As we approach the midpoint of what has been something of a “Roaring 20s” so far, this month’s letter and our Year Ahead outlook consider how US political changes might affect the next stage of this decade.
An upside scenario would see lower taxes, deregulation, and trade “deals” adding to a positive market narrative built on solid economic growth and continued investment in artificial intelligence (AI). A risk scenario is for blanket trade tariffs, excessive fiscal deficits, and geopolitical strife to contribute to higher inflation, weaker growth, and market volatility.
In the rest of this letter, and in our full Year Ahead outlook, we look to unpack some of the key issues and the investment implications for next year and beyond.
In short, while we are monitoring potential risk scenarios closely, our base case is optimistic about the prospects for US stocks, anticipating around 10% upside for the S&P 500 by year-end 2025, with AI playing a pivotal role in driving this growth. We maintain a Neutral stance on stocks in Europe and China, which may be at greater risk in the event of trade disruption, though we do see opportunities in diversified Asian ex-Japan equities.
In fixed income, we would expect the Federal Reserve to look through one-off increases in some prices related to tariffs, and we forecast 125 basis points of further Fed rate cuts by the end of 2025. Investors should deploy cash into quality bonds. Additionally, while the US dollar may stay well bid in the near term, we are more cautious over the medium term and think investors should consider using periods of further dollar strength to reduce holdings. We also foresee higher gold prices.
As we consider a wider range of market outcomes ahead, a combination of humility and market diversification will be key. But the strong market performance of the past few years should also remind us of the adaptability of the economy, the power of innovation, and the potential for long-term market growth. We look forward to guiding you through the year ahead and thank you for your continued trust.
