Solita Marcelli is the chief investment officer, Americas, at UBS Global Wealth Management. Read on as we ask Marcelli about her thoughts on how the global stock market and the U.S. economy will fare in 2025 and where investors should put their money.
What's your overall outlook for stocks in 2025? We see U.S. stocks as attractive for three main reasons.
First, a strong macro environment. Steady economic growth with Federal Reserve interest rate cuts is a supportive mix for stocks. Historically, the S&P 500 averages about an 18% return in the 12 months following the first rate cut when there has been no recession.
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Second, robust earnings growth. We anticipate about 8% growth in earnings per share, on average, for S&P 500 companies next year, building on an expected 11% for 2024.
Third, spending on artificial intelligence (AI) will stay strong as we head into 2025. Considering all of this, our S&P 500 target for December 2025 is 6,600.
What's your forecast for the economy? When I think about this cycle, it's anything but ordinary. The Fed is cutting rates to ease monetary policy, but what's unique is that this is occurring at a time when gross domestic product (GDP) growth remains healthy. We expect growth to stay resilient into next year, with GDP growth of around 2% to 2.5% over the next 12 months. Some cooling might occur, but a major slowdown seems unlikely.
The economy is bolstered by a strong labor market, with no signs of widespread layoffs – at least at this point – and by rising disposable income, after inflation. This should lead to more consumer spending.
Also, Fed easing should help extend the cycle. Following the Fed's first half-point cut, we anticipate another 1.5 percentage points in cuts by the end of 2025 because of our view that inflation will remain relatively contained.
Where do you see inflation ending up? I think it'll be slightly above the Fed's target of 2%. We're heading there, maybe slowly.
Given that backdrop, where should investors put their money in 2025? U.S. stocks are attractive, especially large-cap companies. We're leaning into sectors benefitting from two main factors. One is a macroeconomic environment with low rates and resilient growth, which favors financials and stocks in the consumer discretionary sector.
The second factor is strong spending on artificial intelligence. Tech stocks are a favorite here, as well as communication services, home to some of the big AI beneficiaries. We also like utilities, which benefit from this AI data center boom. At a high level, these are the sectors that provide the biggest opportunities.
Utilities are up quite a bit already. Do you see more running room? We do. But we are not just basing our views on the AI boom. We also like a bit of defensive exposure in our portfolios because we're late in the business cycle. Utilities are our preferred defensive segment.
Do you see the market broadening out beyond the mega-cap tech names and the so-called Magnificent Seven? AI leaders will continue to perform well – I still think that AI is one of this century's biggest investment opportunities.
But beyond AI, other market leaders should emerge as well, such as the beneficiaries of government spending on infrastructure and reshoring. Some $2 trillion is earmarked for these initiatives in the coming years. We have seen a rise in announcements of new U.S. facilities, and manufacturing construction spending is at a multi-decade high as a percentage of GDP. Companies that are involved in infrastructure, energy efficiency, reshoring and cybersecurity (to protect critical infrastructure from cyberattacks) are well positioned to benefit. So, within large caps, we like tech overall, but we don't expect it to dominate to the extent it has in the past couple of years.
What about small-company stocks? We don't love them that much, to be honest. Small caps are inexpensive, and they benefit from lower rates, although many still face challenges from refinancing long-term debt at higher rates. But we see them as less appealing over the next six to 12 months. Earnings at small-cap companies could continue to lag unless we see an acceleration in GDP growth.
What's your view of international markets? The U.S. is our most preferred region. That said, we see opportunities abroad as well.
In the eurozone, it's important to be selective, as earnings growth is just recovering. There, we particularly like small and midsize companies, where valuations are at 20-year lows compared with large caps.
In Asia, we see opportunities, especially in Taiwan and South Korea, where you can tap into secular trends like AI. India is also appealing, with strong structural growth drivers and favorable demographics. Japan has long-term potential, but we're less enthusiastic over the short term because we expect profit growth to slow there.
Overall, we're neutral on emerging markets. The environment is becoming more favorable, but we're holding back until there's more clarity on China's policy of fiscal support and political uncertainty clears in the U.S. – for example, with what's going to happen with tariffs.
Geopolitical strife has been a concern for investors, and gold has run up as a result. Will that be a major theme in 2025? The Middle East conflict is certainly a concern. But I think it would impact markets only if it disrupts oil supplies and pushes prices above $100 a barrel (up from the mid-70s recently), which could affect consumers. At this point, that's not our base case.
But we're very constructive on gold. It will continue to serve as a hedge in portfolios, not just for geopolitical risk, but for clients worried about the impacts of the U.S. election, Fed independence, fiscal spending, deficits, tariffs, etc. I like gold, and I think it has more room to run. Exchange-traded fund flows are picking up. We still expect strong demand from central banks, and lower interest rates tend to support gold prices. We have a target for September 2025 of $2,900 per troy ounce.
Lastly, do you have any advice for fixed-income investors? Over the next six to 12 months, we're focusing on higher-quality assets, such as investment-grade corporates with attractive yields hovering in the upper 4% range. We also favor agency mortgage-backed bonds. We like medium-duration bonds, around the five-year mark on the yield curve. This segment typically does well when the Fed cuts rates. So, medium duration, high-quality bonds.
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