Market outlook -January 2025

• As in the years before, there has been no   way around U.S. stocks in 2024. The S&P 500 registered a handsome annual plus of 24 percent. However, the market rally was driven by a handful of tech stocks, with the so-called Magnificent Seven gaining two-thirds.  
• Another figure also illustrates the dependence of stock market performance on just a few stocks: eight stocks out of the 2,650 companies comprised by the MSCI AC World accounted for half of its annual returns of 16 percent.   
• Other stock markets pleased investors last year, too, yielding extraordinarily high returns: the Japanese Nikkei gained 21 percent in local currency – however, in dollar terms, these gains shrank to less than nine percent due to the strong devaluation of the yen.   
• Notwithstanding the lacklustre economic performance, the leading German Dax index managed to surprisingly grow by 20 percent. “The probability of a continuation of these results in 2025 is rather low,” DWS Chief Investment Officer Vincenzo Vedda states. Several signs sound a note of caution.  
• First of all, prices rapidly rising at a pace well above the normal level: since its interim low in October 2022, the MSCI has gained almost 60 percent globally and the S&P 500 almost 70 percent. Additionally, portfolio managers have reduced their cash positions to the lowest levels in ten years, and the overweight of U.S. and financial stocks has reached unprecedented heights.
• Various factors might therefore trigger corrections. One of them is the fragile geopolitical situation with a host of troublespots. Even US tech stocks, no strangers to success in the past, are supposed to face increasing difficulties in maintaining their pace of growth and justifying their high valuations. Amid all these uncertainties, Vedda is basically optimistic with a view to the stock year of 2025: “Both, the U.S. economy and labor markets are stable. Corporate profits are continuing to recover, and long-term government bond yields should have seen most of their upwards move.”    
   

Topics driving capital markets

Economy: U.S. growth should be substantially more dynamic than economic growth in the Eurozone

• The U.S. economy continues to appear robust. Deregulation, trade policies and expansive fiscal policies announced by incoming president Trump should have a positive impact on U.S. growth. 
• In the Eurozone, however, sluggish economic growth is expected to stay around for a while. But the reason why has changed: after problems on the supply side, the demand side has turned out to be the soft spot now.

Inflation: two-percent target still some way off  

• Inflation decreases in the United States. The pace of a further decline might slow down in case of a massive introduction of tariffs and harsh restrictions on immigration.
• The latest data from Germany clearly signal that the path towards reaching an inflation target of two percent is not an easy one. In December, inflation had climbed to an astonishing level of 2.6 percent. In the Eurozone, the inflation rate has also risen but not to the same degree:  to 2.4 percent in December after 2.2 percent in November.

Central Banks: European Central Bank expected to cut rates faster than the Fed

• The U.S. central bank should be more cautious with a view to rate cuts since inflationary upward risks are still around. We forecast two rate cuts in the current year.
• The European Central Bank should pursue a rather more expansionary policy to counteract the growth slump in the Eurozone. We expect four rate cuts by December 2025.

Risks: escalation of geopolitical crises

—The risks of the past year are essentially the risks of the new year. A number of geopolitical crises and a potential further escalation are among the greatest threats of our time.

—Stock markets are particularly facing two risk factors: first, lower profit growth than expected and second, a rise of 10-year Treasury yields to five percent.

Equities USA

Short-term impetus from U.S. election  

Planned deregulation could translate into rising U.S. corporate profits. Due to the impetus from U.S. elections, we upgraded the U.S. stock market versus the MSCI All Countries World to neutral short-term. Our favorite sector currently is the health sector offering, in our opinion, defensive growth at reasonable prices.

Equities Germany

Waiting for tailwinds from the industrial sector  

Still waiting for recovery – currently, there are hardly any signs for an end of the ongoing depression of the German economy. So it is quite a surprise that the leading German Dax index gained approximately 21 percent in 2024. The potential for further price increases should, however, be rather constrained in view of current valuations as long as the still important industrial sector does not get any support from the global production cycle.

 

Equities Europe

Potential in the long run but rather mixed in the short run  

As before, European equities were not able to keep up with their U.S. counterparts in 2024. Dynamics of economic performance and corporate profits continues to rather support U.S. stocks. In the long run, we continue to see catch-up potential since the valuation discount is still high and the lost decade of profit growth seems to be over.  Most promising stocks at the moment: European small- to mid-caps.

 

Emerging Markets  

Indian economy on its way among the global Top Three  

By 2030, India should have left Germany and Japan behind and join the United States and China as the world’s leading economies. Significantly lower labor costs than in other Asian countries, higher infrastructure investments, growth-enhancing policies and the inclusion of India into major stock market indices are providing a good capital-market environment.

 

• “The framework conditions for a good performance on stock and bond markets are positive for 2025,” Vera Fehling, Chief Investment Officer Western Europe, states. An expected robust global economic growth of 3.1 percent, a presumably falling inflation rate and central banks signaling further monetary-policy easing basically are creating a good environment for both asset classes. However, stocks should hardly find a way to be as successful as in the last two years. Realistic estimates currently suggest medium to high one-digit returns.
• Medium maturities are Fehling’s choice among bonds since they tend to perform well during a rate-cutting cycle. Her favorites continue to be investment-grade euro corporate bonds, which are still in high demand and offered in a wide range of diversity. Fehling is, however, somewhat more cautious with a view to poorly rated high-yield bonds. It is true that European and U.S. high-yield bonds had been extremely profitable investments in 2024, returning roughly eight percent. Meanwhile, however, spreads versus sovereign bonds have fallen to such a low level that a widening is well possible, exerting pressure on prices. 

2024: Excellent returns with high-yield bonds

Total returns on US and Euro corporate bonds in 2024

^{Source: DWS Investment GmbH, as of end of December 2024} 

U.S. government bonds (10 years)

Attractive yield level

 

10-year U.S. Treasuries have experienced a rapid yield rise. We expect yields of 4.5 percent by the end of December.

 

German government bonds (10 years) 

Slight price potential for Bunds

 

Total returns of 10-year Bunds were only slightly positive in 2024. We forecast yields to be sent slightly lower in the course of 2025, resulting in rising prices.

 

Emerging Market sovereign bonds

Promising in the long run, burdened by high U.S. rates in the short run

 

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

The euro devalued by approximately five percent versus the dollar last year. The common currency might come under further pressure this year. A substantially better forecast for the US economy could result in even higher yield spreads, further strengthening the dollar.

After an impressive rally in 2024 (plus 26 percent in dollar terms) we expect the gold price to move in a rather narrow trading range. By the end of 2025, we do, however, see some potential even from an already high level. But a continuation of last year’s rally seems rather unlikely.

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.