Investment Outlook 2025

In the wake of two consecutive stellar years for stocks, sentiment among market participants is exuberantly bullish. However, leaving the party early on the grounds of frothy investor optimism and rich valuations would entail (opportunity) costs. Investors would be better advised, and at the same time better girded for potential rotations and changes in investor preferences, to approach the year ahead with a well-diversified investment strategy. Private-market assets should be included again in 2025 because they are a valuable addition to a balanced portfolio.

Equities: Momentum, momentum, …

After equity markets around the world did very well again in 2024 and US stocks even posted a stellar performance, one thing above all is crystal clear at the turning of the year: stocks today definitely are no longer cheaply valued. In the last 50 years, there has only been one episode when American stocks were even more “expensive” than they are today, and that was during the 1998–2000 internet bubble. Even if one strips out the lavishly valued technology giants, the broad US market’s current price-to-earnings multiple is still far above its historical average. However, this realization is of little use for a 12-month outlook because the P/E valuation metric explains only 20% of the performance of stocks over such a short period. As if to prove this very loose correlation, a constantly expensive US equity market has consistently delivered above-average annual returns over the last decade. Other popular valuation metrics like equity risk premiums or the Buffett Indicator, for instance, are just as unhelpful for the relatively short time frame of an outlook for the year ahead. And the fact that US stocks have posted annual gains north of 20% for two consecutive years now doesn’t fundamentally preclude them from continuing to soar higher again next year. In an identical scenario involving the big bull market of the 1990s, an already strong performance in 1995/96 was followed by three more years of double-digit percent annual returns.

Not a bargain | Rich valuation diminishes (only) long-term upside potential

Price-to-earnings multiples: USA vs. Europe

Sources: Bloomberg, Kaiser Partner Privatbank

The lofty valuation by itself does not imply a negative return expectation for either technology stocks or the broad market. That’s why analysts will probably be forecasting – as they so often do – a gain of around 10% for the S&P 500 index once more for 2025, not just due to a lack of knowledge, but also based on experience. However, even if stock prices continue to climb higher in 2025, there is reason to assume that their trajectory will be a bit less linear than before. Although many items on the Trump administration’s agenda are beneficial for stocks in principle, a lot of advance praise is already priced into them. Moreover, the timing and impact of the possible initiatives could end up this time being the exact opposite of what happened eight years ago. At that time, speculative visions of forthcoming tax cuts caused the S&P 500 to rise by 37% from the moment of Trump’s election victory until the start of the trade war in early 2018. This time, the tariffs issue could dominate right at the start of the Trump 2.0 presidency while further tax cuts would not only be uncertain, but probably would also come only in homeopathic doses. The year 2025 could unfold differently on the stock market than the prior two years did in other ways as well. For instance, the market concentration of the Magnificent Seven may reach its peak. The foreseeable deceleration in Big Tech earnings growth and/or a less industry-friendly Federal Trade Commission than hoped could be the catalyst that makes that happen.

AI speculation knows no bounds | Nvidia outdoes everyone

Market capitalization in USD trillion (share-price performance after reaching market cap of USD 100 billion for first time)

Source: Bloomberg, Kaiser Partner Privatbank

A change of that kind in investor favorites could be accompanied by a continued rotation into small caps. After a two-year earnings recession, the consensus estimate for the Russell 2000 index projects profit growth of around +50% until 2026. If small-cap companies largely live up to that promise, they really could stage a share-price performance comeback because the other parameters are in proper alignment: small caps currently are trading at record-cheap valuations, they usually perform better than average during rate-cutting cycles, and they stand to benefit disproportionately from the coming wave of deregulation. And last but not least, trade uncertainties and a stronger US dollar would have less of an impact on predominantly domestic-oriented US small caps.

