2025 Global Market Outlook: Diversification will likely be key in a time of change

Change can bring opportunities for those who look to invest in the future. As we plan for 2025, we see critical changes—in politics and economics and industries like technology and health care—that could impact your investment strategy.

What kinds of changes do we think will shape the year ahead?

There is likely to be turbulence in markets as these changes work their way through. However, we believe that company earnings will continue to grow—and grow in a way that benefits firms beyond the handful of tech stocks that have dominated markets in recent years. With this in mind, we are shifting toward greater diversification across stocks and bonds.

We believe the global economy could be heading for a slowdown in the first half of 2025 if weaker data from China weigh on the rest of the world. However, central banks are well positioned to respond with swift rate cuts, particularly the European Central Bank. As such, a recovery in the second half of the year is highly plausible.

If this occurs, we expect it to be led by industrials and manufacturing. While technology firms have attracted the most attention in recent years, manufacturing conditions are greatly improving after a long stretch of high interest rates. We see a lot of pent-up demand for goods, both at the household and corporate level.

We also anticipate a surge in infrastructure spending, largely in AI‑related technologies and the green energy transition. Fiscal measures such as the Inflation Reduction Act of 2022 and the CHIPS and Science Act put a healthy floor under this spending, as they ensure further tax incentives and industry-specific grants during the coming year. And with AI helping to boost worker productivity, inflation pressures are expected to ease.

In 2024, global investors were highly focused on the U.S. market and the “Magnificent Seven” technology stocks that were leading the charge on AI. In fact, those seven companies performed so well that investors have asked if a bubble is forming and, as such, whether it is time to pull back.

Our view? It may be time to update portfolio strategies regarding AI, but not because we fear a bubble—indeed, we regard the AI revolution as being very different from, say, the dot-com bubble of the late 1990s. In our opinion, AI is a multiyear investment cycle in which the initial period of incredibly rapid growth is giving way to a period of moderating, yet still impressive, growth.

Real earnings, not speculation

There are several reasons we view AI in these terms. Unlike the dot-com bubble, this AI cycle has been driven by a surge in actual earnings rather than mere speculation. (See Fig. 1.) Back in March 2000, for example, dot-com bellwether Cisco had a forward price‑to‑earnings (P/E) ratio of 130x—in other words, the stock price indicated that investors were willing to pay 130 times the actual estimated earnings of the company on the promise of what its earnings might become.

By contrast, that same P/E figure for AI leader NVIDIA was 33x at the end of September 2024—a fairly typical figure for a successful growth stock—because actual earnings are keeping pace with investor expectations. Wall Street’s estimate for NVIDIA’s 2026 earnings increased from $0.62 per share in November 2022 to $4.07 at the end of September this year, based on current and planned sales contracts.

NVIDIA has enjoyed a powerful advantage because its AI innovations have had a ready-made market among some of the most cash flow-generative firms in history (Microsoft, Google, Amazon, and Meta).

As such, while volatility is always possible, we believe the odds of a steep decline in the value of AI have been greatly reduced.

The AI effect is spreading

While the initial surge of profits for the AI pioneers may be waning, the era of innovation is just beginning. The semiconductor industry, for example, is banking on new kinds of chips for AI applications and is using AI to improve existing chip design and manufacturing processes. Software firms, data infrastructure suppliers, cybersecurity vendors, and financial firms are all developing new ways to capitalize on the advancements in AI.

In a broader sense, AI is only one of several innovation trends that is driving change. In the health care sector, for example, technologies such as robotics and AI are transforming surgical approaches, cancer screening, and care management. At the same time, demand for the weight loss medications known as GLP-1s continues to rise globally. Even biopharmaceuticals, which have struggled while interest rates have been high, are expected to benefit from innovation in 2025.

Outside the U.S.

AI and other innovation trends are global in nature, but to date, it has been U.S. companies that have benefited most from the innovation gold rush. This has resulted in investor portfolios becoming heavily weighted to U.S. equities while nearly all sectors in non-U.S. stock indexes are valued lower than their U.S. counterparts as of fall 2024.

We think this trend could begin to diminish in 2025, based on our positive view of the global economy and the likelihood of lower interest rates, which could enhance spending in Europe and elsewhere. In our view, valuations have become extremely appealing in several industries outside the U.S., particularly in value and small-cap stocks. And some countries, particularly Japan, are well positioned in an innovation-led marketplace.

Impacts on your investment strategies.

We are moving past a highly unusual era in which U.S. tech stocks dominated returns, most of which came from a few standout companies. This surge has been exciting, but from an investment perspective, concentrating on such a small group of companies is not a sustainable strategy—especially when there are a number of compelling alternatives.

For that reason, diversification is the dominant theme in our strategic approach. As discussed in our Mid-Year Market Outlook, we have been focusing on diversification within our portfolios by exploring a wider range of opportunities. Technology and health care are two segments that have captured our attention, but we also see attractive opportunities in traditional value-oriented sectors such as energy, industrials, and financials. We expect value stocks in general to perform well, particularly if rates come down and the economy recovers.

We are particularly interested in:

Overall, we are drawn to companies offering historically attractive valuations in an environment of improved growth. Since the economic outlook remains murky in the first half of the year, broadening our holdings could help us manage near-term risk while opening doors to future growth.

Bond yields have been on a roller-coaster ride as markets have been overly enthusiastic about bank rate cuts. We anticipate continuing volatility in early 2025 as investors and the Fed work to get on the same page.

In this climate, we think it’s wise to focus on securities that offer potentially strong income—specifically high yield bonds, bank loans, and emerging market corporate bonds. Each of these market segments carries above-average credit risk. However, as the global economic environment is expected to improve, credit risk may be less a source of volatility in 2025 than day‑to‑day interest rate fluctuations.

In our view, emerging market corporate bonds are particularly well positioned. Developing economies are showing signs of growth, in part because many of their central  banks are ahead of the U.S. in their rate-cutting cycle. The credit quality of emerging market corporate bonds has also steadily moved higher in recent years.

Thorough credit analysis and thoughtful security selection will be critical,  however. Corporate bonds with the lowest credit ratings in the investment‑grade universe (BBB on the S&P Global Ratings scale) are an alternative for those who want to enhance their income but prefer to limit their credit risk.

Although we think it is likely that interest rates will come down in the coming year, there is a case to be made that global growth could exceed expectations, triggering rate hikes to curb inflation. If inflation remains stubborn, it may be wise to consider adding a small portion of inflation-adjusted bonds, like Treasury inflation protected securities, to a diversified portfolio.

Though this period of transition might seem overwhelming, it’s actually a great opportunity. We are seeing a widening of growth prospects beyond the usual big tech players to other sectors and regions. Here are a few steps to consider that can help you adapt to changing circumstances.

Keep in mind that a well-diversified portfolio should encompass a mix of investments—stocks, bonds, and cash—tailored to your goal’s timeline and your risk tolerance. Mutual funds provide inherent diversification as they typically contain dozens or hundreds of investments focused on a specific theme or goal.

Additionally, actively managed funds benefit from the expertise of investment professionals who make strategic decisions about managing risk while seeking gains. Active management is particularly beneficial now, providing the flexibility and insights necessary to adapt to rapid changes and potentially enhance risk-adjusted results.

As 2025 unfolds, the broadening investment landscape offers a wealth of opportunities if you’re curious and willing to ask the right questions. By exploring new possibilities in sectors like health care, energy, and AI, you can uncover insights that drive smart investment decisions. For the full report, visit our Global Market Outlook landing page.