Investors will remember 2024 as the year of the much-anticipated market correction that never arrived. Despite geopolitical turmoil in Europe and the Middle East, escalating trade tensions with China, and persistently sticky core inflation, every major equity market – barring Brazil – delivered positive returns. Even the Republican ‘clean sweep’ in Washington, which most saw as a potential source of uncertainty, was interpreted by markets as an opportunity for deregulation and pro-business policies.
At the heart of last year’s market rally lay the US, supercharged by the relentless momentum of the artificial intelligence (AI) boom. The Magnificent Seven tech giants[1] continually exceeded profit expectations, and their earnings are forecast to grow robustly again in 2025. Unlike previous technology driven bull markets – whether the mainframe era of the 1960s, the PC revolution of the 1980s, or the dot-com bubble of the late 1990s – this rally is not built solely on inflated valuations. The margins of America’s tech titans now hover at an extraordinary 20%, underscoring the solid earnings and cash flows underpinning this bull run[2].
Against this backdrop, we maintained an overweight position in equities throughout 2024, with substantial exposure to AI beneficiaries through our Digitalisation and Automation themes. While we took profits selectively, our portfolios remain invested in six of the Magnificent Seven, with Tesla as the notable exception. For most equity mandates today, we remain close to market weight in the global technology sector.
Thin pickings elsewhere in markets
Beyond equities, returns across other asset classes were modest at best. Global bonds faced significant challenges, with yields rising sharply in Q4 as expectations for central bank interest rate cuts diminished. Markets now anticipate three fewer rate cuts in the US and four fewer in the UK by the end of 2025[3] compared to forecasts from a year ago. Throughout much of last year, we maintained an underweight position in bonds. However, in Q4, we further reduced our exposure to corporate credit, where spreads had narrowed to near-historic lows.
Commodities offered little cheer either. Oil prices rose only modestly, despite significant supply risks stemming from wars in the Middle East and Russia. The standout performer was gold, rallying 28% in 2024[4], driven by sustained purchases from emerging market central banks seeking to diversify their exposure to the dollar. While we have limited direct exposure to energy and industrial metals, our long-term positions in gold once again proved their worth.
King dollar: The currency that still rules
Currency markets echoed the story of American exceptionalism. The dollar strengthened against all G10 currencies, bolstered both by robust economic growth (which is still running at around 2.5% annually[5]) and sustained capital flows into US assets. Surprisingly, sterling emerged as the second-best-performing major currency in 2024, despite the hostile reaction from business to Chancellor Reeves’ first budget. The UK currency has though moved sharply lower in the first days of 2025 and once again the issue is fiscal sustainability. In our UK balanced portfolios, we retain significant exposure to US dollars while currently hedging most of our euro positions.
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The challenges for 2025
So, can markets deliver another year of US-led growth, or does the steady rise in global bond yields signal the start of a more fundamental shift in market leadership?
Let us consider the key risks and opportunities facing investors:
- How disruptive will the new Trump White House be?
While details of President Trump’s economic agenda remain sparse, US markets are currently giving him the benefit of the doubt. Early signals suggest Wall Street’s confidence may be well-placed – so far, the picks for Trump’s economic team are notably mainstream. Kevin Hassett at the National Economic Council is expected to lead on tax policy, Scott Bessent at the Treasury is advocating a 3-3-3 agenda (3% GDP growth, a 3% budget deficit, and an additional three million barrels per day of energy equivalent production), while Howard Lutnick at Commerce has implied that tariffs might be 'temporary and targeted.'Tensions though loom on the horizon. Trump loyalists and MAGA believers, such as Stephen Miller, will have to face off against Silicon Valley figures like Elon Musk and Vivek Ramaswamy, now installed at the Department of Government Efficiency (DOGE). The potential for internal clashes on issues such as immigration and regulatory policy are already showing.In summary though we see a Trump cabinet that has more strengths than weaknesses and is open to an agenda of deregulation, innovation and, yes, even government efficiency. Policy making will at times appear chaotic, but on balance it looks to be business and market friendly. Note the sharp divergence in US and UK business optimism since Trump’s election (see chart 1).
