2025 Global Market Outlook

Fertile environment for equities, but keep watch for changing conditions

Last year, markets finally reclaimed the peak from early 2022 and managed to sustainably hold above this level – a positive sign for momentum and market sentiment. In 2025, against a more supportive macro backdrop, we see room for risk assets to extend these gains further. Nonetheless, as the year continues, and as the impact of policy decisions is felt unevenly across the globe, investors will need to remain alert to changing conditions. You can read our full report here.

As long-term investors, the release of a Global Market Outlook that opines as to the exact whereabouts of the market at the end of the year seems a moot exercise, not least because attempting to forecast where the market will be in 12 days, let alone 12 months is typically a fruitless exercise. But equally so because when it comes to managing patient capital, whether the market is higher or lower in 12 months is not likely to be of significant long-term consequence for portfolios. Rather, ensuring portfolios are constructed appropriately from the outset, with a view to navigating not only the vagaries of the business cycle but just as importantly those structural forces likely to shape the global economy and markets over the long-term should have the greatest bearing on wealth creation.

As such, this publication does not seek to predict the end point for markets in 12 months, rather it should serve as guide to some of the potential risks and opportunities in 2025. More precisely, we hope it provides an insight into those factors we currently foresee as the most likely to drive market direction in the year ahead, the way these shorter-term events intertwine with longer-term forces, and how we intend to navigate client portfolios over the period.

A fertile environment

We start 2025 with our most ‘constructive’ outlook for risk assets in several years. Given the MSCI World Index registered back-to-back gains of more than 20 per cent over 2023 and 2024, this may seem a somewhat foolish statement. That we expect global equities to register low single digit returns in 2025 may make it more so. 

But ignoring end outcomes, as 2025 commences, the conditions for markets appear the most fertile that we have seen in recent years. Central banks are lowering rates, fiscal policy remains expansive, a new US President looks likely to drive a pro-growth agenda and the contribution to global growth should be more even, with a modest pick-up to 3.3 per cent expected over 2025.

To be sure, markets still face substantial headwinds. Yields are at levels that have historically caused equities to wobble, valuations remain stretched and there are large cluster risks across some markets. Still, the current backdrop sits in stark contrast to the commencement of the previous two years where monetary policy was either ratcheting higher or held at restrictive levels, earnings growth was in decline, PMI data was troughing, markets were in the throes of quantitative tightening (QT) and investors were facing into the biggest election year in history. And these were just the known risks at the start of the year – a banking crisis, the US election circus and new global conflicts provided further consternation throughout.

Yet markets were impervious to the challenges and continued to march higher, driven by momentum and strong investor sentiment. The other supporting factor and one we expect to be a defining feature for markets over the first quarter of 2025 is liquidity.

Figure 1: Markets rose appreciably over the past two years

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Source: MSCI, Marcobond, ANZ CIO

A rising tide lifts all assets

We believe the world is moving from an extended period of disinflationary growth to one where investors will need to adjust to more upward sloping inflation and higher resting rates. This is the culmination of numerous structural forces including changing demographics, rising inequality, a fractured world order and the green transition. Moreover, the financialisation of the world is only likely to see the influence of financial markets on the real economy intensify in future as the ‘tail wags the dog’. In this environment, we believe monetary policy is more likely to be used as a means of controlling inflation through the cycle, rather than as a lever for growth. Not only does this have potential to impact long-standing asset class correlations, but it is likely to see officials look to less conventional measures as a means of extending the cycle and supporting financial markets.

The increasing importance of the US Treasury in supporting financial markets over the past two years has highlighted this. Indeed, by the end of 2024, it is estimated that net impact of Treasury funding decisions had overpowered any liquidity impact from the US Federal Reserve’s (Fed) QT efforts by roughly $200bn since late 2022.

Generally, US Treasury keeps a buffer in the Treasury General Account (TGA) (the current target is approximately US$700bn) by issuing debt at various maturities. However, when the level of Treasury debt is pushing up against the ceiling – as is currently the case – the TGA may be used to fund expenses, which inevitably end up back at banks as deposits or lendable funds, thereby increasing market liquidity.

