By Lawrence Strauss
The beginning of every new year always poses challenges to investors as they take the opportunity to reassess their strategies and portfolios.
But 2025 is especially challenging. As Donald Trump gets set to return to the White House on Jan. 20, investors anticipate a host of policy changes. Among them: tougher restrictions on immigration, fewer regulations for businesses, an extension of the 2017 tax cuts and more tariffs.
What's more, the Federal Reserve is expected to continue to cut short-term rates, and stock valuations are looking stretched, especially in faster-growing sectors like technology and communication services.
In short, there is a lot for investors to keep track of. For some perspective on this and guidance for investors, we asked 10 financial professionals to weigh in on their outlook for markets and the economy, and their recommendations for investors.
1. Beyond the Magnificent Seven
David Kostin, chief U.S. equity strategist at Goldman Sachs, expects the market gainers to broaden in 2025 after several years of dominance by the Magnificent Seven stocks -- Google parent Alphabet, Amazon.com, Apple, Facebook parent Meta Platforms, Microsoft, Nvidia and Tesla.
The Magnificent Seven's performance in 2024 surpassed that of the rest of the S&P 500 by 34 percentage points, but Kostin is forecasting a much smaller difference of 7 points in 2025. The gap in earnings growth between the Magnificent Seven and the rest of the market is "compressing dramatically," he says.
While investors should still allocate some money to the Magnificent Seven stocks, Kostin says, they should be taking a look at other parts of the stock market, notably midcaps.
Midcap stocks, whose market capitalizations range from $5 billion to $20 billion, should benefit from further rate cuts, he says, given that roughly 25% of their debt is floating rate.
He also suggests owning stocks that are mergers-and-acquisitions candidates as Goldman expects dealmaking to pick up in 2025. Among the companies he mentions as possible beneficiaries: small-caps Agios Pharmaceuticals, CG Oncology and Kosmos Energy.
Kostin also says that artificial intelligence is evolving from the initial infrastructure build-out -- which benefited semiconductor companies, data-center real-estate investment trusts and security-software firms, among others -- to a phase involving "companies whose revenues will be enhanced by a widespread adoption of AI."
Those in that phase include Apple, Adobe, Salesforce, ServiceNow and Snowflake, according to Kostin. They are among the 30 companies in a Goldman Sachs basket of stocks that are expected to benefit as AI becomes entrenched.
2. Stick to large-cap growth stocks
Ankur Crawford, executive vice president and portfolio manager at Alger, continues to be all-in on large-cap growth stocks, particularly those tied to AI. She maintains that the innovation and seismic influence of these companies won't be deterred by factors such as policy changes imposed by the Trump administration.
"You want exposure to the most innovative companies that are driving forward this AI paradigm, which is truly kind of a generational shift for our society," Crawford says.
What about the concern that these stocks are expensive?
She doesn't buy that, asserting that having exposure to AI-related stocks "is going to be essential to outperform over the next five years."
Crawford points out that Meta Platforms, for example, recently traded at roughly a 10% premium to the S&P 500 based on forward earnings, a reasonable valuation in her view given the company's strong growth prospects. That is only slightly above the stock's 7% average premium over the past five years.
3. Don't expect big stock-market gains
Saira Malik, chief investment officer, head of equities and fixed income at Nuveen, is more cautious about stock returns after two straight years of 20%-plus gains for the S&P 500. Her 2025 year-end target for the S&P 500 is 6400, about 9% above where the index traded in late December.
"There's a lot of positivity out there about tax cuts and deregulation and all of that, but one question for investors to ask themselves is: How much of this is already priced in?" Malik says.
Still, Malik does see some opportunities in stocks and bonds.
One place for the former is real estate, which she and her colleagues think is primed to do better in 2025 after a relatively weak year. A popular way for individual investors to get exposure to the sector is through REITs, which throw off a lot of income.
Small-cap stocks also make sense to Malik, partly because they are cheaper relative to larger-cap names and because of the expected tailwinds of extending tax cuts and rolling back regulations under the second Trump administration.
Small-caps Malik points to include Addus HomeCare, a home-care and medical-staffing firm; Lumentum Holdings, which makes lasers; and Enpro, which makes industrial products for semiconductor makers, aerospace companies, life-sciences firms and others.
