Published December 27, 2024
Last week we offered Schwab’s 2025 outlook. This week we pursue a bit of a different input. The outlook below is an excerpt from JP Morgan’s Private Banking unit. This type of outlook is more focused on broad economic and industry trends. We hope you find it interesting. Here are the major forces they see:
EASING GLOBAL POLICY
We believe 2025 will be the year of the global easing cycle, which underpins our first five ideas. Falling policy rates will support trend-like economic growth in the United States and the Eurozone, but not boost demand so much that it reignites inflation. In China, policymakers seem set on ensuring that growth stabilizes, especially in response to the increased likelihood of higher U.S. tariff rates.
Global central banks are cutting interest rates
Is now the time for emerging markets (EM)?
We expect developed market (DM) equities to outperform their EM counterparts in 2025, as they have for eight of the past 10 years. Amid global central bank easing, some investors will be tempted to increase their exposures to emerging markets. In past rate-cutting cycles, falling rates have supported emerging market (EM) assets through higher growth, increased capital flows and weaker currencies that boost exports. But we take a more cautious view. EM economies face a host of challenges. Most importantly, China confronts a crisis of consumer confidence (only slightly eased by the government’s recently announced stimulus package). Deflating the country’s property bubble has proven very painful for households and businesses. A stark sign of wariness: Chinese retail sales are 16% below their pre pandemic trend. China also faces the prospect of a renewed trade war with the United States.
U.S. profit margins appear stable at all-time highs. This decade, S&P 500 companies have returned nearly 75% of annual earnings to shareholders through dividends and net buybacks. In the 2000s that share was only 50%. While index concentration in big tech firms remains a concern (the top 10 companies account for 36% of S&P 500 market capitalization, the highest on record), every sector in the S&P 500 is expected to deliver positive earnings growth in 2025. This hasn’t happened since 2018.
A housing shortage continues
Lower mortgage rates could nudge housing sales higher, but they won’t make homeownership affordable for enough new buyers. Demand for housing far exceeds available supply. We estimate that the shortage of new homes relative to trend household demand is between 2 million and 2.5 million units. Existing home sales—currently running 25% below the 2017–2019 average pace—won’t surge anytime soon. Moreover, increasing damages from more frequent and extreme weather, combined with inadequate and unaffordable flood and fire insurance, are becoming a growing concern for homebuyers.
Productivity gains could accelerate with AI
Perhaps the greatest potential boon for global productivity over the coming decade will come from AI, where U.S. companies now enjoy a commanding lead in research and investment. Private investment in AI in the United States totaled nearly USD 70 billion in 2023. By contrast, Germany, France and Sweden each invested less than USD 2 billion.6 If AI-driven productivity gains are sustained, it could propel GDP growth without stoking inflation (and helpfully offset pressure from aging populations). This could support equity returns by boosting revenue and margins. Politically, too, increased productivity could make deficits more manageable, as higher economic growth increases tax income.
Will IPOs come off the bottom of the cycle?
Falling interest rates and a less onerous regulatory environment could help sustain a nascent revival in dealmaking, which had been essentially frozen since 2021. Rate hikes, recession risks and geopolitical tensions left management teams understandably cautious despite strong corporate earnings. Merger and acquisition activity is at its lowest level since 2013. But dealmakers now feel more hopeful. Policy rates are heading lower, and the regulatory backdrop will likely be more friendly. As a backlog of deals stands ready to be cleared, increased private lending should help jumpstart transactions.
Capital investment expansion
Businesses and governments are primed to spend: 2025 will be the year of capital investment. Margins are elevated, profits and C-suite confidence are on the rise, and policymakers are focused on supporting growth. Three global trends require enormous investment: AI, power and energy, and security.
Yes, U.S. big tech companies have opened the spigot for AI spending, but these are still early days. We think capital investment in AI could take off in the coming years, driven by rapid improvements in AI models and corporate adoption.7 Consider: AI could potentially impact all services activity in the economy. Why are we so optimistic? First, because AI models are improving at a rapid rate. In 2021, large language models (LLMs, a type of AI) could answer less than 10% of competition-level math questions accurately. That share increased to 90% in 2024. The models are also becoming less expensive: The price per token for both OpenAI’s higher-performing GPT-4o mini model and Anthropic’s Claude 3.5 Haiku model are 90%–98% less expensive than their predecessors. Second, overall corporate capital investment has been relatively muted, running at a 2.5% annual pace. By contrast, at the end of the dot com boom at the turn of the millennium, corporate capex was running at a 10% annual pace (on a five-year rolling basis). In other words, there is plenty of room for corporations across sectors to increase their AI spending as the use cases become more apparent—and persuasive.
