Top 10 Market Themes for 2025

Posted by Bedrock on 31st January 2025

As we enter 2025, pivotal economic, technological, and political trends are set to shape the landscape for investors. In this article, our research team shares their top 10 themes that will influence the markets in the coming year and identifies the assets best positioned to capitalize on these opportunities. Some themes continue the momentum from 2024, such as the promising outlook for gold and advancements in Artificial Intelligence. Others are more likely to represent a break: chief among them being Donald Trump’s return to the White House.

1. US growth exceptionalism to continue – and dollar strength to persist

US economic growth powered ahead of peers in 2024, fuelled by deficit spending and an investment push. The momentum looks to continue at least into 2025 – though real questions about fiscal sustainability may assert themselves in time. Although Japan seems to have turned an important economic corner, neither it nor struggling Europe and China appear able to match America’s vibrancy in 2025. This is supporting US corporates, whose expected earnings growth continues to outstrip global peers, in turn boosting US financial assets.

On top of this growth exceptionalism, a persistent interest rate differential should keep the dollar strong versus major peers. Trump’s policy mix, including his planned tariffs, is likely to underscore dollar strength.

While US assets are not the only show in town, they should remain at the centre of investors’ attention.

Target Assets: USD-denominated assets; US equities.

“The momentum looks to continue at least into 2025 – though real questions about fiscal sustainability may assert themselves in time.”

2. Heightened volatility is expected after two strong years for equities

Equities have registered strong back-to-back calendar year gains, led by US large-caps: the S&P 500 rose >20% in 2023 and 2024. This pace may be difficult to maintain and valuations are pricing perfection. As the bull market looks to continue into a third year, higher volatility can be expected.

Target Assets: Quality equities; downside protection; portfolio diversifiers; structured products.

3. Look beyond US large-caps

US large and mega-caps, especially Big Tech stocks, led markets in 2024, leaving them richly – but not indefensibly – valued. Markets nonetheless broadened across the year, with US small and medium capitalisation (SMID-cap) stocks beginning a catch-up move vs bigger peers, especially after November’s election. Under Trump’s presidency, US SMID-cap stocks should benefit from tax cuts for businesses that make their products in the US, while deregulation, increased M&A and continued macroeconomic vibrancy should also help.

Beyond US shores, Japanese equities are well positioned to benefit from the improving macroeconomic picture and the fruits of corporate governance reforms. European stocks, especially high dividend yielding names, offer more attractive valuations and important diversification from US markets.

Target Assets: US SMID-caps; Japanese equities; high-dividend developed markets equities.

“Beyond US shores, Japanese equities are well positioned to benefit from the improving macroeconomic picture and the fruits of corporate governance reforms.”

4. AI trend to advance, supporting the linked robotics theme  

Artificial Intelligence was the headline stock market theme of 2024, driving US mega-caps strongly higher. Stellar revenue growth nonetheless kept multiples plausible on the supply side – though key players on the demand side will increasingly need to demonstrate the worth of their AI investment to date. With technological developments continuing, the theme still has scope to run. The linked theme of robotics stands to benefit, both technologically and financially; leading chip player NVIDIA has highlighted robotics as a key growth area.

Target Assets: AI & robotics equities; AI-linked commodities.

5. Electrification will be at the centre of real economy investment

Power-hungry, AI-enabling data-centres together with the wider energy transition are driving up demand for electrification. The US electricity grid in particular is outdated and in need of upgrading – though there is wide global need for infrastructure investment, especially in the power sector. A shift to more active fiscal policy in many developed markets is paving the way for an upsurge in infrastructure investment.

Target Assets: Electrification & electric utilities stocks; industrials; real assets.

6. Defence investment is rising

Growing threats coupled with demands from inbound President Trump for allies to spend more are spurring democratic powers to step up defence and security investment. European NATO members are increasingly addressing their ability to resist Putin’s Russia with US support in doubt, while at the other end of Eurasia, US treaty allies Japan and South Korea face a rising China as well as the deepening partnership between Russia and North Korea. Structurally higher spending on defence procurement should be a tailwind for suppliers in relevant countries.

Target Assets: Defence & security equities.

7. M&A dealmaking to pick up

Regulators have in recent years policed merger and acquisition deals more closely, curtailing activity. However, a deregulation-focused Trump administration should clear the path for greater deal flow, benefiting strategies targeting this area of market activity, such as merger arbitrage and event-driven hedge funds.

Target Assets: M&A beneficiaries (financials); merger arbitrage & event-driven hedge funds.

“A deregulation-focused Trump administration should clear the path for greater deal flow.”

8. A slow rate cutting cycle – especially in the US – sustains fixed income’s appeal

Central banks’ rate-cutting path is likely to be less precipitous than the hikes were steep. This means that the risk-free rate component of fixed income returns will remain comparatively high, keeping starting yields attractive. With spreads historically tight, investors should prioritise carry income over price appreciation. Given tight index spreads, selectivity will remain key in credit. Energy may appeal, especially if inflation looks to stick or rise (a distinct possibility in the US). Financials also remain well placed, with well-capitalised European issuers in particular continuing to trade attractively.

Target Assets: Selective fixed income.

“The risk-free rate component of fixed income returns will remain comparatively high, keeping starting yields attractive.”

9. Gold’s appeal has not dulled – while cryptocurrencies will be an alternative for some

Gold may have enjoyed a powerful rally in 2024 (XAU/USD +27%) but the key trends that pushed it higher remain in place. Increased buying by central banks (especially in emerging markets) looks set to continue, while geopolitical risk is poised to remain elevated, both supporting gold prices. Cryptocurrencies, too, have rallied at the prospect of a pro-crypto Trump presidency. Meaningful deregulatory moves under Trump, fiscal profligacy, and greater crypto mainstreaming may support prices higher. This, and coins’ limited correlation to traditional assets, could make a diversifying allocation appealing to some – though crypto volatility will remain structurally elevated.

Target Assets: Gold, cryptocurrencies.

10. Global economies are diverging

The COVID-19 pandemic and related inflation wave were global economic challenges that brought a degree of synchronicity to economic cycles worldwide. But macroeconomic paths moved apart in 2024 and major economies’ growth, inflation and policy regimes are poised to diverge further in 2025. This will create opportunities for trading strategies that look to benefit from divergent macroeconomic trends.

Target Assets: Systematic & discretionary macro hedge funds.

If you have any questions about the themes discussed in this article, please do not hesitate to get in contact with us: info@bedrockgroup.ch

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