In 2024, the market was heavily influenced by the performance of a few American companies. Looking ahead to 2025, German asset manager DWS’s economists predict a year that may not be as lucrative or as dominated by American tech companies. Despite challenges such as geopolitical instability and potential difficulties for US tech stocks to maintain their previous growth rates, there is still reason for optimism in the 2025 market outlook.
Stable but challenging economic conditions are expected in the coming year. DWS’s Chief Investment Officer, Vincenzo Vedda, notes that the American economy and job markets remain stable, with corporate profits continuing to recover. However, challenges loom in Europe, particularly in countries like Germany where productivity issues and higher-than-expected inflation present obstacles to growth.
While the DAX index surprised many by growing 20% in 2024, DWS’s investment chief believes that sustaining this trend in 2025 is unlikely. The US is projected to experience more dynamic growth than Europe, driven by factors such as deregulation, trade policies, and expansive fiscal measures under the Trump administration. In contrast, the Eurozone may face prolonged slow economic growth due to weaknesses on the demand side.
Concerns over Germany’s inflation rate, which rose to 2.6% in December, are compounded by wage demands and strikes from both private and public sector unions. Despite inflationary pressures, DWS economists anticipate the European Central Bank (ECB) to implement a double-digit number of interest rate cuts by the end of 2025, surpassing the Federal Reserve’s projected rate cuts.
On the stock market front, DWS identifies risks such as lower-than-expected profit growth and a potential increase in 10-year government bond yields to 5%. However, there is a glimmer of hope for small and medium-sized companies, which have underperformed the market for the past three years but are showing signs of improvement.
Philipp Schweneke, head of European equities at DWS, points to three factors supporting a potential turnaround for smaller companies:
– Favorable interest rates, expected to decline to 2% by the end of the year.
– Increased willingness of firms to invest in the current climate, as evidenced by rising lending volumes.
– Improving economic indicators in the Eurozone, particularly in terms of growth, which could benefit small and medium-sized enterprises more than larger corporations.
As for the US stock market, DWS anticipates less favorable conditions in 2025, citing concerns over high valuations and the potential impact of rising bond yields. Realistic projections suggest moderate to high single-digit returns for equities this year.
In the realm of fixed income securities, DWS’s Chief Investment Officer for Western Europe, Vera Fehling, recommends medium-term bonds as a potential opportunity in a period of interest rate cuts. While euro-denominated investment-grade corporate bonds remain attractive, caution is advised when considering high-yield bonds, as spreads against government bonds have narrowed significantly.
Overall, the investment landscape for 2025 presents challenges and opportunities across various asset classes, requiring careful navigation and strategic decision-making to capitalize on potential returns while mitigating risks. By staying informed and adapting to changing market conditions, investors can position themselves for success in the year ahead.