Third, we see the potential for AI to “turn labor into software,” as Sequoia Capital has put it. As models improve their ability to reason instead of merely generating pre-trained responses, they will help create opportunities to disrupt the services sector. AI lawyers, AI software engineers and—dare we say it?—AI investment strategists could become commonplace.
Capital investment in AI will also fast-track the adoption of automation and robotics, impacting industrial and consumer sectors. U.S. industrial companies are set to allocate 25%– 30% of their capital spending to automation over the next five years, up from 15% to 20% over the last five years. This theme isn’t new. Single-purpose robots have existed for over half a century, and robotics returns for investors have been modest so far. But we think momentum is building for broader applications. As access to training data increases and the cost of hardware declines, general purpose robots may be closer to achieving the ability to reason. Globally, companies have invested over USD 4 billion in funding more than 20 “humanoid” robots. Eventually, robots (humanoid and otherwise) may become a part of our daily lives. Waymo is already providing more than 100,000 autonomous taxi rides per week.
Healthcare and defense are two other areas where robotics will become more prevalent. In October, Intuitive Surgical delivered 110 of its semi-autonomous, AI-enabled Da Vinci 5 robotic surgery systems, trouncing the 70 placements from the previous quarter. Earlier in the year, the U.S. Air Force announced a contract award with Anduril and General Atomics to develop Autonomous Collaborative Combat Aircraft. The Department of Defense expects to spend nearly USD 3 billion per year on the program by 2029.
An infrastructure boom to support thirsty AI datacenters
We think capital investment into the power sector is about to ignite for three key reasons: the reindustrialization of U.S. manufacturing, increased use of electrification in clean energy solutions and surging demand from data centers. Overall, we expect power demand growth in the United States to increase by 5x to 7x over the next 3–5 years. Data center growth is a global phenomenon. The number of U.S. data centers, accounting for 40% of the global market, is growing ~25% per year. In Q1 2024, the European, Latin American and Asia-Pacific data center markets grew inventory by 20%, 15% and 22% year-over-year, respectively. Increased data center power requires more water for cooling and chip fabrication, often in water-stressed areas. Global data centers are expected to grow their water usage by 6% annually. Large semiconductor fabrication facilities use the same amount of water as 300,000 households. We see opportunities for water infrastructure and efficiency solutions in parallel with growing power usage. More power will likely come from nuclear energy. We note the equity market’s validation of Constellation Energy’s and Microsoft’s agreement to restart the Three Mile Island nuclear power plant to supply energy to the tech giant’s data centers. This should spur further reinvestment in nuclear energy. Indeed, the surge in the Nuclear Renaissance Index (+75% year to date) is based on market speculation that small modular reactors will be successfully deployed in the next few years. While renewable energy sources will continue to grow (the International Energy Agency believes that for every $1 invested in fossil fuels, $2 are invested in clean energy), latency, transmission and storage costs mean that natural gas will remain a critical energy source.
This is a wealthier generation
Over the past year, U.S. household net worth has climbed to a record of nearly USD 160 trillion.28 European Central Bank data suggests that household wealth in the Eurozone has grown to 60 trillion euros from less than 50 trillion before the pandemic. Since 2019, millennials (born 1981–1996) have nearly doubled their net worth, which is now higher than that of Gen Xers (1965– 1980) or baby boomers (1946–1964) at similar ages.
Market Update
Semiconductor makers rallied Monday pushing the Nasdaq higher by +1% despite a continued rise in bond yields. Mag 7 stocks carried the baton Tuesday leading to another +1% Nasdaq gain; it’s third straight gain as the index seeks to rebound from the Fed-induced selloff in the prior week. Stocks traded flat in a quiet post-holiday session Thursday before selling off to close the holiday-shortened trading week. The downdraft came in the market’s best performing stocks as investors took profits after a strong start to the week. Interest rates closed at their highest levels in seven months.
Stocks recovered about half of their prior week slide leaving the S&P 500 higher +0.65%. The Nasdaq 100 (QQQ) rose +0.92%. Small cap stocks managed only a +0.19% lift as rising interest rates continued to weigh on smaller companies.
Warm wishes and until next year.