Over the first three months of the year, unless President Trump can raise the debt ceiling (something we see as unlikely during this time), it is estimated that roughly US$400bn of surplus liquidity will be injected into the financial system, with almost US$300bn hitting in February alone.

As recent years have shown, liquidity can quickly dominate asset price movement, with fundamentals taking a back seat. This was one reason why we maintained a benchmark position to equities across portfolios for much of last year, and again is a key factor in why we position with a mild overweight to developed market equities at the start of 2025.

As the chart below shows, liquidity has a close correlation with yields. Indeed, despite a restrictive monetary environment, increased liquidity over the period had a similar impact to an expansionary policy environment, where liquidity acts to support asset prices.

While yields have already risen appreciably over the early part of the year, the significant liquidity boost in February should come at an important time for markets, follow quickly from Trump’s inauguration and provide a ballast for markets as they contend with heightened uncertainty and announcements during Trump’s first 90 days in office.

Figure 2: Treasury delivers ‘stealth’ QE

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Source: Strategas, ANZ CIO as at December 20 2024

Figure 3: Liquidity has a close correlation with yields

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Source: Fed, U.S. Treasury, New York Fed, S&P Global, Macrobond, ANZ CIO

Trump 2.0 – emblematic of a much bigger issue

Although we remain constructive toward equities, the path higher over 2025 is unlikely to be linear. Indeed, we expect significant dispersion between asset prices throughout the year. For investors, correctly navigating this volatility should provide opportunity to add significant alpha to portfolios.

One of the primary drivers of this dispersion will be the new Trump presidency. In our view, the return of Trump is significant, and not just because his policy agenda is likely to test the patience of both the Federal Reserve and markets alike. Rather, his return is emblematic of a larger issue, changing demographics (one of our four structural thematics) and rising inequality. More broadly, the parallels between the early part of the 1900s and today should not be ignored – a time when significant market dislocations and financial crises unfolded against a backdrop of wealth inequality, rising populism, unconventional policy, a loss of trust in institutions and the clash of global superpowers.

Trump’s return, and more broadly, the significant failure of incumbents to retain government globally last year should serve not only as a cautionary tale for governments, but also as a warning for investors who hope the fiscal spigots may be closed as quickly as they were opened during the pandemic.

Putting Trump aside for a moment, the world is still grappling with inflationary pressures. Indeed, whether central banks have successfully tamed inflation is a question for late 2025 or more likely 2026. As we have covered extensively in the past, second waves of inflation are not uncommon.

Figure 4: Central banks cannot declare victory yet

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Source: BLS, Macrobond, ANZ CIO

Moreover, the approach this time has been different. In prior periods, inflation has been quashed at the expense of employment. This time, a number of central banks, including the Federal Reserve, have employment mandates within their charters, alongside a need to manage the business cycle. As a result, the ‘pain’ inflicted on society has been different also. Rather than a smaller group of unemployed suffering for a shorter period, rising prices and debt servicing costs have been felt over a longer time horizon and by a greater cohort of the populace. Whether this is ‘acceptable’ economically is unlikely to be answered for several years; however, as last year’s global elections demonstrated, it is increasingly not ‘acceptable’ politically.

At a high level, Trump’s policy agenda seeks to appease the voting populace by dealing with taxation (we will give you more money), tariffs (we will make foreign products less competitive), and immigration (we will protect you from outsiders). But despite his recent shift in rhetoric toward a more fiscally responsible government, this policy agenda is likely to come at a great cost. Modelling by the Committee for Responsible Federal Budget suggests Trump’s plan could increase US debt by USD7.8trn over a decade.

Trump’s policy approach looks likely to continue the protectionist agenda from his first term and is likely to lead to reshoring, the duplication of supply chains and continued fiscal expansion – both by the US and foreign countries in response to US policy. All else being equal, we expect this to support our thesis of upward sloping inflation and higher resting rates over the longer-term.

Of course, for all the consternation surrounding Trump 2.0 it is worthwhile remembering that he pursues a strong economy and share market. Announcements on taxation, spending and a reduction in regulation should favour these goals in the near-term. While an aggressive approach to tariffs and immigration from the start of his term would run counter to these objectives.

