does will also matter. The 200 largest companies outside of the U.S. (excluding financials and utilities) that disclose geographic exposure earned 27.4% of their revenue from the U.S. on average in 2023 (median 26.3%), up from 24.9% (22.2%) in 2017. Health care is most reliant, with U.S. revenue increasing to 38.8% from 31.1%. Packaged medications and vaccines are one of the most-imported goods into the U.S., just behind petroleum and cars/auto parts.
Markets will get over tariffs, as they did in 2019
Though tariffs may increase uncertainty in 2025, we note the experience of 2018 and 2019 may offer some hope. Most global equity markets suffered in the second half of 2018, in part likely due to declining margin sentiment amid the tariff surprise that year, and then bounced back aggressively in 2019 even though many of the tariffs remained.
As we have noted earlier, monetary policy will again be important, with global central banks largely in an easing cycle. U.S. Fed easing usually benefits non-U.S. equities via improvement in sentiment (that is, increases risk taking/tolerance) and could offset some of the concerns caused by tariffs. In 2018, the U.S. Fed was tightening while central banks in China and Europe held steady.
AI may take a back seat
According to analysts’ expectations, AI’s impact to equity market earnings momentum may have peaked in 2024, and ex-AI growth could accelerate in the year ahead. While artificial intelligence stocks dominated global equity market returns during the first half of 2024, the group has yet to fully recover to its mid-July highs, giving other global equities a chance to play catch up. From the start of the year through the market’s high on July 12, AI stocks on average returned 22.9% while the rest trailed at just 4.6%.
Since then, AI companies have fallen on average 0.3%, and 49 of the 81 AI stocks globally (60%) are still below their record-high levels set earlier in the year. The rest of the market has continued to gain at a steady pace, returning 6.3% on average, and continues to press to new highs. AI’s giant lead at the start of the year still puts the group well ahead for the year, returning 22.1%, with the rest up just 11.8%
Inflation remains a risk for equities
Equity markets may be caught off guard if inflation accelerates in 2025 due to better-than-expected economic growth. The correlation between global equities and bonds has once again turned to negative territory for the first time since early 2020. This suggests inflation is no longer a key concern for investors.
Historically, the two asset classes’ returns are the most in sync (i.e., correlations are most positive) when global inflation (measured by the BI Global Inflation Index) is higher than 3%. Global inflation dropped below 3% in May for the first time since March 2021. U.S., European (excluding the UK) and Canadian equity and bond returns were negatively correlated over the last 26 weeks, while all other major global markets maintained positive, but have declining correlations.
Emerging markets uncertainty
Stocks in emerging Asia may continue to find it tough going in 2025. Asia continues to struggle, with decelerating earnings growth and slowing manufacturing activity. While the stimulus announcements in China should be positive, it may not be enough to support a sustained equity markets rally in emerging markets.