Strategies for stock markets in 2025
The onset of each new year invariably presents challenges for investors, prompting a critical reassessment of their strategies and portfolios. However, the year 2025 presents particular challenges. With Donald Trump poised to reclaim the White House on January 20, investors are bracing for a series of policy shifts. Included are stricter immigration controls, reduced regulatory burdens on businesses, a continuation of the 2017 tax cuts, and increased tariffs.
The Federal Reserve is anticipated to persist in reducing short-term rates, while stock valuations appear increasingly inflated, particularly within the rapidly expanding sectors such as technology and communication services. In summary, investors have a considerable amount to monitor. To provide insight and direction for investors, we consulted 10 financial experts to share their perspectives on market trends and economic conditions, along with their advice for investors.
1. In Addition to the Noteworthy Seven
David Kostin, chief U.S. equity strategist at Goldman Sachs, anticipates a widening of market gainers in 2025 following a prolonged period of supremacy by the Magnificent Seven stocks—Google parent Alphabet, Amazon.com, Apple, Facebook parent Meta Platforms, Microsoft, Nvidia, and Tesla. The performance of the Magnificent Seven in 2024 outstripped that of the broader S&P 500 by 34 percentage points; however, Kostin anticipates a significantly reduced gap of just 7 points in 2025. The disparity in earnings growth between the Magnificent Seven and the broader market is “compressing dramatically,” he asserts.
Kostin suggests that while investors ought to maintain a portion of their portfolios in the Magnificent Seven stocks, it is prudent for them to also explore other segments of the stock market, particularly midcaps. Midcap stocks, characterized by market capitalizations between $5 billion and $20 billion, are poised to gain from additional rate cuts, as approximately 25% of their debt is tied to floating rates, according to his analysis.
He further recommends investing in stocks that are potential candidates for mergers and acquisitions, as Goldman anticipates an increase in dealmaking activity in 2025. He identifies several companies that may stand to gain, including small-cap firms such as Agios Pharmaceuticals, CG Oncology, and Kosmos Energy. Kostin notes that artificial intelligence is transitioning from its foundational infrastructure development, which has favored semiconductor manufacturers, data-center real-estate investment trusts, and security-software enterprises, to a stage where “companies whose revenues will be bolstered by the broad adoption of AI” will emerge.
Kostin identifies Apple, Adobe, Salesforce, ServiceNow, and Snowflake as key players in that phase. These firms are included in a selection of 30 stocks curated by Goldman Sachs, anticipated to gain from the deepening integration of AI technologies.
2. Focus on large-cap growth equities
Ankur Crawford, executive vice president and portfolio manager at Alger, remains firmly committed to large-cap growth stocks, especially those associated with AI advancements. She argues that the groundbreaking advancements and profound impact of these companies will remain unaffected by variables like policy shifts introduced by the Trump administration. “Investors seek access to the most pioneering firms that are propelling this AI paradigm, which represents a significant generational transformation for our society,” Crawford states.
What is the perspective on the valuation of these stocks? She remains unconvinced, contending that exposure to AI-related stocks “will be crucial for outperformance over the next five years.” Crawford observes that Meta Platforms recently traded at approximately a 10% premium to the S&P 500 based on forward earnings, a valuation she considers reasonable in light of the company’s robust growth prospects. This figure is marginally higher than the stock’s average premium of 7% observed over the preceding five years.
3. Anticipate modest returns from the stock market
Saira Malik, chief investment officer and head of equities and fixed income at Nuveen, expresses a more cautious outlook on stock returns following two consecutive years of gains exceeding 20% for the S&P 500. Her target for the S&P 500 by the end of 2025 is set at 6400, representing an approximate 9% increase from the index’s trading position in late December. “Amid the prevailing optimism surrounding tax reductions and deregulation, investors should critically consider: To what extent are these factors already reflected in current valuations?” Malik asserts.
