February 11, 2025 | News
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Global equities ended 2024 on a strong note, driven by the continued dominance of U.S. equities, which were propelled even higher by the reelection of President Donald Trump.
However, the year was marked by significant market volatility, sparked by numerous elections worldwide and ongoing monetary policy decisions from central banks.
As we move into 2025, our global equity team believes risks related to tariffs and policy changes have introduced more examination of the state of U.S. exceptionalism and more uncertainty regarding the global investment landscape. Read more for key insights from our global equity team.
The outlook for Europe comes with considerable variability in outcomes.
On the negative side, Europe runs the second-largest bilateral trade deficit (behind China) with the United States. Given that the current U.S. administration purports to abhor trade deficits, European exporters are firmly in the line of fire for tariff increases, likely to have a chilling effect on demand for their products.
At the same time, any tariffs will likely be preceded with inventory buildup, to the extent that importers are anticipating a disruption. In the opening quarters of 2025, U.S. demand for European goods may look stronger than purely economic fundamentals warrant.
But on a more positive front, if the current U.S. administration succeeds in establishing a permanent ceasefire between Russia and Ukraine, European companies are likely to benefit from reconstruction efforts in Ukraine. Qatar is also scheduled to bring significant liquified natural gas (LNG) export volumes online, which may help bring down energy prices closer to levels last seen prior to the 2022 Russia-Ukraine war.
Japan continues to move its corporate governance reforms forward, with the recent report of a potential Honda/Nissan tie-up as further evidence that the quiet shake-up within Japan Inc. is underway.
We believe the market overall has a reasonable valuation, but Japanese companies that already demonstrate global leadership seem to be priced more in line with their peers.
Within emerging markets (EMs), higher-than-expected U.S. interest rates and a stronger dollar may challenge EM currencies and investor sentiment in 2025.
In our view, India has one of the best economic backdrops of the major markets, with plenty of economic drivers as well as stock market support. Of particular interest to us are the domestic infrastructure build-out and related capital investment, continued strong consumption growth and shifts within that, and an undervalued financial sector.
After years of stellar performance, Indian corporate valuations remain elevated, but we believe they are likely sustainable given continued EM investor flows out of China and underpenetrated domestic equity participation.
In our view, India has one of the best economic backdrops of the major markets, with plenty of economic drivers as well as stock market support.
China remains the biggest enigma. Stimulus and relatively low valuations could offer near-term opportunities, yet the long-term growth prospects remain tempered by structural economic challenges and policy uncertainties.
President Xi Jinping appears committed to maintaining economic stability, and we anticipate his series of incremental positive measures will support China’s 5% gross domestic product (GDP) target for 2024 and the growth trajectory for 2025. With valuations still relatively low and company fundamentals improving in certain areas, stimulus efforts could fuel short-term boosts to the equity market as Beijing focuses on stabilizing key economic sectors.
But the sustainability of such rallies remains uncertain given the persistent structural challenges China faces. The country’s long-term outlook is still clouded by high debt levels, demographic pressures, and slowing growth. We remain underweight to neutral across most of our EM, international, and global strategies.
The United States ended 2024 in a position of strength, but today, the outlook for U.S. growth and inflation is less clear because of proposed policy changes to trade, tariffs, and immigration by the new administration.
Given the strong performance of U.S. equity markets in recent years, the United States now encompasses nearly two-thirds of the MSCI All Country World Index (ACWI)[1], up from 56% in 2020. Along with the country's economic growth advantage, this has fueled a wave of commentary on U.S. exceptionalism.
While long a construct broadly applied to the unique nature of our government and societal structures, U.S. exceptionalism has been invoked more recently as an explanation for the United States’ superior innovation, economic growth, and investment returns. This has seemingly been accentuated since the pandemic.
The questions for allocators and investors alike are: why did this develop and how likely is this to persist? What could slow or even reverse this trend? To what degree is it structural and persistent or merely cyclical in nature? Are we likely at or near peak U.S. exceptionalism?
Over the course of 2025, we will attempt to answer these questions. Below is an outline of our current thinking.
Key Drivers of U.S. Exceptionalism
From a high level, the concept of exceptionalism as it is currently popularly interpreted centers on the unique combination of economic dynamism, technological innovation, and strong institutions. This has given the United States a distinct advantage over other major economies and markets.
Many of these characteristics have been in place for several decades, so what is behind the pronounced reaction in the markets now? We believe that since the pandemic, the economic stimulus response and large domestic consumption market have given the United States an economic edge.
At the same time, developments in advanced computing and the rise of tech-platform companies have displayed the United States’ innovation advantage, manifesting in superior corporate performance.
We believe that since the pandemic, the economic stimulus response and large domestic consumption market have given the United States an economic edge.
A Port in a Storm
All of this is occurring at a time when the market is trying to assess the new “normal” global growth rate in a post-pandemic world, and many markets—particularly Europe and China—are going through their own unique growth challenges. The United States, however, has been the clearest port in the proverbial storm.
But it is unclear if the economic differential will persist, and there are several reasons the United States could suffer from trying to achieve its own goal of exceptionalism, with some current or proposed economic, political, or trade policies at risk of backfiring.
The current gaps between the United States and the rest of the world in terms of economic growth and corporate profit margins (and stock valuations) are all at or near the last several years’ highs. Therefore, it may be fair to assume that the growth differential is at or near a cyclical peak.
Challenges to U.S. Dominance
Of greater interest to us are the potential challenges to the United States’ structural underpinnings. The driver attracting the most attention is perhaps the U.S. technological advantage and the belief that it is entrenched and even widening. This could indeed be the case, but progress is not always clearly determined, and it’s certainly not linear.
This advantage is also expressed in a relatively narrow group of U.S. tech corporations that are deemed to be the current and future winners. However, we believe China’s threat to tech superiority is very real and not to be dismissed lightly.
Assuming the United States enjoys a durable advantage, there will likely need to be an assessment of the valuation premium the market is willing to put on that advantage. While this is primarily related to technology and tech-enabled companies, it has created a bit of a halo effect for the broader U.S. market. Multiples, which are a function of interest rates, growth expectations, and animal spirits, have all been (more or less) favorable for the last few years, but that could shift in 2025.
We believe China’s threat to tech superiority is very real and not to be dismissed lightly.
We believe the key near-term market risk is a combination of U.S. policy uncertainty and market concentration, making shares of highly valued companies vulnerable. But for now, we believe there are too many positive structural attributes in place to deny the U.S. advantage and suggest that the balance of power shifts back to long-term averages.
However, many of these attributes could be subject to change after decades of development. Cyclical winds could also easily shift, and even modestly slower-than-expected growth could extract a toll on valuations.
We will be monitoring these issues and will report back in more detail throughout this year, as these are critical considerations for asset allocators and global investors alike.
[1]The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DMs) and 24 EM countries. With 2,647 constituents, the index covers approximately 85% of the global investable equity opportunity set, as of December 31, 2024.
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