We continue to believe as we move into 2025 (and beyond) that the market is primed for additional upside. We remain in the middle-stages of what we believe to be a generational bull market, with the returns over the next 5-10 years to be driven by productivity gains generated by the proliferation of AI use cases. Over the shorter term, we believe the market is primed for returns supported by favorable political policies, robust economic conditions, and strong corporate earnings growth.
Early last year, instead of making predictions, we published a blog post focusing on facts about markets. This year we decided once again to forego the prediction game and focus instead on outlining five key themes we believe are the most important driving factors for markets over the near and long-term.
1. AI and Innovation Dominate
AI Integration Across Industries: While the tech sector has been the main beneficiary of the Artificial Intelligence boom so far, we are anticipating a transition from the first-derivative beneficiaries (ie. chip makers and LLM creators) into the second-derivative beneficiaries. Companies in sectors like industrials, financials, and healthcare that can harness AI will begin to see the efficiencies it can create, in many cases leading to lower costs and increased earnings.
Next Wave of Innovation: Aside from AI, we are seeing an accelerating pace of breakthroughs in other areas of technology such as quantum computing, robotics, and green tech. Many of these remain in the early stages but have the potential to continue to drive forward innovation across industries.
2. Pro-Business US Administration
Market-Friendly Policies: We believe the new administration will deliver on their priorities relating to reforms, deregulation, and incentivizing business, creating a favorable environment for corporate earnings growth and investment.
Infrastructure Boom: Large-scale infrastructure spending plans are also set to drive opportunities in industrial sectors, further broadening market participation.
3. Underlying US Economic Strength
Low Unemployment and Wage Growth: A robust labor market with rising wages is continuing to support consumer confidence and spending power.
Moderating Inflation – Contrary to Expectations: While many headlines are calling for a so-called “second wave” of inflation – we see the opposite scenario. A combination of lagged-effects, and base-effects, are set to bring down inflation data during a time when everyone expects the opposite.
Resilient Fundamentals: Despite global uncertainties, the U.S. economy continues to showcase strong GDP growth, with another year of potentially above-average economic growth in 2025.
4. Broadening Market Participation
Small-Cap Momentum: Small-cap stocks are beginning to gain traction in the positive economic environment. Large cap dominance has been a major story, and this is a theme we believe will begin to inverse over the coming years.
Sector Diversity: While technology continues to shine, industrials and financials, are beginning to contribute more to market gains, reflecting a broadening of the ongoing rally. We believe this a trend that is set to continue, partially enabled by technology as the proliferation of AI begins to create efficiencies in other sectors of the market.
5. A Focus on Corporate Resilience
Earnings Growth: Overall corporate earnings growth continues to come in above expectations. Corporations are proving to be resilient, and strong fundamentals make a good case for justifying somewhat elevated valuations.
Shareholder Returns: Stock buybacks, dividends, and strategic mergers are driving investor confidence and returns. We believe the regulatory environment encouraged by the current administration will only serve to further drive shareholder value creation.
Bottom-Line
Nothing has changed with respect to our optimism about the opportunities that will be presented over the coming years. We believe portfolios focusing on sectors benefitting from technological advancement, companies positioned to benefit from underlying economic strength, and areas of relative value like small cap, are poised to continue to deliver strong returns into 2025 and beyond.