It’s the small things that can sometimes sway an outlook in the most profound way. Take, for example, the late President Jimmy Carter’s historic peace-accords meeting with Israeli Prime Minister Menachem Begin and Egyptian President Anwar Sadat at Camp David back in September 1978. Despite the fact Carter’s internal polling revealed significant appetite for a peace treaty among both Israelis and Arabs, very few observers were optimistic about what could be achieved during this meeting.
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Carter detailed in his memoir, “Keeping Faith,” how the initial agenda only included three days of talks. By day 13, though, textual preferences seemed insurmountable. The negotiations literally came down to a photo finish: At the suggestion of Susan Clough, Carter’s secretary, the U.S. president personalized accord photos for each of Begin’s eight grandchildren. This single gesture paved the way for additional dialogue and eventually a signed peace agreement between Egypt and Israel on Sept. 17, 1978.
Similarly, in 2025, it seems there’s just one key catalyst that will shape many institutional investors’ strategies and outlook: More than 7 in 10, or 72%, of institutional investors say central bank policy will influence their investment decisions this year, according to the 2025 Natixis Institutional Outlook Survey.
Path of Interest Rates and Inflation
The Federal Reserve has lowered rates by one percentage point to a range of 4.25% to 4.5% since Sept. 18, 2024. Financial markets project up to two quarter-point rate cuts in 2025, according to futures pricing.
“We are more dovish than the markets at this point and have three to four quarter-point cuts in our forecast,” comments Nate Thooft, chief investment officer of Multi-Asset Solutions and senior portfolio manager for Manulife Investment Management.
Scott Helfstein, head of investment strategy at Global X, believes core inflation will wane to 2.4% to 2.6% by the end of 2025, but he will keep a close watch on how external factors, such as tariffs, may impact the Federal Reserve’s thought process. He adds, “The market has gotten even more conservative, forecasting between one and two (cuts), which seems to be a vote of confidence in the U.S. economy even as recent bond market volatility is rising. The central question is whether the labor market starts to slow in the new economic regime. Real rates now seem a little high despite labor market strength, so we still think the Fed cuts more than two times, perhaps three.”
Vanguard, for its part, estimates core inflation will reach 2.5% by the end of 2025.
Investors Taking a Wait-and-See Approach
Individual investors appear to be maintaining a wait-and-see attitude about the market as well. As of Jan. 15, only 25.4% of individual investors in the U.S. are bullish on equities in the coming six months, down from 34.7% the week before, according to data from the American Association of Individual Investors. The percentage of bearish investors has risen to 40.6%, a one-year high. Some analysts take this bearish bent in stride and view it as a contrarian indicator, meaning it’s a rationale to give equities a second look. For what it’s worth, the AAII survey also revealed 45.6% of individual investors said the stock market performed better than they expected in 2024, and 21.9% admitted the stock market performed “much better” than they anticipated last year.
Institutional investors have a more sanguine outlook on the market in 2025. Natixis’ survey revealed many institutions are bullish on private equity (73%), publicly traded stocks (67%) and bonds (62%). One-third of institutional managers plan into increase their allocations among U.S. stocks, and 40% plan to increase their allocations to Asia-Pacific stocks in 2025.
Josh Hirt, senior U.S. economist for Vanguard, suggests bonds are worth a second look this year. He adds, “Fixed income is expected to offer long-term gains due to higher starting yields, despite short-term challenges.”
[READ: 7 Best Funds to Hold in a Roth IRA]
Are Artificial Intelligence Stocks Overvalued?
The S&P 500’s price-to-earnings ratio is currently about 22. Still, some analysts say a mixture of artificial intelligence growth and policy deregulations could fuel an even bigger S&P 500 rally in 2025. Julia Hermann, global market strategist for New York Life Investments, comments, “There’s no way around the fact that U.S. growth equities are expensive, but elevated valuations are not unjustified. Strong earnings quality, U.S. economic outperformance relative to other developed markets, and the resilient fundamentals behind the AI boom all help to back up even lofty valuations.” Hermann has constructive views on both high-yield corporate bonds and large-cap growth stocks in the U.S. this year.
Global X’s Scott Helfstein also believes AI will support U.S. equities this year. He suggests, “We do think that automation technology broadly, including AI, will help drive profit margins higher and help companies reduce earnings volatility, driving multiples up a little further in 2025.” Helfstein is particularly constructive on “themes tied to U.S. competitiveness such as U.S. infrastructure and defense technology.”
Long-Term Outlook for Markets
Beyond the next 12 months, several leading investment firms have recently revised their long-term outlooks, or capital-market assumptions, regarding a variety of core asset classes. “Vanguard recommends that investors in 2025 and beyond maintain a diversified portfolio,” adds Hirt.
Here are the 10-year and 20-year market outlooks from Vanguard and Manulife, respectively:
| Asset Class | 10-year return* | 20-year return** |
| U.S. large-cap stocks | 2.5% — 4.5% | 6.7% |
| U.S. small-cap stocks | 4.2% — 6.2% | 7.2% |
| Non-U.S. developed stocks | 7.3% — 9.3% | 5.6% |
| Emerging-market stocks | 5.2% — 7.2% | 7.8% |
| U.S. core bonds | 4.3% — 5.3% | 4.5% |
| Global core bonds | 4.3% — 5.3% | 4.3% |
* Source: Vanguard. Returns are annualized.** Source: Manulife. Returns are annualized.
A balanced allocation of roughly 60% equities and 40% bonds is a common investment strategy among retirees because it can potentially provide them with long-term portfolio growth and current income. PGIM’s current estimated return for a balanced portfolio over the next decade is 6.3% annually.
Still, there is a stark difference between what the market can offer investors versus what they often get in total returns over the long run. For example, over the past 30 years, from Jan. 1, 1994 through the Dec. 31, 2023, the S&P 500 produced an average annual return of 10.15%; however, the average personal return for investors was only 8.01% in the same time period, according to research from Dalbar. Using a hypothetical, initial investment of $100,000 back in 1994, Dalbar estimates that the average investor would have missed out on a whopping $808,690 in total earnings over the past 30 years. Part of the return variance can likely be traced to investment behavior, such as attempting to time the market.
Prospective vs. Predictive Outlooks
One way to think about investment firms’ capital-market expectations is to view them as reasonably prospective, rather than predictive, in nature. For example, if a 67-year-old investor needs a 6% return from her investment portfolio over the next two decades to sustain her retirement needs, including out-of-pocket medical and long-term-care expenses, what kinds of asset classes, taken together, can reasonably help her achieve that kind of outcome?
That’s an important takeaway for investors who want to plan well for their long-term funding needs. It was a high degree of personalization that helped President Carter stay on track with the peace accords in 1978. A personalized approach to investing today can help investors stay on track with their financial goals over the coming decades, too.
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2025 Investment Outlook originally appeared on usnews.com
