Investing During Transition
2025 Global Market Outlook
The world is transitioning at a pace and scale rarely seen before. Radical innovations in artificial intelligence (AI) and healthcare. Elevated geopolitical tensions, including the raised posibility of tariffs following the U.S. elections. A potential slowdown in global growth. Times like these demand actionable insight and the skill of active management. Here’s what to know to navigate the shifts and opportunities ahead.
Mapping the path from slowdown to recovery
There is strong potential for a slowdown in global growth in early 2025. But central banks are poised to respond with rapid rate cuts, paving the way for a fast recovery. We expect a shift from services to manufacturing—the result of a global push toward renewable energy and the rise of Al. These factors are, in part, fueling infrastructure spending.
Key Takeaway
A recovery in the second half of 2025 will likely hasten the transition to manufacturing-led growth.
U.S. exceptionalism has not run out of steam
The U.S. economy is set for another year of growth, bolstered by investments in AI. Fiscal policies and coordinated monetary easing support this outlook. Job creation will likely slow as companies have front-loaded hiring, but unemployment is expected to remain low. Improving productivity should also provide another boost to growth.
Key Takeaway
Despite a slowing jobs market, supportive monetary policy and improving productivity should keep the U.S. economy out of recession.
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Value and small-caps could power international equities
As we emerge from a period dominated by U.S. tech, international equities may offer breadth and room for growth. Diversifying into areas that have valuation support and robust fundamentals, such as value and small-cap stocks, seems prudent to consider. Japan and South Korea could also benefit from structural changes.
Key Takeaway:
We anticipate a broadening opportunity set that favors international markets, particularly value and small-cap stocks.
International small‑cap and large‑cap valuations have converged.
January 30, 2009 through October 31, 2024.
Source: MSCI (see Additional Disclosures). Analysis by T. Rowe Price.
P/E= Price-to-earnings.
Chart shows MSCI All-Country World Indexes, excluding U.S.
Rate cuts provide opportunities for U.S. small-caps and financials
Themes driving the bulk of U.S. equity returns in 2024 may unwind in 2025. Bottom line: We see a broadening opportunity set in equity markets. Small-caps should benefit from further interest rate cuts and any signs of an improving economy. Underappreciated sectors like energy, financials, and industrials could offer opportunities, signaling a stock-pickers' market.
Key Takeaway:
The key trends that dominated U.S. equities in 2024 may fade in 2025, but this will likely expand the opportunity set.
U.S. equity valuations are close to historic highs in many sectors
As of October 31, 2024.
Source: Standard & Poor’s, via FactSet (see Additional Disclosures). Analysis by T. Rowe Price.
Time period range to determine the current relative valuation percentile as of October 31, 2024, is January 1, 1990, through October 31, 2024. Valuations are calculated monthly.
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Finding income in high yield bonds, bank loans, and emerging markets
Bond yields have been on a roller-coaster ride as markets pre-empted shifts in central bank policies. Given current market pricing, this implies upside risks to yields. Where to focus: Cash/cash-equivalent yields remain attractive, but longer-duration fixed income is vulnerable. High yield bonds and bank loans are best positioned in our view, while emerging market bonds present favorable growth prospects.
Key Takeaway:
Non‑investment‑grade sectors and emerging market corporate bonds offer attractive yield opportunities even if government bond yields decrease.
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Topic in Focus
Weaker growth and lower rates set to open up private markets
Evolving economic and market conditions could expand opportunities for private market investors. Private credit will cater to complex financing needs, while potential IPOs and increased merger and acquisition activity, driven by lower interest rates, may offer liquidity avenues for private equity investors.
Key Takeaway:
A more challenging economic environment and the Fed’s rate‑cutting cycle should open up opportunities for private market investors in 2025.
Radical innovations revealing real prospects in healthcare
A wave of innovation is transforming the health care sector’s prospects. And not just in GLP-1s. Technological developments are leading breakthroughs in AI-led cancer screening and robotic surgery. Therapeutic breakthroughs could have major impacts. A return to lower rates and inventory normalization may also bring a timely boost for the sector.
Key Takeaway:
A new generation of treatments and technologies are paving the way for what could be a golden age in health care.
AI’s “easy money” era is over, but an abundance of opportunities remain
The launch of ChatGPT ignited a surge in Al stocks. While the initial rapid growth phase may be over, Al remains a powerful productivity enhancer for the global economy. What does that mean for investors? Transitioning to Al's next investment phase. Innovative "linchpin" companies—with strong fundamentals—offer the strongest growth prospects.
Key Takeaway:
Investors seeking to navigate the next phase of the AI investment cycle should look for key tech firms that are innovating within growth markets.
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This document reflects the views of the respective associates of T. Rowe Price Associates, Inc., and certain of its investment advisory affiliates. Where noted (articles "U.S. Equities" and "Private Markets"), the views expressed are those of associates of T. Rowe Price Investment Management, Inc., and Oak Hill Advisors, L.P, respectively. The views expressed in this material may differ from the views of other associates and/or T. Rowe Price group companies. T. Rowe Price Associates, Inc. (TRPA), and T. Rowe Price Investment Management, Inc. (TRPIM), have separate research platforms and make investment decisions independently. Oak Hill Advisors, L.P. (OHA), an alternative credit manager, is a T. Rowe Price company.
Views are the opinions of the Global Market Outlook authors as of November 15, 2024.
Active investing may have higher costs than passive investing and may underperform the broad market or passive peers with similar objectives.
T. Rowe Price cautions that economic estimates and forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual outcomes could differ materially from those anticipated in estimates and forward-looking statements, and future results could differ materially from any historical performance. The information presented herein is shown for illustrative, informational purposes only. Any historical data used as a basis for this analysis are based on information gathered by T. Rowe Price and from third-party sources and have not been independently verified.
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Additional Disclosures
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