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 health care. Elevated geopolitical tensions, including the raised possibility of tariffs following the U.S. elections. A potential slowdown in global growth. Times like these demand actionable insights 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 the year 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 Al. 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
The traditional premium of small-caps has virtually disappeared.
Past performance is not a reliable indicator of future results. Actual future results may differ materially from estimates.
As of September 30, 2024.
Source: MSCI (see Additional Disclosures), Analysis by T. Rowe Price.
P/E = price to earnings.
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 also 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
Returns may underperform bonds in the medium term
Past performance is not a reliable indicator of future performance.
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 31, 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 have tried to anticipate shifts in central bank policies. Given current market pricing, this implies upside risk to yields. Where to focus: Cash/cash-equivalents remain attractive, but longer-duration fixed income is vulnerable. High yield bonds and bank loans are best positioned for yield in our view, while emerging market bonds also present favorable income prospects.
Key Takeaway
Non-investment-grade sectors and emerging market bonds offer attractive yield opportunities even if government bond yields decrease.
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Topics 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 M&A 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 will open up opportunities for private market investors in 2025.
Radical innovations revealing real prospects in health care
A wave of innovation is transforming the health care sector's prospects. And not just in GLP-1s. Technological developments are leading breakthroughs in Al-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 Al investment cycle should look for key tech firms that are innovating within growth markets.
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Tactical allocation views
Get the T. Rowe Price Multi-Asset Division’s expert views on the relative attractiveness of asset classes and subclasses over the next six to 18 months.
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Views are the opinions of the Global Market Outlook authors as of November 15, 2024.
Financial Terms: For a Glossary of financial terms, please go to: www.troweprice.com/en/us/glossary
Investment Risks:
Active investing may have higher costs than passive investing and may underperform the broad market or passive peers with similar objectives. Each persons investing situation and circumstances differ. Investors should take all considerations into account before investing.
International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. The risks of international investing are heightened for investments in emerging market and frontier market countries. Emerging and frontier market countries tend to have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed market countries.
Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences. Financial services companies may be hurt when interest rates rise sharply and may be vulnerable to rapidly rising inflation. Health sciences firms are often dependent on government funding and regulation and are vulnerable to product liability lawsuits and competition from low-cost generic product.
Because of the cyclical nature of natural resource companies, their stock prices and rates of earnings growth may follow an irregular path.
The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. Growth stocks are subject to the volatility inherent in common stock investing, and their share price may fluctuate more than that of a income-oriented stocks.
Small‑cap stocks have generally been more volatile in price than the large‑cap stocks.
Investing in private companies involves greater risk than investing in stocks of established publicly traded companies. Risks include potential loss of capital, illiquidity, less available information and difficulty in valuating private companies. They are not suitable, nor available, for all investors.
All investments involve risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market.
Fixed‑income securities are subject to credit risk, liquidity risk, call risk, and interest‑rate risk. As interest rates rise, bond prices generally fall. Investments in high‑yield bonds involve greater risk of price volatility, illiquidity, and default than higher‑rated debt securities. Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Because of the nature of private credit there may be heightened risks for investors, such as liquidity risk and credit risk to the underlying borrower and investments involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities.
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. Forward-looking statements speak only as of the date they are made, and T. Rowe Price assumes no duty to and does not undertake to update forward-looking statements.
Additional Disclosure
For more information on third-party market data please visit troweprice.com/marketdata.
Important Information
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
The views contained herein are those of the authors as of November 2024 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.
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