Rather, we expect Trump to adopt a more nuanced approach to America-first, using threats as a bargaining chip to help meet other policy objectives such as immigration, while seeking to implement tariffs on countries with large trade surpluses with the US. We expect decisions surrounding China to be more structural in nature as the approach has bipartisan support, and is part of the fight for global hegemony, but a watered-down approach to trade policy seems more likely and less problematic for global as well as US growth.

As a result, over the second half of 2025, and more likely into 2026, we see scope for yields to lift again as central banks grapple with reinflation risks from Trump policy and global growth faces potential headwinds. While this could present problems for equities, in the near-term, should the global easing cycle remain intact, we see room for rates to fall as markets separate rumour from fact and surplus liquidity helps ease pressure. Moreover, in the immediate term there may be a boost to corporate earnings, if, as seen during 2018, corporates seek to stay one step ahead of tariffs and bring forward trade.

Figure 5: Tariffs could be a positive for earnings – at least initially

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This belief helps inform our positioning within portfolios where we start the year with a bias toward US equities (that we believe are better positioned to withstand Trump headwinds) and mild overweight to gold. Although gains commensurate with 2024 are unlikely, the precious metal should remain well supported by rising deficits, simmering global tensions, and central bank demand as regions seek to reduce their reliance on the US dollar.

Conversely, we hold a mild dislike for broader emerging markets and China that look particularly susceptible to weakness over the first half. Nonetheless, we expect strong earnings growth across emerging markets over 2025, and coupled with already cheap valuations, maintain a strong focus on fundamentals and look to identify periods of dislocation as a possible means to increasing our position over the latter part of the year.

Indeed, in 2025, the cadence of policy announcements and subsequent implementation of measures could matter as much for investors as the policy detail itself, with a ‘buy the rumour, sell the fact’ approach likely as markets digest Trump 2.0.

An eye on fundamentals

While we expect liquidity to play an important role for markets this year, it would be ill-considered to completely ignore fundamentals at this point in the cycle. In 2025, concentration risks – that includes Australia and the US – alongside rich equity valuations are expected to again be a major factor for investors to navigate. While we remain cognisant of these risks, we don’t believe they are insurmountable. Rather, they speak to a continued need for portfolio diversification – including alternative assets – and tactical positioning over the year ahead, ensuring adjustments are made should market pricing move too far ahead of fundamentals.

Indeed, we start the year with our largest overweight in US shares, where we hold a modest preference for tech-related mega caps. The US market is among the most expensive – relative to history and global peers. Moreover, the Magnificent 7 is expected to contribute roughly 35 per cent of S&P 500 net income growth in 2025, below its market weight. Nonetheless, we are comfortable with this positioning given we expect the AI theme has further to run and that these companies are expected to continue to produce earnings growth greater than the broader index. Nonetheless, we remain alert to any declaration in the broader AI capex cycle as a potential catalyst to adjust portfolios.

In Australian shares we commence the year with a mild underweight. The ASX, like the S&P 500 is another heavily concentrated and currently overvalued market when compared to history. However, unlike the US where we expect strong earnings growth from the largest constituents, here the earnings outlook appears more constrained, leaving room for disappointment. While we see modest earnings growth potential for the banks over 2025, we expect soft iron ore prices and continued risks to the outlook for China as a possible drag on the Materials sector.

Across fixed income, we hold a preference for investment grade credit relative to high yield, where spreads remain unattractive and trade close to post-GFC lows. And while we don’t expect falling yields to contribute strongly to total portfolio returns this year, duration continues to offer attractive entry points and strong carry. Here we position with a mild overweight, conscious that risk assets are likely to have moments of weakness and duration should provide a good hedge for portfolios if growth concerns become elevated over the latter part of the year.

Figure 6: Regional valuations remain mixed

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Source: FactSet, Macrobond, ANZ CIO

As the year commences, we expect favourable liquidity conditions to persist, but with the added benefit of a more supportive monetary environment. While this could lead to rising inflationary pressures and a resurgence in upward pressure on central bank rates, the near-term outlook presents a more constructive environment for risk assets.

As always though, and perhaps more so than usual under Trump 2.0, investors should expect the unexpected and be prepared to adjust portfolios as necessary. In 2025, a diversified portfolio and long-term investment strategy should again be the best way to navigate unforeseen risks and participate in opportunities as they arise.