Equities Outlook
Upside in a Divergent World
Despite uncertainties relating to the implications of US policy going forward, the fundamental backdrop for global equities, and particularly US equities, remains positive. Steady growth, strong consumer balance sheets, ongoing disinflation, rate cuts and corporate friendly policies continue to provide a positive equity backdrop. Divergence within regional equity performance, however, is likely to remain a feature as US exceptionalism continues with tax cuts and deregulation adding to its already existing structural competitive advantages. However, policy uncertainty and the potential inflationary impact of Trump 2.0 pose risks to the downside, particularly given high valuations.
As 2024 draws to a close, equity investors have plenty of reasons to celebrate with the S&P 500 on track to have one of its best years in history. Equity strength has been led by the US, given its economic resilience, rising earnings, falling inflation and continued optimism on the potential benefits of AI. As we look to 2025, the outlook for equity returns continues to be positive, with economic and corporate fundamentals remaining strong. While growth is moderating it is still firm and above trend in the US and close to trend for the global economy. Double-digit earnings growth for global corporates is expected, boosted by margin improvements and mid- to high single digit revenue growth.
A key question on investors’ minds is whether the US can continue to outperform. On a relative basis, US equities still appear to be well positioned. The cyclical and structural advantages which have supported US equities in recent years remain in place with US exceptionalism likely to continue. Deregulation has the potential to release ‘animal spirits’, boosting business sentiment and activity levels. Added to this, earnings growth is set to exceed other regions given a better growth backdrop and corporate tax cuts. Finally, the artificial intelligence (AI) theme has further room to run and can continue to provide impetus. It is important to note that valuation risk is evident in the US, with multiples at levels higher than long-term averages. However, it is rare to see multiple contraction when earnings growth is above average and monetary policy is accommodative, as we are seeing currently.
Trump 2.0 policy poses some risks to our positive outlook for equities, particularly around higher tariffs and stricter immigration policies. These policies could see a slower growth backdrop, upward surprises in inflation, a pausing in rate cutting cycles (or even rate hikes), higher bonds yields due to higher inflation and/or deficit concerns, perceived threats to Fed independence and global geopolitics. All in all, we expect there to be greater volatility and divergence between regions.
We continue to advocate for geographic diversification in equity portfolios given higher US multiples and concentration risk in the Magnificent 7. Valuations in other regions are attractive, being slightly below long-term averages in most cases and already discount many of the uncertainties and risks associated with the US election outcome. With earnings forecast to grow in all regions, unchanged valuation multiples would generate upside in non-US markets.
Given the above issues and associated uncertainties, greater volatility is possible in 2025 but with the strong underlying fundamental backdrop and lower rate environment, the overall trend in equities is expected to remain upwards.
ILIM Outlook 2025 - Equities
