8 Big Investment Trends for 2025

1. Don’t let macro forecasts influence your investment decisions

The U.S. economy has been defying gravity for two years—and counting. Economists of all stripes kept predicting a recession would eventually emerge, yet we saw neither a hard or soft landing in 2024. Not only did the wheels never touch ground, but the flight itself remained relatively smooth: economic growth was strong and inflation cooled back close to a normal 2% pace.

Has investor anxiety evaporated? No. Recession fears tend to be sticky and, while prices are generally under control, rolling waves of high inflation have left investors worried about the country’s macro health. However, longer-term investors should avoid being distracted by economic forecasts. They mean little in isolation. Active management teams are there to analyze the economic trends and find opportunities within the market uncertainty.

Cumulative revisions to consensus estimates for 2023, 2024 GDP and inflation

Source: Bloomberg, BMO GAM, as of November 11, 2024

2. Politics and investing are like wine and vinegar

A recent study leveraging millions of U.S. households showed that after the 2016 U.S. Presidential election likely Republican voters increased their equity and market beta exposures, while likely Democratic voters rebalanced into safer assets.¹ Put another way, they allowed political opinions to influence their investment decisions. How did their biases impact the performance of their portfolios? The answer should be concerning to anyone who votes with their wallet.

The authors conclude that political opinions tend to cloud investors’ judgement, leading them to misinterpret public information and exaggerate the implications of political leadership on the economic and investment outcomes. As a result, politically-sensitive investors tend to massively alter their portfolio mix based on non-investment related factors.

Market performance and the U.S. presidency S&P 500 total returns: 1928-2024

Source: Bloomberg, BMO GAM, as of October 2024

3. Policy shifts are a stock-picker’s paradise

With Republicans re-taking the White House and Congress in 2025, the potential for big legislative actions has undoubtedly increased. Investors should brace themselves for Trump 2.0—and we expect rising policy uncertainty to fuel market gyrations across bonds, currencies, commodities and equity markets. This volatility creates a stock picker’s paradise, where the manager’s skill at security selection can truly shine.

S&P 500 Dispersion Index during first two years of Trump presidency

Source: Bloomberg, BMO GAM

4. An ideal window to increase portfolio diversification

U.S. economic exceptionalism has continued to be a major theme, with the S&P 500 delivering robust cumulative returns in the past two years. Such bursts of performance are historically rare, only appearing about once per decade, and should be acted on quickly before they fade.

Investors have a brief window of opportunity to reposition their portfolios to meet the challenges of a new era. While we remain tactically bullish, strong trailing performance coupled with high equity valuation and tight credit spreads should motivate longer-term investors to increase their diversification with yield-focused alternatives.

S&P 500 2yr rolling returns: rarely this strong

Source: Bloomberg, BMO GAM, as of November 11, 2024

5. Inflation pain is still hitting hard

Recent election results across many countries show that inflation has taken its toll, with many incumbent governments struggling to win re-election. Change is in the air, and diminishing standards of living are cited by voters as the primary reason for dissatisfaction. This strikes at a paradox in the data. In reality, real wage growth is recovering and growing positively, yet emotionally, households are carrying inflation trauma that may take years to forget. We expect a slow recovery of consumer sentiment despite the fact most developed economics are still enjoying a full employment backdrop.

U.S Consumer Price Index – key items

Source: Bloomberg, BMO GAM, as of November 13, 2024

6. Fiscal debt servicing to remain an issue

The U.S. national debt currently sits at $34 trillion USD and, as we know, high debt levels do not mix well with high rates. Interest payments are now among the Treasury Department’s largest expenditures, topping $1 trillion USD annually.² Naturally, the costs of servicing this debt will be of vital importance to the incoming administration, and, specifically, to Treasury Secretary Scott Bessent, who has proposed trimming the annual deficit down to 3% from 6.4%.

A steep decline in the deficit would leave the U.S. on a much more prudent fiscal footing, and could ultimately support the case for fixed income. On the monetary side of the aisle, Chairman Jerome Powell’s term is due for renewal in 2026, which means central bank independence could resurface as a topic of concern in the new year.

U.S. federal debt interest payment: actual vs. Congressional Budget Office projections

Source: Bloomberg, BMO GAM, as of November 26, 2024

7. Cheaper fossil fuels?

Ever since the start of the Russia-Ukraine conflict, Europeans have learned a hard truth about economics: cheap energy is key to standards of living. A country needs abundant fuel sources in order to maintain civic operations and lay the foundation for growth, which is why embargos on Russian oil and gas have posed significant challenges for the continent. Policymakers across the world have taken notice, and we now expect energy to be at the core of the Trump Administration’s industrial policy. De-regulation and fiscal support appear to be high on the list, which should help keep oil prices at low levels, or perhaps even lower than they were in 2024.

Crude prices have been remarkably low when adjusted for inflation, and should remain a tailwind to the U.S. and Canada, unlike in Europe. However, the megatrends of decarbonization and energy transition will likely continue due to the increasing digitalization of the economy, which in turn requires more power generation. As an example, data centres are expected 9% of all electricity by 2030.³

Real oil prices

Source: Bloomberg, BMO GAM, as of November 15, 2024

8. Crypto mania gets an ambassador

Bitcoin and other digital assets saw phenomenal growth in 2024. The icing on the cake is President-elect Trump’s pro-crypto nominee for the Securities & Exchange Commission, who is expected to clear the way for mainstream adoption in 2025. We also witnessed a surge of new investment vehicles in the U.S., including a spate of ETFs that make the space more easily accessible.

There is even talk of creating strategic Bitcoin reserves to complement the central bank’s holdings of gold and other currencies, all of which could help drive demand for digital assets in the year ahead. While holding this asset class can help to diversify portfolios, investors should think twice about large allocations given the high degree of volatility.

Total crypto market cap (trillions, USD)

Source: Coingecko.com, BMO GAM, as of November 28, 2024

For more insights on market risks and opportunities, explore our 2025 Investment Outlook Centre.

Sources

¹ NBER, Belief Disagreement and Portfolio Choice, June 2021. Beta: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

² Visual Capitalist, U.S. Debt Interest Payments Reach $1 Trillion, April 16, 2024.

³ Bain and Company, Utilities Must Reinvent Themselves to Harness the AI-Driven Data Center Boom, Adjusted using Consumer Price Index, October 2024.