2025: More of the same?

Will interest rate reductions continue, and can US technology stocks still dominate?  

In 2024, stock markets benefited from interest rate cuts and rises in the share prices of large technology companies. In this 2025 stock market outlook, we consider whether it will it be more of the same in 2025.  

Further rate reductions?  

In the middle of 2024, as inflation continued to slow, the Bank of England and the US Federal Reserve (Fed) started to reduce interest rates to support economic growth, which helped to boost stock markets.  

Investors were generally expecting interest rate cuts to continue into 2025. But in December, the US Fed lowered its interest rate expectations for 2025 which surprised the market. At the same time, inflation rose slightly in several regions towards the end of the year, adding further uncertainty. That said, we believe there’s still reason to be cautiously optimistic on further interest rate cuts during 2025. In our view, slow and steady rate cuts, if they come through, would encourage investment activity and support economic growth. This in turn has the potential to boost stock market performance. 

Can technology companies still dominate?

We’ve probably all heard about the substantial share-price rises of US technology companies in recent years, particularly among the now well-known ‘Magnificent Seven’ group of growth and technology shares, such as Microsoft and Nvidia. Excitement about the rise of Artificial Intelligence-related technologies, or AI for short, has been a crucial influence on the success of the technology sector.  

While we believe the AI technology boom is likely to continue, it will be important to monitor the growing share prices in this industry. Technological developments and investor sentiment towards AI and other technology companies is unlikely to always be so positive. In our view, there could be periods of short-term volatility as investors consider whether share prices fairly reflect the ongoing sales and profit potential of these stocks. January’s volatility in US AI company shares on news of a strong uptake of a chatbot from a Chinese AI company – DeepSeek – highlighted this issue.  

Something else to look out for is how companies in other sectors who were early adopters of AI technology start to fare. They may demonstrate what efficiency or other benefits this technology has delivered so far. In 2025, it’s possible that companies in other sectors overtake technology companies in terms of performance leadership. This is partly because we believe current AI technology company share prices fully reflect the expected growth potential. At the same time, sectors that have underperformed over the past two years may be due something of a catch up in performance.  

Outlook for stock markets across the globe 

US
This was the strongest regional market in 2024, not least because of the dominance of AI companies, most of largest of which are based in the US. We believe company profits should continue to grow this year. But because share prices have risen so strongly in some sectors there will likely be very little room for companies to disappoint investors when they publish earnings. 

Donald Trump’s return as US president has brought the prospect of new investor-friendly policies such as tax cuts and regulatory changes. But one of the main issues to monitor is the introduction of US tariffs on goods coming from key regions around the world.

This could have negative implications for global growth, inflation and interest rates. As US stock market indices, such as the S&P 500, were close to record highs at the end of 2024, there is perhaps less scope for the country’s stock markets to repeat the scale of growth they produced over the 12 months after Trump’s previous election victory. 

UK
In 2024, the UK stock market produced a strong return, but it trailed the soaring US stock market. It has also been behind the US for much of the last decade, in part because the UK stock market has few technology and AI companies. However, many UK companies sell a large amount of their goods and services to international markets, and the UK stock market has many other interesting sectors, including healthcare and financials.

Overall, the UK has a low growth profile at the moment, which could mean there’s limited interest from investors for now. However, we believe that the UK market is attractive on a longer-term basis, but it requires a positive catalyst, such as improved economic growth, to enable it to perform better relative to the US. We will closely monitor the new US government’s tariff policies for any potential to negatively impact UK companies’ exports.

Europe
Stock markets on mainland Europe also fell behind the rise of the US in 2024, held back somewhat by the low economic growth and political uncertainty in Germany and France. Because they have trailed US stocks, European stock markets may have an opportunity to start to catch up some of this gap in performance. However, low profit growth and low economic growth across much Europe may continue to hamper Europe’s companies. Potential tariff increases imposed on European goods from the US is a risk. 

China
Chinese companies’ shares increased strongly in value in the second half of 2024 helped by the government’s introduction of policies to help business. There’s market uncertainty surrounding an increase in US trade tariffs which could hold back short-term performance. There could also be further difficulties in the property market and there remains potential for government intervention in certain industries. Nevertheless, China continues to hold solid economic growth potential and Chinese companies have relatively attractive share prices that may provide opportunities. 

Emerging markets
China’s high weighting in emerging market stock market indices has helped emerging markets outperform most other regions for 2024 as a whole. In 2025, we believe many stocks in emerging markets may benefit from generally lower inflation, broadly solid overall global growth and likely ongoing interest rate reductions in several countries. The potential for new tariffs from the US is an ongoing issue for emerging markets.

The conflicts in Ukraine and the Middle East could have global as well as regional implications and should also be carefully watched.  

Overall, we believe there are reasons to be cautiously optimistic about the prospects for global stock markets over the coming year. As always, we focus on a diversification across investments and geographies designed for the long term.