- Will the US economy ever slow down?The Federal Reserve’s rapid and aggressive rate hikes over the past two years have yet to deliver the slowdown many economists anticipated. A key factor lies in the structure of US consumer debt: over 70% of it is tied to mortgages[6] with more than 90% of those loans locked in at 30-year fixed rates[7]. This insulation has blunted the impact of rising interest rates on household budgets, prolonging economic resilience. The implication is clear – interest rates may need to remain higher for longer, if the Federal reserve hopes to dampen spending meaningfully and bring core inflation back to target. Bond markets will be watching this closely hence our caution on global fixed interest.
- How damaging are tariffs and immigration controls likely to be?Trump’s proposed tariffs on imports from China, Mexico, and Canada threaten to raise costs for US manufacturers and consumers alike. Immigration restrictions, meanwhile, risk worsening labour shortages in critical industries such as construction, hospitality, and agriculture. Both policies are potentially inflationary. If tariffs are implemented gradually though, and with strategic intent, global growth should remain largely unscathed. However, the risk of hasty or politically motivated measures remains, so caution is needed across the most vulnerable markets (Mexico and China) and big exporters to the US, primarily in Europe.
- How fragile is the Chinese economy?China’s economy today is burdened with excess: millions of empty or unfinished apartment blocks, trillions of dollars in debt straining local governments and ballooning industrial production driving an export surge that is fanning trade tensions worldwide. China still has strengths: it dominates global manufacturing and has commanding positions in new technologies, such as electric vehicles and renewable energy. Policymakers have proven adept at handling past crises, and are readying bold new stimulus to support the economy. We continue to have very little direct exposure to Chinese assets – a more shareholder friendly environment and evidence that outright deflation can be avoided (e.g. rising bond yields), will be essential for us to reconsider our position.
- Can the UK economy return to growth?The UK started 2024 with a bang and ended with a whimper. The economy grew by a strong 0.7% in the first quarter and 0.5% in the second quarter but then stagnated in Q3 with only modest growth likely for Q4[8]. Indeed, the UK seems to be back where it was a year ago – with a lacklustre economy, ailing stock-market, and a government with sharply falling poll ratings. These are early days, but the government’s stated commitment to growth clearly needs to be backed up with action, after a disappointing start for UK business. Key will be the behaviour of bond yields – with 30-year gilts now yielding more than 5%[9](for the first time since the mid-nineties), markets are sceptical. But there is hope, given that services dominate UK-US trade, the hit to output from Mr Trump’s tariff agenda should be manageable and we still see UK GDP growth of 1.8% next year[10](behind the US but more than double estimates for the eurozone).
Conclusion: A year of delicate balance
As we enter 2025, markets stand at a crossroads between optimism and uncertainty. The US remains the global economic powerhouse, propelled by technological innovation and resilient consumer demand, while political risks under the new Trump administration are at least partially discounted. Europe, in contrast, faces a combination of political gridlock and subdued business confidence (although a possible ceasefire in Ukraine could change this meaningfully). Meanwhile, China’s economy remains precariously balanced, as policymakers attempt to navigate a path through mounting debt, a troubled property sector, and industrial overcapacity.
This will be a year where we will need to tread carefully but will likely still continue to overweight global equities. Earnings and dividend growth look robust while global equity valuations outside of technology, still look attractive. Meanwhile a focus on the future winners from AI and digitalisation, will offer new opportunities across industries and markets.
Success then in 2025 then, will depend on vigilance across bond markets, adaptability over AI, and most importantly a willingness to seize opportunities amid the undoubted political noise.
[1] Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla
[2] Empirical Research Partners, December 2024
[3] Macrobond, January 2025
[4] Bloomberg, December 2024
[5] Atlanta Fed GDP Now Forecast, January 2025
[6] Statista, December 2024
[7] Federal Reserve Bank of St Louis, February 2024
[8] UK ONS data, December 2024
[9] Bloomberg, January 2025
[10] Sarasin forecast, January 2025
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