Market outlook -December 2024

• “Our base scenario for 2025 is that we expect it to become another good year for investors,” Vincenzo Vedda, DWS Chief Investment Officer, states. Waning inflation, normalizing growth and expected further rate cuts are establishing a positive background.   
• The investment strategist expects the economic outlook and robust profit growth to prevent equities from turning negative in the long run – this is, at least, his base scenarios. However, the already familiar risk factors are still around: US valuations are historically high, and markets are still driven by a handful of US tech companies with extremely high market capitalizations. Such a concentration is not without risks. 
• Moreover, global trade could be hampered by measures taken by president-elect Donald Trump – keyword: tariffs, with potentially negative implications for markets. With a view to equity investment regions, Vedda does not have explicit preferences. He relies on a broadly diversified global equity portfolio. With a view to sectors, he regards the software segment within the tech sector to be particularly promising, followed by Asian semi-conductor manufacturers. Among defensive sectors, health appears to be most attractive although the future US government might trigger some volatility here.   
• Vedda is rather cautious regarding the long-term outlook for equity markets: “We expect the MSCI All Countries World to return around five percent annually in the ten years to come. In the past two decades, realized returns were almost twice as high – amounting to approximately ten percent per year. However, until January 20th, 2025, the day of Trump’s inauguration as US president, the US equity market could continue to ride on the wave of euphoria, unleashed by Trump’s victory. Afterwards, this adage might come true: “Buy the rumor, sell the fact.”  

Topics expected to drive capital markets in 2025

Central banks: European Central Bank expected to make more rate cutting steps than the Fed

• “The Federal Reserve should continue on its rate-cutting path, however not at the pace recently expected by the markets. Over a 12-month horizon, we forecast three rate cuts,” Johannes Müller, Chief Economist, states.
• He expects the ECB to cut rates in four steps of 25 basis points each by December 2025 so that rates would return to the level of 2.0 percent (from currently 3.25 percent).

Inflation: two-percent target could be reached in the Eurozone by the end of 2025

• “The last mile on the path towards a target inflation rate of two percent will be the most difficult one,” Müller adds. For the United States, he forecasts further falling price rises and an inflation rate of 2.4 percent (after 2.9 percent in 2024).
• Inflation rates are also expected to fall in the Eurozone and might already reach their two-percent target in December 2025. For 2024, the inflation rate should still amount to 2.3 percent according to Müller.

Economy: growth outlook for the USA substantially better than for the Eurozone

• The US economy has proven to be more resilient than expected. Müller sees the main reasons in the expansive fiscal policy, the spending of high savings accumulated during the pandemic and the robust labor market. Growth should amount to 2.7 percent in 2024 and slightly weaken to 2.0 percent in 2025.
• For the Eurozone, Müller expects a normalization of the economic cycle, particularly since the production cycle should have slumped already. Growth might, however, be rather meagre in 2025: 0.9% (2024: 0.7%).

Asian equities: waiting for an impetus from domestic consumers

• “Generally, our outlook for APAC equities is neutral,” Ivy Ng, DWS Chief Investment Officer APAC, states. The performance of stock markets in China, India and Japan in the year to come should primarily depend on consumer sentiment in the countries concerned.
•  “In China, we still wait to see the implications of fiscal state measures on corporate results,” Ng continues. US tariffs could have fewer effects than many expect, since the share of exports to the United States has fallen from 20 percent in 2017 to 13 percent in 2023. The performance of the Indian stock market, in its turn, will primarily depend on higher investments by corporations and the justification of high valuations by an increase in profitability.   
• “The Japanese stock market could benefit from a cyclical recovery of the world economy which should translate into improved corporate profits,” Ng adds. It is supported by a strong rise in stock buybacks and rising real wages, which are boosting consumption.

 

