Think back over the last five years and just consider how much has happened in the markets—and the world, for that matter. Following a record-long 11-year bull market, the onset of Covid-19 created a rather catastrophic (albeit short-lived) crash in February 2020—soon followed by a swift recovery. In 2021, we experienced both the highs of meme stock mania and the lows of supply chain shortages and geopolitical unrest. Some might say the markets have moved quite magnificently in either direction over the last few years—thanks in part to a series of rather unpredictable historical events.
Which brings us to today, the start of a new year—and the entry point into the second half of the 2020s. Where does the stock market stand today, and what could investors expect to see in the coming year?
First, on a headline, basis stocks are expensive, as determined by their decade-high price-earnings ratio.1 But to some, a high price-earnings ratio can indicate expectations of potentially strong growth and high corporate earnings—which could mean good news for investors. But of course, past performance doesn’t guarantee future results. All investing may lose money, including principal.
No one can predict the future with certainty. But as for what investors could expect to see in the coming year, let’s dive into a few predictions.
The term "globalization" refers to the "free movement of goods, capital, people, and ideas across borders," and it’s been one of the most powerful changes to impact our world economy in the last several decades.2 Globalization has enabled free-flowing supply chains between countries all around the globe, making it possible for consumers in the U.S. to easily purchase goods, consumables, vehicles, and other physical items made in foreign countries.
Globalization peaked in 2008 (notably around the time of the global financial crisis), and has gradually been phasing out as a new type of trade takes its place—one that’s been primarily shaped by the pandemic and recent geopolitical conflict (the Ukraine war, tensions in the Middle East, and the U.S.-China trade war, to name a few examples).2
Recent trade flows suggest fracturing, or fragmentation, is taking place as countries realign their supply chains based on political allyship, concerns about fragility, and increasing costs.
A shift toward global fragmentation could likely lead to long-term economic risks, including possibly higher inflation (as countries move production of goods to higher-cost countries), potentially tighter monetary policy, and a reduction in economic growth for certain countries.2
For investors, however, further fragmentation could represent an opportunity for what some are calling an "industrial renaissance."2 The need for new manufacturing centers and warehouses has driven construction spending growth dramatically in the past year. In fact, U.S. manufacturing construction spending has nearly tripled since January 2020 from around $79.28 billion to $236.11 billion by October 2024.3
This spotlight on infrastructure and manufacturing is also supported by recent legislation, including the Inflation Reduction Act, CHIPS and Science Act, and the Infrastructure Investment and Jobs Act (IIJA). While shifting more manufacturing to the U.S. could be met with certain challenges—strict regulatory requirements, labor, and energy needs—we predict domestic manufacturing could continue to present sustainable growth opportunities for investors in 2025 (and potentially beyond).
In 2024, some generative AI companies became standouts in the tech world because they were among the world’s largest producers of graphics processing units, or GPUs.4 While originally used to enhance visuals and graphic load times on computers and smartphones, these computer chips and semiconductors are advanced enough to process the immense amount of data necessary to train AI programs.
When ChatGPT and other AI programs emerged, those generative AI companies were already well-positioned to provide the necessary technology to power them—meaning demand skyrocketed.
In 2025, it seems likely to us we could see the second-order effects from 2024’s generative AI boom across a few notable industries including:
Generative AI requires massive amounts of energy. Unless further action is taken to address the large energy draw required to power AI servers, we could see serious strains on the power grid system, increased carbon emissions, and other negative climate impacts.
It’s estimated that data centers will require between 11-12% of total U.S. power demand by 2030, roughly triple today’s 3-4%. In terms of cost, an estimated 50 gigawatts of additional data center capacity may be required to meet that growing demand—requiring an estimated investment of more than $500 billion in data center infrastructure.5
As AI continues to evolve, investors may want to pay close attention to how regulators, legislators, and large corporations address the increasing need for energy and infrastructure.
Not only do cybersecurity breaches lead to serious data privacy concerns, but they are becoming increasingly costly as well.
