As we move into the final few weeks of the trading year, thoughts naturally turn to what 2025 may bring:
Which markets and sectors will outperform? And which will underperform?
And, will there be a crossover from the trends seen in 2024?.
The continuation of some trends looks inevitable simply because they are so entrenched, for example the dominance of mega cap US equities.
Consider this slide from fund manager Schroders, which highlights the outsize weighting of the Magnificent 7 in the MSCI ACWI.
An index which tracks the performance of large and mid cap equities in 23 developed and 24 emerging markets.
Source: Schroders
The seven largest US stocks make up 20.0% of the index and outweigh the contribution made by 7 out of the 8 largest countries in the index, including the UK, China and Japan.
One stock punching above its weight is one thing.
However the US has seven trillion dollar companies, and another two or three stocks, that could shortly join this select club.
Tech stocks seem likely to continue to be prominent if not dominant in 2025
The removal of US Federal Trade Commissioner Lina Khan, could negate the threat of a series of antitrust and competition inquiries in the US.
And in turn that could encourage another round of technology M&A activity.
Or at least that’s the view of analysts at Wedbush, a US broker that specialises in researching tech and growth stocks.
The broker believes that US tech stocks could rally by another +25.0% next year driven by the AI revolution and tech firms spending on this new technology.
A +14.0% rally in the price of Broadcom on Thursday night, after its earnings release, demonstrates that investors are still happy to buy into the AI theme- if the story is pitched properly.
Wedbush also expects to see the market caps of Nvidia, Apple and Microsoft reach $4.0 trillion, and for Tesla to reach a value of $2.0 trillion by the end of 2025.
And that likely means a theme that we have touched on several times in 2024, will continue into 2025.
And that is the underperformance of other large cap equities in the US relative to the mega caps.
That differential is captured in the chart below of the equal weight S&P 500 index in black, plotted against the cap weighted version of the index in blue.
Source: Barchart.com
Note though that the market cap weighted S&P 500 index hasn't had everything its own way, because Momentum has outperformed the equity benchmark.
That’s demonstrated here by the iShares Momentum Factor ETF, drawn in orange below, which looks set to finish 2024 with a +35.0% return.
Source: Barchart.com
So what of other equity markets such as those in Europe how might they fare in 2025?
Answering that question is tricky because there are conflicting forces at work.
On the one hand we have the ongoing political turmoil in France and Germany, which could leave two of the most important European economies without proper representation just as President Trump takes office.
The Trump presidency might force European policy makers' hands in key areas such as trade negotiations.
Large manufacturers and exporters, such as France and Germany, will be wary of trade tariffs and their impact.
However increased defence spending and the possibility of fiscal stimulus in the Eurozone to try and boost the economy could be beneficial.
Head of NATO Mark Rutte this week called for European defence spending to rise by +50.0% to 3.0% of GDP, by 2030.
In fact he went further and challenged leaders to match their cold war defence spending, which in the 1980s ran at some 3.80% of GDP. Mr Rutte would also like the EU to raise its current spending on defence ten-fold.
In a recent research note JP Morgan Asset Management observed that:
“The re-election of Donald Trump is likely to have far-reaching consequences beyond the US”
And that
“Domestically, the incoming President will almost certainly introduce more fiscal stimulus, meaning governments elsewhere, notably in Europe and China, will have little choice but to follow suit to offset any negative economic effects stemming from aggressive trade policy.”
Authorities in Beijing have now indicated that they will increase fiscal stimulus to boost consumption in the Chinese economy in 2025. Leaving the door open to European economies to do something similar.
Though as we have already noted, Germany and France will need to resolve the leadership issues before they can move down that road.
There could be some positive spillover from any increased Chinese stimulus as China is one of Germany’s biggest export markets. Indeed, a pickup in Germany’s new orders could be a sign that any future Chinese stimulus is working.
Source: Trading Economics
Not all bad news
There are positives for European equities even before we consider additional stimulus. The ECB cut Eurozone interest rates again this week and is thought likely to do so again in 2025.
Analysts are also quite bullish about the prospects for earnings in Europe, and some 50.0% of European stocks are expected to generate double digit earnings growth in 2025.
Source: Schroders
The trouble is it’s not clear that the market will reward the share prices of many of those stocks, even if they deliver those earnings gains.
Or at least not those in broad-based indices. For example, the STOXX 600 index, much of which is domestically focused, is up by less than +9.0% year to date.
Whilst the far narrower and export led Dax 40, has posted +22.0% gains, despite all of the challenges facing the German economy.
So yes there are going to be opportunities in European stocks next year.
However, you will probably need to be tactical in your approach to benefit from them.
The question then becomes will traders put in the leg work necessary to highlight and exploit these opportunities?
Or will they just buy more of the Magnificent 7 instead?
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