The past 12 months have been a very good period for investors, with performance once again led by a stellar showing from the US equity market.
Australian equities have once again lagged the US, but have also surprised to the upside, despite a subdued earnings growth backdrop.
Bond yields have been volatile, but have largely traded sideways, while a tightening in credit spreads has driven good performance for most credit-related investments. Gold has been the standout commodity (which has helped our Alternatives allocation), while most other commodities have been relatively lacklustre.
US Economy Continues to Defy Slowdown Expectations
Looking back on expectations 12 months ago highlights that the US economy has once again surprised significantly to the upside in terms of growth outcomes, with real GDP growth very resilient at an “above trend” 3%. While growth was resilient, US inflation did largely moderate as expected. This ultimately allowed the Fed to cut the policy rate multiple times, which was largely in line with market expectations 12 months ago. This goldilocks macroeconomic and policy backdrop provided a supportive backdrop for equities.
Growth outside the US was marginally disappointing, however it remained positive in the “rest of world,” with Australia actually posting one of the largest misses to consensus growth expectations versus last year’s forecasts. This lacklustre domestic growth backdrop doesn’t appear to have worried the equity market, even with inflation proving to be a bit stickier than expected.
Last year’s modest hopes for a cut by year end have proved overly optimistic, though the market is once again hopeful of multiple RBA cuts in 2025, starting as early as February. We still think May is a more likely start for domestic rate cuts, but see scope for three cuts through the course of 2025. This should help domestic growth improve in 2025, relative to the lacklustre growth backdrop in 2024.
2025 Outlook. Goldilocks US Macro Still Looks Supportive for Risk Assets
Our base case is that US GDP growth should slow back to a trend rate in 2025, although risks once again appear skewed to a better-than-trend outcome. The US inflation downshift has showed signs of pausing recently, but inflation should resume its downtrend over the next six months as demand eases. This should allow the Fed to broadly remain in easing mode over much of 2025, once again providing a supportive backdrop for equities. The earnings growth pulse should broaden in 2025, encouraging broader participation in the equity advance, despite the headline S&P500 index delivering more “normal” returns after two exceptional years.
Not too hot, not too cold - Will Goldilocks get what she wants again in 2025?
The main risk for equities would appear to be a departure from the Goldilocks US macro narrative. A “too hot” scenario looks to be the main macro risk at this juncture.
This could stem from a stubborn (or accelerating) US inflation backdrop short circuiting the Fed rate cut cycle and pushing up long bond yields. Aggressive fiscal stimulus flowing from President Trump’s policy platform could also raise overheating concerns, though this is more likely to be a risk for later in 2025.
At the other end of the spectrum, the risk of significant economic downside from the US in 2025 appears unlikely, but can’t be completely discounted as excess consumer cash balances fade. However, we struggle to see the market getting too worried about an excessively cold scenario, given Trump’s looming pro-growth policy platform.
While these risks bear watching, we re-iterate our view that an easing in inflation pressure in 2025 remains our central case, with overheating or re-accelerating inflation a risk case to monitor, rather than a high probability scenario.
Trumps 2025 Tariff Wildcard
The other major risk to an equity bull market may stem from President Trump’s broader policy platform. The market appears increasingly relaxed with the broad outline of Trump’s pro-growth and pro-deregulation policies. However, the stagflationary risks of Trump actually following through on an aggressive global tariff policy bear watching. For now, the market appears to be betting that tariffs will be used as a negotiation tool and ultimately be significantly watered down, thus not posing a genuine stagflationary threat to the US and global economy.
US stocks not priced for perfection but pretty close
Perhaps the biggest risk is in the pricing of the US equity market. Valuations in the US are not at all-time-highs, but they are very much at the upper-end of the long-term range. Valuations in Australia look similarly stretched versus historical levels.
In simple terms, US and Australian equities are not priced for much to go wrong, whatever it may turn out to be.
Valuations are generally not a particularly good market timing tool, but lofty valuations combined with bullish investor positioning constrain our global equity weighting to neutral, despite our relatively supportive macro central case.
Valuations look less demanding outside of the US and Australia, but this has been the case for some time now. GDP growth, earnings growth and currency trends have been less supportive for investment performance outside the US, albeit returns have still been decent over the last year in an absolute sense. Investors are faced with the classic dilemma that the US offers lofty valuations, but strong momentum in terms of both share prices and earnings. At the same time, “cheaper” areas of the global equity market appear somewhat growth constrained.