Still in a downtrend… | …but with lots of room to rise

Russel 2000 index vs. S&P 500 index

Sources: Bloomberg, Kaiser Partner Privatbank

Equity valuations outside the USA are also comparatively cheaper, but it’s doubtful whether that alone is enough to enable European stocks to outperform for longer than just a few months. The economic activity outlook in Europe remains bleak at the start of 2025 while earnings growth expectations for the year (+10%) tend to appear overly ambitious. A tactical window of opportunity could at least open if the ECB lowers interest rates faster than currently anticipated, if China stimulates its economy more vigorously, if the trade war turns out to be only a minor commotion, and if the US economy loses steam relative to other countries. Speaking of China, retail investors there are already back in the grip of speculative fever again. The government of China, through its extensive September package of support measures if not before then, has demonstrated that it wants to stabilize not just economic activity, but also the country’s equity market. In December, it adjusted its monetary policy from “prudent” to “moderately accommodative” for the first time since the financial crisis, sending another positive signal to the financial market. In the first half of 2025, only time will tell whether investors’ hopes will also be nourished by additional fiscal stimulus measures and whether corporate earnings ultimately will pick up in China. If that does happen, Chinese stocks still have a lot of upside potential left.

Fixed income: A risky endeavor?

The fixed-income risk scenario actually envisaged for the outlook for 2025 appears to have moderated significantly on the (US) bond market ahead of the turning of the year, though it hasn’t completely vanished. That scenario would have seen yields on long-term government bonds rise swiftly to new highs above 5%, driven by inflation fears (punitive tariffs, mass deportations, booming economic activity) and reckless fiscal policies with even bigger budget deficits. However, recent weeks have given reason to hope that it won’t get as bad as that either because the Trump administration ultimately is wise enough to refrain from applying higher doses of inflation- and deficit-fueling measures or because there is not enough unity in the US Congress after all to endorse such measures. The November nomination of Scott Bessent to serve as the future Secretary of the US Treasury has at least acted as an effective chill pill and has soothed market participants’ worries for the time being. The concept of a new Department of Government Efficiency (DOGE) was likewise received as a positive signal and gives reason to presume that Trump and his advisors are well aware of the financial market’s vulnerability to a further, and especially a rapid, uncontrolled deterioration of US federal finances.

Self-restraining | Yields above 5% in the USA would not be sustainable

Yield on 10-year government bonds

Sources: Bloomberg, Kaiser Partner Privatbank

But even if it turns out that the last few weeks were merely a staged “Trump show” and the risk scenario really does come true (probability: less than 20%), a bond selloff would quite quickly become self-restraining. That’s because if the yield on 10-year US Treasury notes were to lastingly rise above the 4.75%–5.00% range, that would surely spark panic in the White House. The stock market – Donald Trump’s personal feedback indicator – would likely then also be adversely affected and would force a course correction. Yields around or above the 4.3%–4.5% level thus present investors with a good opportunity to return any underweight in government bonds to neutral and to place a small hedge against the current equally low probability of a recession occurring. In the baseline scenario, meanwhile, (US) bond yields neither rise sharply nor fall steeply. If US economic activity stays robust and the Fed cuts its policy interest rate only to a level of 3.5%–4%, the current US Treasury yield level would be practically at its fair value. In that event, substantial price gains wouldn’t be realistic unless the US economy cools down more severely against expectations. Meanwhile, a somewhat more sobering situation is presented by government bonds in Europe, where yields are already at lower and even less attractive levels than before. Increased exposure to European sovereign bonds is warranted only for those investors who either are compelled to be invested in this asset class or would like to place certain bets on, for example, a strong currency (Swiss Confederation bonds) or a recession in Europe (German Bunds).

Thin air | Credit spreads close to historical lows

Credit spreads in basis points

Sources: Bloomberg, Kaiser Partner Privatbank

Opportunities will be rather scarce in 2025 also in riskier segments of the fixed-income asset class. Credit spreads on investment-grade and high-yield corporate bonds and on emerging-market bonds are so tight by now that it is hard to justify stepping up exposure to them. We advise against going to great lengths to proverbially pick up pennies in front of a steamroller just to earn a slightly higher return. Anyone in the fixed-income space who is seeking a higher return, and one that is largely uncorrelated to boot, is better off with insurance-linked (cat) bonds again in 2025. The (re)insurance industry continues to exhibit a structural imbalance between the supply of and the demand for insurance coverage. In the wake of another intense US hurricane season that nonetheless resulted in a relatively low amount of claims expenditures, premiums in this asset class remain at an attractively high level.

