Maintaining perspective: Investment outlook 2025

Our current positioning is broadly neutral between equities and bonds, with a slight preference for alternatives (namely gold). There is a partial US dollar hedge in place on our equity book, as the US continues to play an outsized role in global equity markets. Overall, we maintain a constructive medium-term stance on risk assets, but material risks are explicitly present.

2024 review

• While 2023 represented a year of recovery for risk assets, 2024 was the year they flourished. Markets were buoyed by the expectation of accommodative monetary policy, slowing but still positive economic growth, and the optimism surrounding artificial intelligence (AI).
• The year was one of both economic and political change, with more than half of the world’s population given the opportunity to take to the voting booths. All this change bred uncertainty, which manifested at times into market volatility. Investors sought a safe haven in gold, which surpassed several records over the course of an impressive year, ending more than 35% higher in Euro terms.
• Central banks spent another year in the spotlight. Across developed economies inflation approached the 2% target but proved to be sticky. The Federal Reserve initiated their easing cycle with a 0.50% interest rate cut in September and shaved off a further 50 basis points by year end to finish at 4.5%. The European Central Bank (ECB) issued four quarter-point rate reductions to bring the main bank lending rate to 3%.
• The US equity market rose sharply in the wake of Donald Trump’s US election victory in November as a red sweep became ever clearer. The S&P 500, Nasdaq 100 and Dow Jones all soared past record heights. The dollar strengthened against major peers, and long-term bond yields also ascended due to inflationary projections surrounding Trump’s policies.

Equities outlook

• Within respective multi-asset funds our allocation to equities is currently neutral. Whilst the stellar returns of 2024 are not likely to be repeated in 2025, the market is supported by numerous tailwinds. Trump’s election appears to have unleashed a degree of “animal spirits” amid increased consumer and corporate confidence in the US. There may be negative longer-term consequences of his tax cutting, tariff raising, and deregulation agenda, but some of his promised measures would likely boost growth and earnings.
• Within equity portfolios we continue to favour the US over other areas, namely the Eurozone, Japan, and Asia Ex-Japan. On a global sectoral basis, we currently have a preference for Communication Services (which includes companies such as Alphabet and Amazon), Financials and Materials. The largest sector on an absolute basis continues to be Technology, which is now over one quarter of the stock market.
• Equities remain close to all-time highs,  even after a poor Christmas week post the December Federal Reserve meeting. Elevated valuations form part of the ever existing but changing “wall of worry”. The forward p/e for the S&P500 is over 22.4x compared to a longer-term average of 16.4x (and Europe ex-UK forward price earnings (p/e) is below its average since 1990). High valuations are not, necessarily, an obstacle to further market upside.

Fixed Income Outlook

• Our positioning within bonds is relatively neutral government offerings from both an allocation and duration perspective. We continue to have a preference for periphery over core issuers. In relation to corporate bonds, or credit, we have no material preference for medium over short-dated bonds and are overweight banking and insurance on a sectoral basis. Our fixed income exposure continues to be nearly all euro-denominated.
• In relation to monetary policy, we have seen some divergence in recent months, as the ECB grapples with a slowing economy within the monetary bloc whilst the Federal Reserve has a more robust backdrop for the US economy to contend with. For 2025, the market is currently forecasting five 25-bps rate cuts for the ECB to bring the main bank lending rate down to 1.75%. In the US, stickier inflation, the aforementioned robust economy, and potential for fiscal expansion indicates fewer cuts, with the market currently forecasting two cuts to leave the rate at 4% at the end of 2025.
• Within corporate bonds, credit spreads (the excess yield on offer versus a treasury equivalent) are close to multi year lows. At these levels, there is limited pickup to compensate for macroeconomic risks into the future. Company balance sheets are generally well positioned, and tax cuts and deregulation provide tailwinds, particularly for financials.  Absolute yields are firmly in positive territory and continue to contribute to portfolio returns in a meaningful way. 

For the equity bulls  

1. Moderating inflation supports stable bond yields and lower borrowing costs.
2. US economic momentum underpins high corporate earnings growth.
3. Deregulation and tax cuts in the US fuel innovation and growth.
4. The Artificial Intelligence (AI) thematic grows stronger with more widespread use-cases.
5. China surprises with more significant domestic stimulus; eurozone consumption leads a broader recovery.

For the equity bears           

1. US economy underperforms high expectations; Eurozone and Chinese economies fail to regain positive momentum.
2. Inflation stays above target limiting central banks’ ability to ease policy.
3. Equities correct due to stretched valuations.
4. Trade disruptions due to geopolitical conflicts harm supply chains.
5. Financial market stress from high government debt levels or financial excesses.

Zurich Investment Outlook

The Zurich Investment Outlook is produced twice yearly by the team at Zurich Investments, based in Dublin, Ireland. This publication provides an in-depth insight into our current thinking and positioning, and expands on the reasons behind our economic views to our clients and customers. Download the Investment Outlook for more detailed information on the investment markets.