Looking Beyond the Mag 7 in 2025
Our base case is that the US continues to lead in 2025, although we expect broader participation beyond mega cap tech. Areas such as mid and small caps look appealing and have started to perform well in recent months. We also note that US financials have now slightly outperformed US tech on a 12-month rolling basis, so the mega cap tech bull run, while still bubbling along, is becoming less of a defining feature of the US market upswing.
Our overall view is to expect more moderate global equity returns but broader participation from sectors and styles. US tech still has an attractive growth outlook, but multiples are rich. As earnings growth broadens in 2025, investor interest should continue to broaden out. Outside of our liking for mid and small caps, quality is our preferred style and should do well in a world of more normal returns. Elsewhere, we are holding value and growth in equal measure.
As we discussed, Australian valuations look stretched and banks concern us most. Tech and many other growth areas have run hard but at least have growth, although we believe investors need to be increasingly selective. In line with our global view, domestic mid and small caps look to be an attractive hunting ground. However, in general we continue to prefer global equities to the overall Australian equity index.
| MSCI World | US | UK | Europe | Japan | EM | Australia | |
| 1 Yr Fwd PE | 19.5 | 22.4 | 11.5 | 14.4 | 15 | 12 | 18.5 |
| CY24 EPS growth | 9 | 9 | -1 | 2 | 12 | 23 | -3 |
| CY25 EPS growth | 13 | 15 | 7 | 9 | 8 | 15 | 5 |
Source: Refinitiv, Wilsons Advisory.
Fixed Interest and Credit. Decent Yields Still on Offer
As discussed in our introduction, the last 12 months have proved volatile for long bond yields, both in the US and Australia, as expectations for central bank easing have waxed and waned. Despite the volatility, we have largely ended up with long bond yields at the same level as 12 months ago.
Our base case is that bond yields can edge lower in 2025. However, we believe Trump’s policy platform will keep yields from rallying too aggressively, while also creating some tail risk that keeps us from overcommitting to duration.
Floating rate credit has performed well due to a combination of a steady underlying (domestic) cash rate with narrowing credit spreads driving some additional capital gains. Credit should provide more moderate but still attractive returns in 2025. We struggle to see how spreads can tighten much further, but credit conditions should stay benign in both the US and Australia, in line with macro conditions. We still see credit as appealing relative to cash, in addition to being appealing in the context of our expectation of lower equity returns in 2025.
Alternatives. Attractive Return and Attractive Diversification Potential
We continue to see a valuable role for alternative assets such as private equity, private credit, unlisted real estate, hedge funds and gold. Importantly, alternatives can act as both a portfolio diversifier and a portfolio return enhancer.
We expect that private credit should at least moderately outperform public credit, with wider current domestic spreads than public credit combined with the support from a relatively benign macro backdrop.
Private equity returns have been mixed in 2024, with the exit environment difficult and valuations gradually adjusting to public market levels. We expect a better exit environment in 2025, and valuations now appear more reasonable. We continue to prefer the mid-market segment over the large end of the private equity market.
We continue to see opportunities in unlisted property and unlisted infrastructure, with attractive total returns on offer for high quality opportunities. The inflation hedging potential of such assets remains a positive for unlisted real asset exposure.
Genuinely uncorrelated assets, such as hedge funds, should prove their worth as part of a well-diversified portfolio, particularly if absolute equity market returns moderate and equity market volatility picks up.
Gold has been a strong performer in 2024. However, we continue to maintain an allocation as a geo-political hedge, and to play the structural trend of central bank asset diversification which should continue to support gold.
| Asset Class | Tactical Tilt | Change | Wilsons View |
| Cash | Underweight -3% | no change | Underweight cash as fixed interest/credit is likely to produce superior 12 month returns in our central case view. |
| Fixed Income/Credit (Domestic & Global) | Overweight +1% | no change | Australian bond yields look reasonable value despite tail risks posed by Trumps policy platform. Floating rate credit is still offering attractive returns. |
| Equities - Domestic | Underweight -1% | no change | Australian equities lack near term earnings growth though earnings growth should improve in 2025 as policy is eased. Valuations look increasingly full. Small/mid caps preferred. |
| Equities - International | Neutral | no change | Market has read Trump as bullish for equities but tail risks have risen. US valuations look very full despite a likely soft landing & possible tax cut. Global Small/mid caps preferred. |
| Alternatives | Overweight +3% | no change | A range of growth and defensive alternative strategies appeal, including domestic private credit & selected real assets. Gold appeals as a portfolio hedge against geopolitcal risk and as a beneficiary of both Fed easing & progrssive central bank accumulation. |
*Our tactical tilts represent our view over the next 6 to 12 months though active tilts could be held for shorter or longer periods depending on both asset class performance and fundamental developments. Source: Refinitiv, Wilsons Advisory.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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