Global growth disparities in the economies will persist in 2025, with the US leading developed economies. Europe will remain lacklustre, particularly Germany, while China struggles with its structural headwinds (property and local Government debt). Australia’s growth is below trend but improving, with the Federal Election a key watchpoint. The global interest rate cutting cycle continues but as is the case with growth there are significant divergences. 

 

The US S&P 500 earnings are projected to rise by 12% in 2025. Despite numerous and significant macroeconomic risks, AI-driven productivity gains and Government deregulation initiatives could provide upside earnings strength, particularly for small to medium sized companies. Consensus expectations are for the US stock market breadth to widen as 2025 progresses but with considerable volatility. At the moment markets are dealing with the fallout from Trump's policy uncertainties with a flow on to economic conditions this means a high risk of a further likely volatile correction in shares. Of course, at some point economic weakness and its impact on poll support for Trump and Republican politicians along with share market falls – with Trump seeing share gains as a key performance indicator – will put pressure on Trump to reverse course and focus on more positive policies. But Trump’s acknowledgement that his policies will cause “a little disturbance” and “I’m not even looking at the market” along with Treasury Secretary Bessent’s comment about 6-12 months of pain and “a detox period” suggest that we may have a way to go yet. So, we continue to see a high likelihood of a 15% plus correction in shares before more positive forces around Trump’s tax cuts and deregulation and more Fed rate cuts get the upper hand.

 

China is also at a critical juncture as it faces multiple challenges including local government debt, excess production capacity, weak consumer confidence, and a property market overbuild. To date, authorities have been drip feeding reform initiatives and stimulus. China’s National People’s Congress in March is a key watchpoint for investment markets. To reflate the economy, further and significant stimulus is needed, particularly on consumption, but the size and direction of such measures are the key unknowns. 

 

Australia's per-capita recession continues, but employment growth remains resilient. With inflation back near the RBA’s target, interest rate cuts have started and these should support the consumer and the housing sector. This interest rate cutting cycle is likely to be smaller than those seen in the past.

 

Investment markets are currently facing a wide range of potential outcomes, both very positive and very negative. These include: i) geopolitical uncertainties, ii) policy shifts (deregulation, immigration, central bank actions), iii) technological disruption, iv) economic divergence, and v) valuation concerns particularly in the US. Against a backdrop of these positive and negative risks, our asset allocation stance remains fully invested and mildly cautious. From a fundamental basis, stronger than expected earnings growth could drive risk market prices higher despite limited room for multiple expansion. Additionally, liquidity from continuing central bank interest rate cuts should provide some modest support to risk markets. Whilst investor sentiment is currently stable it will likely fluctuate with 2025’s developments.