China has reduced its dependence from the USA

How China’s exports have developed since 2017

^{Source: DWS Investment GmbH; as of end of November 2024}

• “2025 should become a good year for bonds. We expect positive returns for all essential asset classes. This holds true for both, sovereign bonds and corporate bonds,” Thomas Höfer, DWS Head of Investment Grade Credit EMEA, says. Höfer favors investment-grade euro corporate bonds; total returns of 4.7 percent are well within reach here.  
• High-yield bonds have a higher probability of widening yield spreads, resulting in price losses. Higher yields would, however, compensate for these risks. The yield outlook of sovereign bonds is almost as good as for corporate bonds. Poor growth and inflation rates approaching the two-percent target of central banks nourish expectations of further rate cuts in 2025.  
• Over a 12-month horizon, 10-year Treasuries could yield total returns of 4.6 percent. Return expectations for 10-year Bunds are only slightly lower at 4.3 percent. A sharp increase of public debt could entail risks, according to Höfer, since excess supply of bonds could result in rising yields and thus in falling prices.  
• Höfer’s conclusion: “Fixed income assets offer attractive returns and a positive yield outlook and should be an interesting alternative to stocks particularly from the viewpoint of risk and reward. "The high appetite for this asset class should lead to further capital inflows and support valuations.  
• Asian bonds should offer even slightly higher return opportunities, however accompanied by higher risks. Ivy Ng, DWS Chief Investment Officer APAC, sees particular opportunities in broadly diversified assets, by reducing the traditionally high weight of Chinese bonds and increasing investment in bonds from countries such as Japan, India and Indonesia.

 

Return opportunities of sovereign and corporate bonds

Expected total returns in the USA and Europe by December 2025

^{Source: DWS Investment GmbH; as of end of November 2024}

• "After markets have sailed into stormy waters in   the wake of rising interest rates, the situation on the real estate market has improved substantially,” Ulrich von Creytz, DWS Chief   Investment Officer Real Estate Europe, states. “After two hard years on the European real   estate market, we are now facing a turnaround,” von Creytz continues.
• Recently, we have observed a recovery of core real estate, i.e high-quality property in excellent locations. This is particularly true for the segments of residential properties, logistics and high-quality office spaces. The market is, however, divided: demand of high-quality property has already started to increase again since the second quarter of 2024. In the case of lower-quality property we are still waiting for the turnaround.  
• With a view to property loans, von Creytz forecasts a growing financing gap since banks have started to trim their loan portfolios due to higher loan loss provisions and more stringent regulations. This creates more opportunities and attractive return expectations for alternative lenders.  
• Another attractive sector are infrastructure investments in Europe, since capital to the tune of 14 trillion euro should be needed by the year of 2040.  
• This offers particularly attractive investment opportunities for private infrastructure capital investments, since governments will not be able to raise his huge amount of capital on their own. Compared with the United States and Australasia, Europe appears to be interesting also from the viewpoint of valuations.

 

Infrastructure investments: valuation advantage for Europe

Ratio of Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation and Amortization

^{Source: DWS Investment GmbH; as of end of November 2024}

Equities

Equities USA

Trump politics could continue to boost US stocks short-term

The US market has had a good run in 2024, driven by the big tech papers. Donald Trump’s main themes – tax cuts, deregulation, re-shoring – could continue to boost prices in 2025. S&P 500 target:  6,500 points (12/2025).

Equities Germany

Some upside potential left for the Dax

Despite the good performance in 2024, we see some further upward potential for the Dax. After general elections in February 2025, a pro-business stance might prevail, and private consumption could give further support. Dax target: 20,500 points (12/2025).

 

Equities Europe

Moderate upward potential

—An expected profit growth in the mid one-digit range and good dividend yields establish a good basis for a moderate positive development. —Stoxx 600 target:  525 points (12/2025).

 

Equities Japan

Japan: sound starting position for 2025

—The weak yen, rising real incomes and corporate governance reforms should support the market. —We would use short-term soft spots to build up positions. —MSCI Japan target: 1,770 points (12/2025).

 

Fixed Income

US government bonds (10 years)

Yield spread to short maturities should widen

—The yield curve should steepen, i.e. the spread between long and short maturities should widen and volatility rise. —Yield forecast:  4.50% (12/ 2025).

German government bonds (10 years)

Poor growth should keep returns low

—Poor growth in Germany should result in yields of short maturities falling faster than those of long maturities. —We expect yields of 2.20 percent by December 2025.

Emerging market sovereign bonds

Poor yield outlook, increased risks

Emerging Market bonds are threatened by headwinds from possibly higher US rates and a stronger dollar. Expected total returns of 3.4% fall short of those from industrial countries

 

Credit

Investment Grade

USA	Eurozone

 

High Yield

USA	Eurozone

Market expectations for US rate cuts have diminished, the growth outlook is substantially better than for the Eurozone. All this lends support to the dollar. Exchange rate forecast: 1.05 (12/25).

Since the beginning of 2024, gold has gained 22 percent. Gold purchases by central banks and the uncertainty around the future US economic policy should continue to support the gold price. Forecast: 2,800 dollars/ounce (12/2025).

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 04 December 2024 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.