Markets Update December 2024 - Capital markets 2025: Stronger fluctuations, but positive return expectations for the equity markets

Investors can look back on a very successful year these days. Buoyed by the robust US stock markets, numerous leading indices achieved double-digit returns. The driving forces behind this development were favorable fundamental conditions that led to a typical “Goldilocks” scenario: inflation remained under control and the US economy managed a “soft landing” that did not give rise to fears of inflation or recession. This stable constellation enabled the Fed to initiate a cycle of interest rate cuts, which further improved the investment environment. Corporate profits also played their part: The technology sector and AI-related companies in particular achieved above-average profit growth. However, it should not be forgotten that a significant proportion of the price gains - around two thirds in the case of US equities - is primarily attributable to valuation increases. To a certain extent, these increases in value are an “advance” that is likely to be “repaid” in later years through lower returns.

Exciting prospects for the new year

The stock markets in Europe and Asia could gain relative strength compared to the US stock markets in 2025. US equities have reached record valuation levels. The gap, particularly compared to trading centers in Europe, has reached extreme proportions that can only be partially justified by the higher profitability of US companies. In addition, monetary policy could give US stock markets a leg up in 2025. The Trump agenda increases the risk of a new wave of inflation. This could in turn prompt the Fed to tighten the monetary reins. This scenario would be poison for the extremely interest rate-sensitive US stock markets. On the other hand, the European markets could recover in the new year, as the inflation and growth outlook strongly suggests that the ECB will continue its rate-cutting cycle in 2025. China could also surprise positively in the new year. In view of the ongoing economic crisis, the Chinese leadership is determined to use all monetary and fiscal policy instruments to revive the economy in the long term.

The geopolitical situation remains a major source of uncertainty. In the new multipolar world order, no single superpower is in a position to set the direction solely through its economic or military superiority. Against this backdrop, Donald Trump is a major unknown. It remains to be seen whether he will contain global conflicts or exacerbate them through erratic decisions. These factors suggest that 2025 could be a year of promising opportunities, but also challenges for the capital markets.