Complex equities landscape, potential Fed policy shifts likely in 2025, RBC Wealth Management suggests

MINNEAPOLIS, Dec. 5, 2024 /PRNewswire/ - The global equity markets rally over the past two years may continue into 2025 but requires positive economic growth and rosy corporate earnings seasons to make that happen, RBC Wealth Management suggests in its Global Insight 2025 Outlook released Thursday.

Investors in U.S. equities will need to be nimble and keep return expectations in check given the complex investment environment and potential geopolitical risks. The U.S. Federal Reserve's rate-cut cycle is anticipated to continue into Q1 before pausing at a policy rate around 4.25%, keeping yields across the fixed income landscape well above historical averages.

And although there's little to no evidence that Washington policies are key drivers for market returns over time, tariff unknowns from the Trump administration and Republican-controlled Congress – including how various trade partners will respond – complicate industry and stock selections.

"The market will potentially need to contend with the most aggressive tariff policies in almost 100 years," said Kelly Bogdanova, vice president and portfolio analyst at RBC Wealth Management – U.S. "This makes the Fed's job of forecasting inflation and GDP growth, and properly calibrating interest rates, more complex."

U.S. equities: Volatility and opportunities expected
The S&P 500 rose 68% over the past 25 months, propelled by AI-driven optimism and monetary easing. However, already-stretched valuations and increasingly frothy investor sentiment now call for vigilant positioning in portfolios.

Some of the unusual complexities in 2025, such as tariff policy changes, could also impact equity performance and generate volatility while still opening opportunities. RBC Wealth Management believes the 14.6% year-over-year consensus earnings growth estimate seems too robust. It would take 2.3% or better GDP growth to achieve that and would need more than just tech-oriented stocks to the carry the load.

"We recommend starting the year without major sector overweights," Bogdanova said. "We think the market will provide opportunities to take advantage of sector and industry dislocations in 2025."

U.S. fixed income: Rate cuts, but could a hike be on the table?
Yields across the fixed income landscape are likely to remain well above the historical average.

Economic optimism has pushed credit market valuations to extremely rich levels, while fewer rate cuts in the pipeline will likely increase the shelf life of cash and short-duration securities to offer attractive income. Despite this, we think the strategy for 2025 will be gradually increasing duration and reducing credit risk exposures.

"While we expect rate reductions through the first quarter of 2025 and then a pause, the pro-growth policies being proposed risk overheating the economy and fueling renewed inflationary pressures, potentially posing a remote chance that the Fed pivots back to rate hikes," noted Tom Garretson, fixed income senior portfolio strategist at RBC Wealth Management - U.S.

The "Unstoppables" – Long-term secular trends
Four transformative forces, coined the "Unstoppables," are set to redefine the investment landscape:

• Artificial intelligence: Both tech and non-tech sectors are ramping up AI spending to avoid obsolescence, with infrastructure and implementation leaders poised to benefit.
• Aging populations: The global population of individuals 65 and older will approach 1.6 billion by 2050, according to a projection by the United Nations. As a result, RBC believes the rising costs of eldercare and increasing longevity will drive demand for biotech, financial services and adaptable housing solutions.
• Renewable energy and electrification: Renewables are becoming dominant energy sources, supported by cost declines and grid-scale storage advancements. These trends reflect ongoing momentum from 2024, when green investments began to overtake traditional energy sectors.
• Energy infrastructure evolution: Utility-scale storage and electrification efforts are enhancing energy resilience, providing investment opportunities in sectors like smart grids and renewable infrastructure.

While 2024 benefited from cooling inflation, improved economic indicators, and monetary easing, we enter 2025 with ongoing geopolitical tensions, stretched equity valuations, and secular trends like AI and electrification as pivotal forces shaping investor strategies.

For more information on RBC Wealth Management's outlook on the investment landscape for the year ahead from global and regional perspectives, visit the Global Insight 2025 Outlook page.

Past performance is no guarantee of future results.

About RBC
Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 98,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada's biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our more than 18 million clients in Canada, the U.S. and 27 other countries. Learn more at rbc.com.

We are proud to support a broad range of community initiatives through donations, community investments and employee volunteer activities. See how at rbc.com/peopleandplanet.

About RBC Wealth Management – U.S.
Founded in 1909, RBC Wealth Management delivers trusted advice and world-class wealth solutions to individuals, families and institutions. A subsidiary of Royal Bank of Canada (RBC), it is one of the largest full-service wealth management firms in the U.S., supporting the complex needs of high-net-worth and institutional clients by providing access to private banking, credit, investment management, asset management and other services. In the United States, RBC Wealth Management had $640 billion in total client assets (as of Oct. 31, 2024) with more than 2,200 financial advisors operating from 192 locations in 42 states. RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC. Learn more at rbcwm.com.

For more information, contact:
Megan Boldt, RBC Wealth Management, megan.boldt@rbc.com, 612-371-6123

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SOURCE RBC Wealth Management - U.S.