2025 Outlook: At the Doorstep of the Reckoning

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The investment landscape for 2025 is shaped by four key macroeconomic trends that call for prudence and strategic positioning:

1. The U.S. faces a fiscal reckoning as government spending cuts and inflation risks dominate the outlook. Investors may want to consider diversifying their equity portfolios and hedge against inflation risks.
2. Bull markets in gold and bitcoin are supported by inflationary pressures, fiscal uncertainty and de-dollarization trends. Investors may want to maintain positions in these assets as core inflation hedges.
3. The next phase of AI could be driving broader market benefits, while soaring electricity demand underscores the importance of nuclear and natural gas. Investors may want to look beyond tech to energy, infrastructure and utilities.

The Challenge of Fed Loosening in a Persistent Inflation Environment

The U.S. economy is at a critical juncture as fiscal policy takes center stage. Fiscal spending is unsustainable, and these problems are often addressed in the year after a Presidential election. My base case is that the incoming administration will be able to cut $500 billion in spending. While this signals an attempt to address fiscal imbalances, the cuts are unlikely to eliminate the deficit entirely. In simple terms, the U.S. could be going from two feet on the gas pedal to one foot on the gas. However, failure to follow through could exacerbate inflation risks, leading to higher long-term interest rates and potential market volatility. While the U.S. stock market has many things going for it—profit growth, a strong economy, low unemployment—high valuations and inflation risks could caution against an overweight position.

Services Inflation Still High

Source: Bureau of Labor Statistics. Data as of October 2024. The "Consumer Price Index for All Urban Consumers: All Items Less Food & Energy" is an aggregate of prices paid by urban consumers for a typical basket of goods, excluding food and energy. This measurement, known as "Core CPI," is widely used by economists because food and energy have very volatile prices. Past performance is no guarantee of future results.

Inflation remains persistent, especially in services and wages, defying expectations of rapid moderation. The Federal Reserve’s approach of “higher for longer” interest rates reflects the huge fiscal stimulus, and while short-term rate cuts may occur, any sharp easing is unlikely barring a severe economic contraction.

Higher tariffs can also be inflationary, although only in a minor way. It should be noted that when analysts cite the 1930 Smoot-Hawley Tariff Act’s so-called bad effect on global trade, this is usually overstated.

Gold and Bitcoin: Inflation Hedges in Focus

Gold and bitcoin continue to stand out as robust hedges against inflation and fiscal uncertainty. Gold’s bull market is underpinned by foreign central bank purchases and a global trend toward de-dollarization. Bitcoin, which recently surpassed $100,000, continues the bull cycle following its Q2 “halvening”.

Bitcoin and Gold Have Led in 2024

Source: FactSet. Data as of 30 November 2024. “U.S. Stocks” represented by the S&P 500 Index. Past performance is not indicative of future results. Index performance is not indicative of product performance. It is not possible to invest directly in an index.

Both assets have proven resilient in inflationary periods and align with the long-term shifts in investor sentiment toward alternative currencies and decentralized assets.

AI Phase 2: From Tech Dominance to Broader Market Benefits

While semiconductor stocks drove the initial wave of the AI trade, we believe that financial markets could reflect the fact that many businesses are realizing the productivity gains from AI in the future. Companies are increasingly deploying AI to enhance operational efficiency, creating opportunities in sectors beyond tech. This phase is also fueling unprecedented demand for electricity, underscoring the strategic importance of reliable energy sources.

Nuclear energy is emerging as a critical player, with sudden bipartisan support and growing investments from hyperscale tech companies. The timeline for new nuclear facilities spans years, creating interim opportunities in natural gas and grid infrastructure as bridging solutions.

Key Takeaways for 2025

• Fiscal Reckoning and Inflation Risks: Reduce overexposure to U.S. stocks, and rebalance toward inflation-hedging strategies and global opportunities.
• Gold and Bitcoin: Maintain or increase exposure to gold and bitcoin, assets for hedging inflation and fiscal uncertainty that are supported by long-term trends.
• AI Phase 2: Look beyond tech to energy and infrastructure plays, including nuclear, natural gas and utilities.

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