As for bonds, Malik favors securities that include stronger-quality high-yield bonds, mortgage-backed securities and senior loans, which look increasingly attractive given that it looks like rates will stay higher for longer. Those loans reset regularly based on prevailing interest rate levels.
4. Not-so-fast on large-caps
David Kelly, chief global strategist at J.P. Morgan Asset Management, says investors should be wary of pricey stock valuations, especially among large-cap issues.
"There is a certain amount of risk in the S&P 500 overall, and it's particularly concentrated in large-cap growth stocks," he says. "The problem is that for a lot of investors, they are now overweight in that very sector."
If a hypothetical investor had 60% in the S&P 500 and 40% in the Bloomberg U.S. Aggregate Bond Index at the start of 2019 and hasn't rebalanced since then, that asset mix was recently 79% stocks and 21% bonds, Kelly says.
Besides being overweight large-cap growth stocks, that leaves many investors underweight bonds, which can help smooth a portfolio's volatility. Some investors, he says, might not be aware of how much risk they are taking and should consider rebalancing.
Kelly is also keeping a close eye on inflation, fearing a resurgence thanks to the policies of incoming President Trump. "If you tighten immigration significantly, and if you raise tariffs significantly in 2025, it gives you more inflation," he says.
5. Prepare for bumpy weather
Chris Senyek, chief investment strategist at Wolfe Research, sees considerable policy uncertainty as 2025 kicks off. "The market has taken a very rosy view of Trumpenomics, but it's going to be a bit more of a bumpy road." he says.
As such, he favors starting 2025 with a position in the Magnificent Seven stocks, communication services and other large-cap tech stocks that can weather most storms thanks to their strong and reliable earnings growth.
"The tech fundamentals are already really strong with AI spending and everything else," he says. "They don't need a policy jolt to keep the fundamentals strong."
Ultimately, Senyek envisions the stock market going through three phases in 2025:
-- The first, which began on the heels of the presidential election in
November, saw stocks rally "over the enthusiasm for positive policy
changes" in the new Trump administration.
-- The next act, which will begin in early 2025, is the implementation phase
"where we hear more details on specific policies such as tariffs, tax
cuts or deregulation."
-- Finally, the market will have to digest these policies, leading to the
third market phase later in the year.
Until this last phase, Senyek believes it is best for investors to stick with the tried and true and wait for a clearer picture of President Trump's policies and what they will mean for other sectors and industries.
6. It's time for value
John Rogers, founder of Ariel Investments and portfolio manager, who is a longtime value-stock-focused manager, enters 2025 with a lot of conviction, even though value stocks have been an afterthought for much of the past two decades.
"Large-cap growth stocks have gotten extraordinarily expensive versus small-cap value," says Rogers. "So the theme I have is: Buy smaller companies and buy value companies within the small-cap universe."
The Russell 1000 Growth Index had returned 35% in 2024, more than double the 14% result for the corresponding value index.
Rogers also says he expects the new administration's rollback of regulations for businesses offers an opportunity for some companies. "Boardrooms and many people have delayed deals, scuttled deals or didn't get involved with deals because of the regulatory environment," he says. "The biggest change is going to be less regulation."
If those themes dovetail as Rogers expects, he says that should help smaller-cap financial firms such as Lazard and private-equity firm Carlyle Group. "Private equity is going to do really well in this environment," Rogers says. "You're already seeing it in the number of deals that are being talked about."
7. Bonds over stocks
Mike Cudzil, senior bond portfolio manager at Pimco, says he believes bonds will be attractive relative to stocks in 2025.
If the Fed cuts rates further this year, as expected, that would give bondholders a boost in price. Bond yields and prices move inversely. Yet if rates do climb, Cudzil says there is still a cushion to have a positive return as yields are high enough to offset a modest decline in price.
Among the types of bonds he says he is overweighting are asset-backed securities, including credit cards and auto loans; agency mortgages; triple-A-rated commercial mortgage-backed securities; and triple-A-rated collateralized loan obligations.
8. Prepare for more volatility
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January 03, 2025 10:00 ET (15:00 GMT)
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