A fast-changing world order likely will affect the investment landscape this year
As we enter 2025, the financial investment landscape presents an unusually wide range of risks and opportunities. Traditionally, predictions for financial markets center on corporate earnings expectations and the path of interest rates dictated by global central banks. While these considerations remain important, a number of macroeconomic and geopolitical forces could take center stage in the near term.
First and foremost, a new administration will assume control of all branches of the U.S. government on Jan. 20. Potential implications include:
- Restrictive immigration policies: While the social impact deserves consideration, we must also assess the inflationary effects of such measures.
- Tariffs on key trading partners: What consequences might arise for global trade and domestic prices?
- Tax cuts: Could they stimulate the economy, or will they exacerbate public finance deterioration, leading to wider deficits and sharply higher yields on U.S. Treasuries?
Chief Investment Officer Thierry Hasse
- Provide relief to local populations.
- Lead to lower energy costs.
- Spark large-scale reconstruction projects not seen since the post-World War II era.
However, these outcomes also raise questions: Would a costly peace for Russia weaken Vladimir Putin’s rule? Could the Iranian regime face destabilization similar to Syria’s? Rarely have we seen so many opportunities for generational change, each with significant implications for investment portfolios.
U.S. financial markets: The investing envy of the world
Despite a lackluster close to the year, U.S. equities posted strong gains in 2024, with the S&P 500 up 23.3% (its second consecutive year of 20%-plus returns) and the Nasdaq up 28.6%. This performance was primarily driven by top technology companies. The equal-weight index ETF (RSP), by contrast, rose only 11% (Source: Briefing.com).
The U.S. economy is projected to grow at 2% annually over the next few years, with unemployment remaining steady at 4.2% (Source: Federal Reserve, December 2024). S&P 500 earnings grew 6% in 2024 and are expected to rise by double digits in 2025 and 2026 (Source: FactSet, 12/31/2024). If these forecasts hold, U.S. equities could deliver annualized returns of 10% to 12% over the next two years.
Concerns about high valuations persist—the S&P 500’s forward P/E ratio stands at 22, above the historical average of 17. At Elevage Partners, we acknowledge these valuations but believe they are justified for top companies like Apple, Microsoft and Amazon due to their consistent earnings, global market dominance and exceptional returns on capital. Few, if any, international firms rival the “Magnificent Seven” of U.S. tech.
Will 2025 finally be the year of the bond market?
Fixed-income markets underperformed in 2024, with the S&P U.S. Aggregate Index returning just 1.82% (including interest income). The three-year return was -1.79%, and the five-year return a mere +0.06% (Source: S&P). These results stem from the Federal Reserve’s aggressive rate hikes in 2022-2023 to combat post-pandemic inflation.
Looking ahead, there is reason for optimism:
- Normalized interest rates: U.S. two-year Treasury notes yield 4.25%, while 20-year bonds approach 5%.
- Potential rate cuts: The Federal Reserve has signaled a willingness to lower rates further if inflation continues to decline toward its 2% target.
For the first time since the Great Financial Crisis, savers have an opportunity to earn 4% to 5% on low-risk investments. However, uncertainty remains a significant factor. Restrictive immigration policies could create wage pressures and contribute to inflation, yet reforms might also improve economic efficiency in unexpected ways. Similarly, while tariffs might initially drive up costs, businesses may respond by reconfiguring supply chains and utilizing AI to enhance productivity. Even retaliatory tariffs, while potentially slowing economic activity, could help temper inflationary expectations. The interplay of these forces underscores the complexity of the economic landscape ahead.
Positioning for the future
At Elevage Partners, we strive to maintain well-diversified and balanced portfolios tailored to your financial goals, risk tolerance and aspirations … your WHY. As we navigate 2025, we remain focused on proactively addressing the heightened uncertainty and volatility shaping the global economy. Whether these changes stem from technological disruption or shifting geopolitical forces, our team is dedicated to closely monitoring and adapting your investments to align with your objectives.
We look forward to working with you in the year ahead and helping you achieve your financial goals. As always, please feel free to reach out to us with any questions or to discuss your investment strategy.
Here’s to a New Year filled with opportunity and success for you and your loved ones!
Thierry Hasse, Chief Investment Officer
The information contained herein represents the views of Elevage Partners at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein In addition, there can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Any statement non-factual in nature constitutes only current opinion which is subject to change. These materials are provided for informational purposes only and do not constitute investment advice. Any reference to a security listed herein does not constitute a recommendation to buy, sell, or hold such security. Past performance is no guarantee of future results. The historical returns of any securities and/or sectors mentioned in this commentary are not necessarily indicative of their future performance.