A new year often brings a fresh market outlook, as an “out with the old, in with the new” sentiment takes hold.
Here’s a look at how some major asset classes may perform heading into 2025:
— Cryptocurrencies.
— AI stocks.
— Pharmaceutical stocks.
— Financial stocks.
— Energy stocks.
— China stocks.
— European developed-market stocks.
— Defensive stocks.
— High-yield bonds.
— 10-year Treasurys.
Cryptocurrencies
President-elect Donald Trump is more supportive of crypto
than President Joe Biden, lifting prices of digital assets such as Bitcoin, Ethereum and XRP.
Investment advisors are still reluctant to allocate cryptocurrencies in client accounts, due to difficulties of valuing the assets, as well as concerns about a bubble.
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Nonetheless, retail investors remain enthusiastic. Geopolitical tensions may be heightening interest.
“Cryptocurrency is a somewhat liquid store of value when citizens of a country lose faith in their sovereign fiat currency and want to preserve value,” says Jason DeLorenzo, founder and owner of Ad Deum Funds in Chantilly, Virginia.
“Donald Trump and his new SEC Chairman pick, Paul Atkins, seem to want to work with the crypto community, which would open up wider demand from Americans,” DeLorenzo adds.
However, current trading levels (Bitcoin eclipsed the $100,000 mark in early December) may present an opportunity for crypto holders to exit their positions at highs.
“At these levels, I would be careful investing in a purely speculative asset like crypto,” DeLorenzo says.
Artificial Intelligence Stocks
Many of 2024’s top performers in the S&P 500 are keyed to artificial intelligence, or AI. Tech companies Palantir Technologies Inc. (ticker: PLTR), Nvidia Corp. (NVDA) and Broadcom Inc. (AVGO) have grown fast due to their focus on AI systems and applications.
Earnings at those companies are expected to grow at strong double-digit rates. That’s continuing to attract institutional investors.
However, like cryptocurrencies, there’s reason to be cautious about a potential AI bubble, or at least be prepared for a pullback before the next uptrend.
“AI is the next greatest tech revolution. It will make some careers obsolete while creating new and different ones in their place,” DeLorenzo says.
“Historically, when a new technology is identified, a bubble forms as speculation and dreams of what can be overshadow the obstacles to get there,” he adds.
In those cases, he says, buying on the dip may be a sound approach.
Pharmaceutical Stocks
A prominent investment theme in the first half of 2024 was the ascendence of anti-obesity drug makers. Novo Nordisk A/S (NVO) and Eli Lilly & Co. (LLY) were among the top performers, but other areas of the industry remain promising as those two stocks correct.
Frédérique Carrier, the London-based co-chair of RBC Wealth Management’s Global Portfolio Advisory Committee, says the “gray wave” of a growing elderly population bodes well for the pharmaceutical industry.
In a December report titled, “The Unstoppables,” Carrier and co-author Jim Allworth wrote, “The cost of caring for this fast-growing segment that is no longer earning income is a problem desperately looking for a solution.”
In the report, the authors cite an Alzheimer’s Association estimate that in 2024, U.S. health care costs for people age 65 and over suffering from Alzheimer’s disease will reach $360 billion. That’s as much as cancer and cardiology care combined.
Given the high costs to households as well as governments, and considering many people spend a significant portion of their later years battling chronic diseases, it’s imperative that scientists focus on extending the number of healthy years in old age, Carrier says.
Biotech companies that focus on conditions with unmet needs and which can execute on rigorous clinical trials “are likely to benefit from this theme,” she says.
Financial Stocks
The S&P financials sector has been among the top performers in 2024, with the vast majority of stocks posting year-to-date gains. The three most heavily weighted stocks, Berkshire Hathaway Inc. (BRK.A, BRK.B), JP Morgan Chase & Co. (JPM) and Visa Inc. (V) are all up 20% or more.
“One of the more popular Trump trades has been to buy financial stocks because of his promise to reduce regulation,” DeLorenzo says. “However, private and public debt is at all-time highs, and this can weigh on bank reserves.”
Investors may want to proceed cautiously with financials at this juncture, he says, especially in a long-term investment portfolio, although there may be short-term opportunities for trades.
Energy Stocks
Investors may typically associate oil and gas stocks with the energy sector, and that’s valid. Behemoths Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are the biggest companies in a sector whose revenues are largely derived from fossil fuels.
However, investors should start looking toward renewable sources of energy, Carrier says.
In their report, “The Unstoppables,” Carrier and Allworth wrote, “Renewables are set to become the dominant source of power, in our view.”
Government subsidies that began two decades ago led to the rapid installation of wind farms, solar collectors and energy storage facilities that have driven down the cost of renewable power, they added.
These projects, now being built without subsidies, could mean renewable energy is the lowest-cost energy source in many countries.
“Despite the incoming Trump administration prioritizing U.S. fossil fuel production, the adoption of renewables will almost certainly continue, in our view, thanks to striking cost advantages,” the RBC report said.