Cat bonds in an uptrend | Still an attractive asset class

Plenum Cat Bond Fund Index

Sources: Bloomberg, Kaiser Partner Privatbank

Currencies: Expensive US dollar

Donald Trump doesn’t like a strong dollar – that was already the case eight years ago (when he said, “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me.”), and his view hasn’t changed since then. But even though Trump wields enormous presidential powers, not even he can devalue the greenback at the press of a button. Various theoretically conceivable ways of doing that would probably prove impracticable. An attempt, for example, to arrange a modern Plaza Accord-style coordinated intervention to devalue the dollar in cooperation with the ECB, the Bank of England, and the Bank of Japan would probably find those actors unwilling to play along. Meanwhile, a unilateral intervention by the Fed would quickly run out of the money needed to sustain it. Capital controls or similar restrictions would diminish the attractiveness of the US financial market and would undermine the US dollar’s role as the world’s reserve currency (a status that Trump wishes to maintain). The only other options left are either actions that would be questionable (demanding interest-rate cuts by the Fed) or would have only a short half-life (talking down the dollar), or would be to simply come to terms with existing realities. Those realities at the moment – comparatively higher interest rates, stronger economic growth, the prospect of punitive tariffs (which are synonymous with decreasing demand for the currencies of US trade partners) and, last but not least, the attractiveness of US stocks (to which there is currently no alternative in investors’ minds) coupled with corresponding inflows of capital into the USA – all argue in favor of the US dollar.

Past the peak? | Reversion to the mean sooner or later

US dollar index

Sources: Bloomberg, Kaiser Partner Privatbank

In the end, though, Trump may actually get what he wants because an even stronger US dollar is the consensus view, which is rarely 100% accurate, and because the action on the currency market is always based on relative developments between different currencies starting from what’s already priced in at the moment. Viewed from this angle, it can only get worse for the dollar going forward. Above all, though, the situation could get better than currently expected in the other large currency area – the Eurozone – in 2025 because interest-rate and economic growth differentials may move in favor of the euro, which would wrong-foot market participants who are predominantly positioned long the dollar by now. A surprise of that kind would also fit with the picture from an overarching perspective because the dollar has been lavishly valued for quite a while now, which gives reason to expect a substantial reversion toward the mean sooner or later once the necessary impetus is present. If that happens, that could provide grist for a currently hardly-talked-about theory that a major dollar trend reversal has long been underway and that the high hit in autumn 2022 marked the greenback’s peak.

The Swiss franc was strong once again in 2024. It is starting off the new year close to its all-time high against the euro. But despite the franc’s high nominal price, it – unlike the US dollar – is not overvalued, but actually is fairly valued or even mildly undervalued, depending on which model one goes by, due to Switzerland’s comparatively lower inflation and higher productivity. Most currency analysts in their forecasts for 2025 once again appear to be ignoring the fundamental forces of gravity pulling on the EUR/CHF cross. Only one-fourth of analysts see the EUR/CHF exchange rate below 93 centimes at the end of 2025, and almost no one (two out of 36 analysts) foresees a price below 90 centimes. But that’s exactly the direction in which it may be headed over the next 12 to 18 months. Since the franc, objectively speaking, is not overvalued, the Swiss National Bank is unlikely to fiercely combat a further appreciation of the currency, but probably will seek only to moderate its speed by using tools including verbal interventions, forward guidance via inflation forecasts and, in case of an emergency, temporary interventions on the currency market. New SNB President Martin Schlegel says that negative interest rates also remain part of the national bank’s toolbox. Although his comment to that effect in November was an obvious attempt to scare speculators who are betting on a stronger franc, we wouldn’t entirely rule out the possibility that the policy interest rate in Switzerland could drop back below the 0% line once more in the years ahead.

