Prices, profits, politics to shape 2025 markets, says Mediolanum

Three critical factors—prices, profits, and politics - will shape the global economy in 2025. However, despite potential headwinds, global growth is projected at 3% for 2025, with the US outpacing Europe, according to Mediolanum International Funds Ltd (MIFL).

Geopolitical tensions, particularly potential trade conflicts involving the US, Europe, and China, may reshape growth prospects and create inflationary pressures. However, such market volatility may also present opportunities for investors who adopt a diversified approach and maintain a long-term perspective.

MIFL’s latest Global Market Outlook highlights the positive outlook across both equities and bonds in the year ahead. Technology innovation and the energy transition are expected to continue to drive equity market growth, with the Technology and Healthcare sectors showing strong growth, while bonds may arguably be more attractive than they have been in decades as inflation eases.

Key projections:

Prices

• Inflation outlook is steady, having eased over the past year and is now close to US and Eurozone targets of 2% and 3% respectively.
• Further interest rate cuts are expected in 2025 with two more expected by the Federal Reserve and six by the ECB which should ease consumer pressure and support economic growth, benefiting bond and equity investors.
• The euro could weaken due to divergent interest rates, however this may be a boost to eurozone export competitiveness.
• Risk of potential trade war between China, Europe, and the US may drive inflation higher.

Profits

• Corporate profits are projected to remain robust with analysts forecasting 12.5% global earnings growth over the next 12 months, led by India at 18%, America at 15%, China at 10%, and Europe at 8.5%.
• Technology is expected to have the highest level of growth (+22%) followed closely by Healthcare (+19.5%).
• A positive outlook for equity markets with conditions favoring gains, though investors should monitor geopolitical and economic developments.
• Technology innovation and the energy transition are expected to drive long-term growth in equity markets fueling corporate profits and boosting tech stock prices, with both trends expected to continue.
• Bond market outlook is positive, with opportunities in corporate, emerging markets, and sovereign bonds. With the softer macroeconomic backdrop, European and emerging market fixed income assets are expected to outperform US counterparts, where investors may perceive risks.

Politics

• The re-election of President Trump, combined with Republican control of Congress, is likely to lead to higher tariffs on China and Europe, affecting global trade dynamics, particularly European and Chinese exports.
• President Trump's agenda of large fiscal stimulus, tax cuts, and increased spending could exacerbate the US's already high debt levels (above 100% of GDP) and drive inflation higher.
• Europe faces political challenges, with France's budgetary struggles and Germany's upcoming February 2025 elections following a no-confidence vote. Bond markets are monitoring the economic impact of these instabilities and the US.
• Trump's trade policies and tariffs on Chinese goods could worsen China’s economic slowdown, affecting supply chains and other emerging economies. A stronger US dollar may also increase the cost of servicing dollar-denominated debt.

Brian O’Reilly, head of investment strategy at MIFL, said: "The global economy in 2025 presents both opportunities and challenges, shaped by technological innovation, the energy transition, and shifting political dynamics.

"While global growth is expected to remain steady at 3%, geopolitical tensions, including trade tensions conflicts involving the US, Europe, and China, could heighten market volatility.

"By adopting a diversified approach across asset classes, maintaining a long-term perspective, and utilising tools like Mediolanum’s proprietary IIS (Intelligence Investment Strategy), investors can turn such periods of market turbulence into opportunities in the year ahead.”.