Investable ideas, Carrier adds, include renewable energy gear makers and providers of energy storage and smart-grid solutions.
[SEE: 7 Clean Energy ETFs to Buy Now]
China Stocks
The threat of U.S. tariffs against Chinese-made goods isn’t the only factor sending the iShares China Large-Cap ETF (FXI) sharply lower (after a brief spike) in December. The nation’s retail sales are down, suggesting consumers are struggling.
Beijing has introduced economic stimulus measures, but analysts are increasingly saying more robust actions may be necessary.
In a report published on Dec. 12, Liz Young Thomas, head of investment strategy at SoFi, wrote that much of the bad news about China stocks is already priced in.
“China’s sluggish growth may drive the country to announce more stimulus in 2025, and present an opportunity for upside,” she wrote.
She added that Trump’s plans to limit trade with China, as well as greater risk from a sluggish economy, may change the implications for China.
“But absent a change in the investing or macro-environment, we find these pockets of the market to be compelling,” she wrote, referring to China as well as other sectors and types of investments.
European Developed-Market Stocks
European indexes have underperformed U.S. stocks by a wide margin over the past decade, due in no small part to the U.S.-based large tech stocks that dominated the market.
The Vanguard FTSE Europe ETF (VGK) returned 5.1% over a 10-year period as of Nov. 30, versus the Vanguard S&P 500 ETF’s (VOO) return of 13.3%.
In a Dec. 13 research report, Bank of America analysts said they were overweighting the Swiss equity market, citing its defensive nature at a time when they expect a global economic slowdown.
“We lower Germany to underweight after the recent run and lift the U.K. to market weight after pronounced underperformance,” analysts wrote.
They also underweighted Italy and Spain, given their link to banks, which they expect to fade on lower bond yields, as investors demand higher premiums to take on assets with greater risk.
Investors may want to use caution with European stocks in 2025.
“Europe and Asia are both entering economic turmoil,” DeLorenzo says. “They are entering a recession and deflation phases of their economies before America does.”
Defensive Stocks
Growth has been the main investing theme of the past decade, but defensive stocks may look good if the market turns south.
Typically, defensive sectors include utilities, consumer staples and telecommunications, all of which tend to see stable revenue streams, even in an economic downturn. Health care also has some characteristics of defensives, although the fast pace of medical technology development can also lead to growth.
Despite underperformance, investors shouldn’t abandon more defensive sectors of the market, says Cliff Hodge, chief investment officer and partner at Cornerstone Wealth in Huntersville, North Carolina.
“Many of these companies have strong balance sheets and could hold up relatively nicely during a broader market correction,” he says.
For example, he adds, some of these sectors, such as health care and utilities, can be a stealthy way to get exposure to AI, as these technologies expand and begin to benefit broader parts of the economy.
A case in point is Texas-based utility Vistra Corp. (VST), which has returned more than 240% year to date. That growth is spurred by optimism about the company’s potential to capitalize on the demand for electricity to power AI data centers.
High-Yield Bonds
High yield sounds great, but it often comes with some added risk. High-yield bonds are those that bond rating agencies consider to be at a greater risk of defaulting than investment-grade bonds.
The difference here is that high-yield bonds are issued by capital-intensive companies with high debt loads, financially distressed companies or startups with not much of a debt service track record.
For investors who understand the risks, high-yield bonds can offer opportunity. For example, those who don’t want to go through the potentially arduous process of choosing individual bonds can purchase an ETF such as the iShares iBoxx $ High Yield Corporate Bond ETF (HYG).
“U.S. economic growth remains solid, and most companies have done a good job taking care of near-term maturities,” says Atul Bhatia, fixed-income portfolio strategist at RBC Wealth Management in Minneapolis. “For those that do need to raise funds, the growth in private credit has upped competition among lenders to the benefit of borrowers. All in all, there is a good set of tailwinds for the sector.”
However, he notes, investors should use some caution.
“The main concern is valuation,” Bhatia says. “Like most risk assets, high-yield bonds are expensive. Solid credit work is always the key to the sector, but at these prices, there’s very little margin for error.”
10-Year Treasurys
The 10-year U.S. Treasury note is considered the proxy for the risk-free rate. That’s because it’s backed by the U.S. government, and is deemed to have very little risk of default.
However, the 10-year, like other debt instruments, faces interest rate risk, as changes in market interest rates can affect its price.
Also, inflation risk can erode the purchasing power of its fixed interest payments over time.
“There’s no question that bonds have had a tough go over the past couple of years, but they are an important piece of a broadly diversified portfolio,” Hodge says. “With valuations in the equity market near all-time highs, high-quality bonds offer a compelling risk-reward opportunity.”
“Investors can still earn a solid coupon, with potential for price appreciation if the economy sputters; investors get paid to wait, and could see meaningful price appreciation over the next couple of years,” he adds.
The 10-year Treasury yield spiked on Dec. 18 after the Federal Reserve said it anticipated only two rate cuts in 2025, fewer than previously expected.
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