Gravity | It’s a law of nature also for the EUR/CHF exchange rate

EUR/CHF

Sources: Bloomberg, Kaiser Partner Privatbank

Alternative assets: To the moon

The price of Bitcoin more than doubled in 2024 and vaulted over the psychologically important USD 100,000 mark in December. While this signal validated the bullishness of crypto enthusiasts, it arguably snapped the increasingly thinning threads of patience among many of the last remaining crypto skeptics and die-hard crypto bears for good. FOMO (the fear of missing out) can be distinctly heard and felt by now in the cryptocurrency space. It’s questionable whether an easing of regulation by the US Securities and Exchange Commission under Paul Atkins, with an assist from David Sacks as the new “crypto czar” in the White House, will send cryptocurrency valuations straight to the moon in 2025 – a pause for breath wouldn’t be astonishing on the heels of the recent dizzying gains. However, if it perhaps wasn’t evident before, the performance in 2024 and the successful founding of Bitcoin ETFs demonstrated that cryptocurrencies are here to stay. Their suitability as a portfolio component for an individual private investor depends on that person’s risk appetite and investment goals. If enjoyment of speculating doesn’t stand in the foreground and one’s aim is to participate in a young asset class, to hedge against the debasement of paper currencies, or to forestall headaches caused by missing out on a rally (a not entirely irrelevant motive), an allocation to crypto should amount to only 5% of one’s total portfolio and shouldn’t exceed 10%.

Upward trend… | …in classical and digital versions

Gold price and Bitcoin price

Sources: Bloomberg, Kaiser Partner Privatbank

The outlook for classic, non-digital gold likewise remains fundamentally bullish. But in the wake of bullion’s 30%-plus price gain in 2024, the air is gradually thinning out here as well. However, the velocity of the further trend upward matters less for investors than the uptrend’s strategic underpinning does. Its undergirding support is still strong given the continued high demand for gold on the part of central banks and as a hedge against geopolitical risks. Last but not least, the prospect of a downward drift in market interest rates also makes a case for the precious metal. Meanwhile, the monetary-policy pivot in 2024 and the ongoing rate-cutting cycle have consequences also for real estate assets. The medicine has already exerted an impact on daily tradable, liquid vehicles like REITs (real estate investment trusts) and Swiss real estate funds, for which further upside potential appears constrained in the wake of their substantial gains in recent quarters. The picture looks different for illiquid real estate vehicles, which look set to finish bottoming out soon. That market has found an equilibrium at a lower level and has potential to rally.

Liquid markets have already priced in the interest-rate turnaround | Illiquid real estate assets are more attractive now

SXI Real Estate Funds Index

Sources: Bloomberg, Kaiser Partner Privatbank

Just like illiquid real estate assets, other private-market asset categories also were unable to keep pace with publicly traded stocks and gold in 2024. But that doesn’t diminish their value for a diversified investment portfolio. On the contrary, their comparatively lower volatility on the upside and especially on the downside is a desired feature of the private markets asset class. The chances are good that an allocation to private markets will pay off in 2025 in terms of both absolute and relative performance. Private equity and infrastructure assets particularly look set to get a boost in 2025. The private-equity carousel has already started to spin faster lately and looks destined to pick up even more speed on the back of an increase in M&A activity under the Trump 2.0 presidency and due to a looming revival of IPOs, which will also be beneficial to investment performance. Meanwhile, thanks to the AI boom, the infrastructure segment is benefiting from enormous demand for data centers and from their voracious hunger for energy. Finally, private credit is the asset category where investors’ sights will have to be lowered a bit in the near future. A drop in benchmark interest rates and a tightening of credit spreads due to tougher competition from the syndicated loans market lead to lower expected returns here as a result. However, they are still more attractive than the returns that investors can expect to earn in the liquid bond market.