2025: An Outlook on Markets

Context: What happened in 2023 and 2024 so far?

In 2023, inflation surged post-covid due to easing monetary policy, a strong increase in money supply, fiscal policy and supply side constraints. Economy was surging from the recession experienced during covid leading into 2024.

On the other hand, 2024 was a really tricky year for investors. With the Fed hiking rates up to 5.00% — 5.25% to combat sticky inflation that was well above Fed’s expectation of 2%, many believed that markets were going to tank. Indicators such as the inverted yield curve supported this idea. However, other factors such as strong consumer savings from covid and strong job employment data outweighed the negative sentiment of a bear market. Furthermore, with the boom of AI, mainly large language models (LLM) and generative AI, the Magnificent Seven US technology stocks now accounts for a fifth of MSCI’s world share index and has seen its highest levels yet. These factors above have led to the S&P 500 closing in a price level close to 6000 as of 30th December 2024.

Towards the end of 2024, the Federal Reserve has shifted its monetary policy stance from tightening to easing, implementing a series of interest rate cuts totalling 1.25% points. However, the danger coming into 2025 is that inflation still remains a bit above the Fed’s target, leaving the Fed hesitant to cut rates further even though the underlying economy is weakling. With Trump now in office with his strong views on tariffs, this would definitely present a period of volatility for markets.

The Main Regime Leading into 2025

In the USA, President Trump was quick to sign executive orders after taking office. This includes:

• Signing a directive creating the Department of Government Efficiency (Doge) — a new advisory body on cutting government costs.
• Blanket tariffs on China, Canada and Mexico which he has ordered federal officials to review US trade relationships for unfair practices, including those with Canada, Mexico and China. A spat with Colombia over deportations sparked a threat by Trump to implement 25% tariffs but a deal was reached to avert a trade war.
• An import tariff of 25% is set to be imposed on 12 March on Steel and aluminium imports from all sources. He has also followed through with a 10% duty on Chinese goods.
• Signed off on withdrawing from the Paris climate agreement — the landmark international deal to limit rising global temperatures.
• Proclaimed that “America’s sovereignty is under attack”, declaring this to be a national emergency that allows him to free up more funding to reinforce the border with Mexico.
• Ordered that officials deny the right to citizenship to the children of migrants either in the US illegally or on temporary visas. The policy currently faces legal challenges.
• Heated debates on X on the topic of ending the Ukraine-Russia war.

What is Up with China?

• DeepSeek’s achievements undercut the belief that bigger budgets and top-tier chips are the only ways of advancing AI, a prospect which has created uncertainty about the future of high-performance chips.In contrast, OpenAI, valued at $157 billion, faces scrutiny over its ability to maintain a dominant edge in innovation or justify its massive valuation and expenditures without delivering significant returns.
• DeepSeek’s apparently lower costs roiled financial markets on 27 January, leading the tech-heavy Nasdaq to fall more than 3% in a broad sell-off that included chip makers and data centres around the world. Nvidia’s stock price plunged 17% on Monday before it began to recover on Tuesday.

Policy Impacts?

On Tariffs & Tax Cuts:

As of now, the danger for the US is that inflation remains a bit above the Fed’s target, leaving the Fed hesitant to cut rates further even though the underlying economy is weakening — this could present a period of volatility for bond markets. For now, there does not seem to be any new exogenous factors exerting pressure on inflation. While some argue that Trump policies on tax cuts might be inflationary, we have to first consider that consumers are still being staggered under the effects of price pressures seen over the past 2 years, it is likely not possible for Trump to reinstate inflation again. Furthermore, tariffs seem to be just a tool for negotiation (Mexico and Canada renegotiated on this). However, I note that random 25% tariffs on Steel and Aluminium is difficult to account for. Despite that, I believe that he will be cautious on this as bringing down consumer prices was one of the main reasons why he was reinstated as president while Biden was driven out. The Fed is also relatively cautious on this issue:

The Fed left interest rates unchanged at 4.25%-4.5% at its meeting on January 28th. The Fed noted that US inflation remains ‘somewhat elevated’ omitting its previous statement that ‘progress’ was being made towards its target 2% inflation rate. Fed Chair Jay Powell said that the Fed would need to see ‘real progress on inflation or some weakness in the labour market before we consider making adjustments.’

