Market outlook Feburary 2025

• Germany in front of Europe, with the United States following suit: this has been the rather unusual ranking of stock market performance since November 2024. The reason why the United States had to make do with third place was the setback for stocks closely linked with the trend topic of Artificial Intelligence (AI). 
• One trillion dollars of market value evaporated on the day when a new competitor from China emerged, claiming to have developed an Artificial Intelligence assistant using less data and electricity at a fraction of the cost of incumbent services.
• “This has revealed the risks of high market concentration in the United States,” DWS Chief Investment Officer Vincenzo Vedda says. However, this concentration and the vulnerability going hand in hand with it are not confined to the US market.
• The MSCI World index is currently made up of 75 percent of US stocks. Any frictions on the US market, be it in the tech sector or because tax cut expectations or publicly announced deregulations are delayed, can easily very quickly trigger off substantial price corrections.
• Vedda’s 12-month view of the US stock market and European stocks is nevertheless positive: “We have left behind the decade of low profit growth,” Vedda is convinced. Most of the potential threat by US trade tariffs has already been discounted
• Europe has experienced the biggest increase of capital flows in many years, even beating US markets in January so that the historically very high valuation discount for US equities has slightly decreased
• There is, however, one cloud on the horizon: “The economic environment in Europe might not be sufficient to maintain these dynamics,” Vedda cautions.

Topics driving capital markets

Economy: high growth gap between the United States and the Eurozone persists  

• Zero growth in the Eurozone in the fourth quarter of 2024, after 0.4 percent in the previous quarter. Once again at the bottom end of the range: Germany with a declining economic output of 0.2 percent. Economic growth in the biggest Eurozone economy is on the level of 2019, this means five years of stagnation.
• The growth gap between the Eurozone and the United States remains big. In the fourth quarter of 2024,   the US economy has grown by 2.3 percent  

Inflation: prices continue to rise  

• Higher energy prices are the main reason for Eurozone inflation rising to 2.5 percent in January (2.4 percent in December). Inflation continues to be high in the services sector – 3.9 percent.
• US consumer prices rose by 0.2 percent to 2.9 percent in Q4, whereas core inflation – which excludes energy and food – fell slightly.

Central Banks: Eurozone eases, US on the sidelines  

• The European Central Bank has cut its key interest rate for the fifth time in a row to 2.75 percent in an attempt to counter the economic slump in the Eurozone.
• The US Federal Reserve left its policy rate unchanged at its January meeting. Future rate cuts will depend on a substantial decrease of inflation or a lasting cooling-off on labor markets.

Risks: tariffs, interest rates, geopolitics  

• With Trump’s announcement of tariffs from next month onwards, hopes of a moderate course in this respect are vanishing. The months to come might prove to be rough.
• Geopolitical escalations could worsen the global outlook. If 10-year Treasury yields surpassed the threshold of five percent, stock market valuations could be hit substantially.

Equities USA

Earnings growth should be key for further price action     

High valuations and the pronounced optimism of market participants with a view to future stock market performance are an environment increasing the vulnerability of US stock exchanges to corrections. The development of corporate profits should be key for the future path of US stock markets. Tech corporations are bearing the brunt of the burden since market players expect their disproportionate growth to continue into 2025 and 2026.

Equities Germany

Some potential left, even amidst high uncertainty  

During the first days of February, markets were disrupted by the probability of US punitive tariffs on European products. Should they even exceed expectations, at least some Dax corporations would be badly hit. All in all, the outlook for German blue chips is rather good. Purchasing managers indices for the manufacturing sector appear to be stabilizing. Moreover, expectations are currently so low that even small positive surprises could provide further support.

 

Equities Europe

For the time being, a lack of economic dynamics might confine price potential  

We downgraded European stocks to neutral after the US presidential election. A muted growth outlook and US tariffs could be a burden. In the long run, we continue to see some catch-up potential versus US stocks.  European banks are currently among our favorites.

Equities Japan:  

Selectively good opportunities  

In the last few months, the Japanese stock market has benefited from a weak yen, rising real wages and corporate reforms. Just like on most markets currently, selection remains key. The sector of communications services has already had a good run and continues to be promising. We are also optimistic with a view to the health sector, expecting positive earnings revisions and good growth perspectives.

 

• “Bonds are not only yield earners but increasingly return as elements of diversification,” Christoph Schmidt, Head Investment Strategy Multi Asset, says.
   Their correlation to stocks should normalize again in an environment of falling interest rates and monetary easing, and bonds should once again provide some balance in a portfolio during periods of market stress
• Simple solutions, like in 2023 when money-market funds yielded over four percent with very low volatility, are losing ground. The returns of money-market funds are closely linked with key interest rates, which have decreased for some while and are expected to be further cut particularly in the Eurozone in 2025.
• Schmidt mainly favors longer maturities such as 10-year US Treasuries, currently yielding approximately 4.5 percent. Among corporate bonds, he prefers investment-grade bonds, while high-yield bonds are currently expensively valued, with risks similar to stocks.
• Schmidt counters the currently high risks of concentration in global and US stock indices with a clear selection within the Magnificent Seven and a broad diversification in the rest of the equity portfolio. Gold remains a strategic portfolio pillar for him.

Correlation between stocks and bonds diminishes

Correlation* of the performance of the MSCI World and US government bonds in the last 50 years

^{6-month average of rolling annual correlation, based on weekly returns. Source: DWS Investment GmbH, as of January 2025}

U.S. government bonds (10 years)

Attractive return levels

 

The 10-year US Treasury yield rise seems to have slowed down for the time being. The current yield level of 4.5 percent is rather attractive.

 

German government bonds (10 years) 

Price gains well possible by year-end

 

10-year Bund yields have been slightly decreasing of late. We expect them to be still somewhat lower by year-end – around 2.2 percent

 

Emerging Market sovereign bonds

High yield potential

 

Expected tailwinds from falling U.S. rates might fail to materialize for the time being. This could be a short-term burden. In the long run, Emerging Market bonds are, however, supported by an above-average interest-rate level.

 

Credit

Investment Grade

USA	Eurozone

 

High Yield

USA	Eurozone

Threatening US tariffs have boosted the dollar recently, but will, in our view, not be implemented on a one-to-one basis. Short-term, we expect the Euro to strengthen slightly. Long-term, a better growth outlook for the United States and the yield spread should, however, rather burden the euro.

The excellent performance of gold last year has continued unabated in the first weeks of 2025. For the first time, the price for one ounce of gold has surpassed 2,800 dollars. Over a twelve-month horizon, further price potential should be confined. A major upward movement could only be triggered by more aggressive ETF purchases by Western investors or a further escalation of geopolitical conflicts.

Legend The strategic view by December 2025 The indicators signal whether DWS expects the asset class in question to develop upwards, sideways or downwards. They indicate both the short-term and the long-term expected earnings potential for investors. Source: DWS Investment GmbH; CIO Office, as of 07 January 2025 DWS Market Outlook: The entire document can be found here.
	Positive return potential
	Potential profits but also risk of loss rather limited
	Negative return potential

Forecasts are based on assumptions, estimates, views and hypothetical models or analyses which may prove to be incorrect. Past performance is not indicative of future results.