In 2024, the global average cost of a data breach reached a record-breaking $4.88 million, which represented a 10% increase over 2023.6
Just as AI has been adopted in ways to improve our everyday lives, cybercriminals have found ways to leverage it as well. In some cases, AI makes it possible for scammers to target individuals in highly sophisticated phishing schemes to steal corporate credentials. They may impersonate loved ones, create fake audio or video, and otherwise deceive unsuspecting individuals into giving up their personal information or providing access to financial accounts.
As cyber threats continue to grow alongside AI, we think more emphasis may be placed on increasing cybersecurity initiatives in 2025—both at the federal level and among large corporations.
Generative AI is making a difference in various surprising industries, including the world of biotechnology and biopharma. The 2024 Nobel Prize in Chemistry, for example, was awarded to three scientists who successfully developed an AI model that could predict proteins’ complex structures—a problem scientists have been attempting to solve for decades.7
Having the ability to accurately model the shape of the proteins is essential to designing high-efficacy treatments with limited side effects—though eventually, even more benefits of this technological innovation will likely surface.
Similarly, a recently developed AI system is being used to help doctors improve the success rates of in vitro fertilization (IVF). If it passes clinical trials, it could be used in clinics across the country to make the IVF process more efficient for hopeful parents.8
Between 2022 and 2023, the Federal Reserve raised interest rates 11 times in an effort to curb historically high inflation.9 The Federal Fund Rate remained steady between July 2023 and September 2024, but it has begun to drop.10
While we aren’t economists and won’t be focusing on the impact rates have on the economy here, we think there is some known correlation between persistently high interest rates and equity valuations—and that is what may be particularly relevant for investors like you.
While the recession fears that plagued much of 2022 and 2023 have faded, many professionals predict we may not be headed to a pre-pandemic economic state—but rather a new era defined by the challenges and growth spurred on by the post-pandemic recovery.
Interest rates appear to remain relatively high—as compared to what we saw prior to 2022. When interest rates are high, the cost of debt (and often, the cost of doing business) increases. Higher interest rates (especially ones as persistent as what we’ve seen in recent years) can lead businesses to scale back investment—or at least, delay it. It can also impact hiring and the labor market.
When corporations are financially squeezed—either by high interest rates, high inflation, or both—their valuations may be impacted. It’s hard to predict what a continued high-rate environment will bring in 2025, but as an investor, you may want to watch what large corporations are doing—particularly those whose growth plans require big spending.
While we’re thinking ahead to 2025, we thought we’d share a few lower probability predictions our team has batted about recently.
GLP-1s: Take the recent rise in GLP-1s, for example. Around one in eight adults has used the medication in the past, and it’s likely to continue gaining popularity.11 In fact, the market is predicted to exceed $200 billion by 2031.12 With more adults expected to reduce their BMI in 2025 and beyond, an increased need for wardrobe refreshes may be something more apparel companies capitalize on in the coming years.
Energy prices: Should we see the wars in Russia and the Middle East halted, it’s possible we’ll see drops in energy prices, even as the global economy slows and demand drops. Will gas fall back below $2 a gallon? Will oil drop to $50 a barrel? We’ll see, but with less conflict in important energy producing regions, it may become a possibility.
401(k)s: For those contributing to an employer-sponsored retirement account, like a 401(k), we also believe that more plan providers may try to incorporate private equity and alternative investments into their offerings. In a recent survey, 36% of respondents expressed interest in gaining access to these assets within their 401(k) plan—even indicating that they would increase their contributions as a result.13
As you prepare yourself and your portfolio for the year ahead, keep in mind that it’s important to maintain a long-term focus—both in terms of market performance and your own personal goals. Just as the market has done in years before, we’re likely going to watch equity valuations go up and down as global events unfold. Remember that short-term volatility doesn’t have to define your portfolio’s long-term performance, if you don’t let it. Avoid making impulsive or short-sighted decisions, and instead maintain a disciplined, forward-focused mindset.