Nonetheless, Malik identifies certain prospects within the realms of stocks and bonds. One area of interest for the former is real estate, which she and her colleagues believe is poised for improvement in 2025 following a relatively lackluster year. Individual investors often seek exposure to the sector via REITs, which generate substantial income. Malik finds small-cap stocks appealing, in part due to their relative affordability compared to larger-cap counterparts, as well as the anticipated benefits from prolonged tax cuts and the potential rollback of regulations under a second Trump administration.
Small-cap stocks Malik highlights the inclusion of Addus HomeCare, a provider of home-care and medical staffing services; Lumentum Holdings, a manufacturer of laser technology; and Enpro, a producer of industrial products catering to semiconductor manufacturers, aerospace firms, life sciences companies, and more. Malik expresses a preference for securities characterized by higher quality, specifically high-yield bonds, mortgage-backed securities, and senior loans. These options appear increasingly appealing in light of the expectation that interest rates will remain elevated for an extended period. The loans undergo regular resets in accordance with the current interest rate environment.
4. Caution advised regarding large-cap stocks
David Kelly, chief global strategist at J.P. Morgan Asset Management, cautions that investors ought to be cautious regarding elevated stock valuations, particularly within the realm of large-cap equities. “The S&P 500 carries a degree of risk, notably concentrated within large-cap growth stocks,” he states. “The issue at hand is that many investors currently find themselves excessively concentrated in that particular sector.”
A hypothetical investor who allocated 60% to the S&P 500 and 40% to the Bloomberg U.S. Aggregate Bond Index at the beginning of 2019, without any rebalancing, would now find their asset distribution at approximately 79% in equities and 21% in fixed income, according to Kelly. In addition to an overweight position in large-cap growth stocks, this scenario results in many investors maintaining an underweight stance in bonds, which are instrumental in mitigating a portfolio’s volatility. Some investors may not fully grasp the extent of the risks they are assuming and ought to contemplate rebalancing their portfolios. Kelly is monitoring inflation closely, apprehensive about a potential resurgence attributed to the policies of the incoming President Trump. “A substantial tightening of immigration policies, coupled with significant increases in tariffs in 2025, is likely to exacerbate inflationary pressures,” he asserts.
5. Brace for turbulent conditions
As 2025 commences, Chris Senyek, chief investment strategist at Wolfe Research, identifies significant policy uncertainty on the horizon. “The market has adopted an overly optimistic perspective on Trumpenomics, yet the journey ahead is likely to be fraught with challenges,” he asserts. Consequently, he advocates for initiating 2025 with investments in the Magnificent Seven stocks, alongside communication services and other large-cap technology equities, which are well-positioned to endure various economic challenges due to their robust and consistent earnings growth.
“The underlying technology fundamentals are robust, particularly with the surge in AI investment and related activities,” he asserts. “A policy jolt is unnecessary for maintaining robust fundamentals.” In the final analysis, Senyek anticipates that the stock market will traverse three distinct phases in 2025: The initial phase, which commenced following the presidential election in November, witnessed a stock market rally fueled by optimism regarding prospective policy shifts under the new Trump administration. The forthcoming phase, set to commence in early 2025, will focus on the implementation stage, during which we can expect to receive further insights into particular policies, including tariffs, tax reductions, and deregulation measures.
Ultimately, the market must assimilate these policies, paving the way for the third phase of market activity later in the year. Up to this final stage, Senyek advises investors to adhere to established strategies and bide their time for a more definitive understanding of President Trump’s policies and their implications for various sectors and industries.
6. The moment for value has arrived
John Rogers, the founder of Ariel Investments and a seasoned portfolio manager, approaches 2025 with considerable conviction, despite the fact that value stocks have largely been overlooked for the better part of the last twenty years. “Large-cap growth stocks have become remarkably overpriced in comparison to small-cap value,” states Rogers. “The strategy I propose is to invest in smaller firms and seek out undervalued entities within the small-cap sector.”
The Russell 1000 Growth Index achiev ed a return of 35% in 2024, significantly outpacing the 14% return of its value counterpart. Rogers anticipates that the new administration’s reduction of regulations for businesses presents a significant opportunity for certain companies. “Boardrooms and numerous individuals have postponed transactions, abandoned negotiations, or refrained from engaging in deals due to the prevailing regulatory landscape,” he states. “The most significant shift will involve a reduction in regulatory measures.”
Should those themes align as anticipated by Rogers, he posits that this development could benefit smaller-cap financial entities like Lazard and the private-equity firm Carlyle Group. “Private equity is poised to thrive in this environment,” Rogers asserts. “The current discourse reflects a noticeable uptick in the volume of deals under consideration.”
7. Preference for bonds over stocks
Mike Cudzil, a senior bond portfolio manager at Pimco, asserts that bonds are likely to present a more appealing investment option compared to stocks in 2025. A further reduction in rates by the Fed this year, as anticipated, would likely enhance the value for bondholders. There exists an inverse relationship between bond yields and prices. However, should rates increase, Cudzil suggests that there remains a buffer to achieve a positive return, as yields are sufficiently elevated to counterbalance a slight decrease in price.
He indicates a preference for several categories of bonds, notably asset-backed securities such as those linked to credit cards and auto loans, agency mortgages, triple-A-rated commercial mortgage-backed securities, and triple-A-rated collateralized loan obligations.
8. Anticipate increased fluctuations
Yung-Yu Ma, chief investment officer at BMO Wealth Management, advises that investors prepare for increased volatility in the stock market this year as the Trump administration implements its trade policies. “This is likely to prove more disruptive than currently anticipated,” Ma asserts, noting that he does not foresee trade issues derailing the U.S. economy. “We maintain a generally positive outlook on U.S. equities; however, it is prudent for investors to brace for potential market corrections,” he states.
He advises maintaining a diversified portfolio of U.S. equities, incorporating a mix of small-cap stocks alongside the large-cap technology shares that performed well in 2024. “We anticipate a broader distribution of economic and technological advantages to various firms within the economy,” he states.
9. Be vigilant regarding inflation
Jason De Sena Trennert, chairman and CEO of Strategas, observes that while the markets stand to gain from the policies of the Trump administration, particularly in terms of reduced regulation, he expresses caution regarding a potential rise in inflation. This concern stems from factors such as pent-up demand for wage increases, substantial deficit spending, and the trend towards deglobalization.
He expresses concern that mass deportations may exert upward pressure on prices. Simultaneously, Trennert identifies investment prospects, particularly in investment-grade corporate debt with maturities extending to five years, as shorter-term bonds exhibit reduced susceptibility to influences such as increased government debt resulting from further tax reductions. Regarding equities, he does not foresee a third consecutive year of returns exceeding 20%, given that market valuations are high and cannot be maintained “without the earnings growth to support it.”
“I believe the bull market will persist, albeit with a deceleration in its upward trajectory,” remarks Trennert, who indicates he has engaged in conversations regarding a potential role in the new administration. Investors ought to contemplate themes such as securities associated with artificial intelligence, the infrastructure supporting AI, including data centers, and the firms that provide the necessary energy for this technological transformation. “The typical CEO faces a greater risk of dismissal for underinvesting in artificial intelligence than for overspending in this domain,” he asserts. “To pursue such investments, substantial power resources are essential.”
10. Uncertainty surrounding interest rates
Aditya Bhave, a senior economist at BofA Global Research, posits that interest rates may remain elevated beyond the levels deemed typical in earlier economic cycles. One potential outcome is that the Federal Reserve fails to bring inflation back to its long-term target of 2%. “The prevailing high interest rate landscape is expected to persist, a consideration that investors must incorporate into their strategies,” Bhave states.
The conclusion is that elevated interest rates, coupled with additional tax reductions, may lead to an increase in government deficits and long-term bond yields. Nonetheless, he anticipates that the forthcoming administration will adopt a pro-business stance in terms of regulation and taxation, creating a conducive environment for investors at large.