The January figures showed the US added 143,000 jobs in January — short of predictions of 170,000 but following an upwards adjustment of the December figure from 256,000 to 307,000 and with a 10 bps fall in the unemployment rate to 4%.

The US labour market is at its tightest with unemployment close to historic lows. The data is therefore essentially bolstering the Fed’s view that interest rates do not presently need to fall with inflation still being slightly sticky. Overall, still positive on US index. We might see stronger growth and higher interest rates which may support the dollar’s strength but it could be counterproductive to Trump’s goal of boosting manufacturing exports that was promised when he campaigned.

On Debt Issue:

I have seen countless Youtube videos saying that once the government reaches its debt ceiling and cannot borrow more money, it could potentially default on its debt obligations, causing significant economic disruption. Proponents of this argument believe that high debt levels can lead to higher interest rates, making it more expensive for individuals and businesses to borrow money, together with potential economic influence as a significant proportion of US debt is held by foreign governments.

While this may be true (the world would go into armageddon if this happens), given that debt being issued in dollars, central banks can commit to quantitative easing to bring down yields. Furthermore, we would have to see impacts of Elon’s DOGE — thus far, the site has listed $55 billion in total estimated savings. This is not too much of a concern for me.

On Russian-Ukraine War (Mainly Commodities & Geopolitical Impact) :

If Trump were to stop the Russian-Ukraine War, we can expect to see a fall in oil prices due to increased supply (Russia was a leading oil exporter globally) which could additionally be a source of disinflation for the US. At the moment, the US only exports high quality liquefied natural gasses from its shale oil and horizontal fracking methods. It is still dependent on Russia and Saudi Arabia for crude petroleum.

At the moment, after looking at Trump’s and JD Vance’s stance on Europe (relatively obvious — refer to Vance’s tweet on Niall Ferguson), US military spending on Europe might be cut after a negotiation with Russia and Ukraine:

For three years, President Trump and I have made two simple arguments: first, the war wouldn’t have started if President Trump was in office; second, that neither Europe, nor the Biden administration, nor the Ukrainians had any pathway to victory. This was true three years ago, it was true two years ago, it was true last year, and it is true today. And for three years, the concerns of people who were obviously right were ignored. What is Niall’s actual plan for Ukraine? Another aid package? Is he aware of the reality on the ground, of the numerical advantage of the Russians, of the depleted stock of the Europeans or their even more depleted industrial base? Instead, he quotes from a book about George HW Bush from a different historical period and a different conflict. That’s another currency of these people: reliance on irrelevant history.

Number one, while our Western European allies’ security has benefited greatly from the generosity of the United States, they pursue domestic policies (on migration and censorship) that offend the sensibilities of most Americans and defense policies that assume continued over-reliance. Number two, Russians have a massive numerical advantage in manpower and weapons in Ukraine, and that advantage will persist regardless of further Western aid packages. Again, the aid is *currently* flowing. Number three, the United States retains substantial leverage over both parties to the conflict. Number four, ending the conflict requires talking to the people involved in starting it and maintaining it. Number five, the conflict has placed — and continues to place — stress on tools of American statecraft, from military stockpiles to sanctions (and so much else). We believe the continued conflict is bad for Russia, bad for Ukraine, and bad for Europe. But most importantly, it is bad for the United States.

Given the above facts, we must pursue peace, and we must pursue it now. President Trump ran on this, he won on this, and he is right about this. It is lazy, ahistorical nonsense to attack as “appeasement” every acknowledgment that America’s interest must account for the realities of the conflict. That interest — not moralisms or historical illiteracy — will guide President Trump’s policy in the weeks to come. And thank God for that (JD Vance on X, 20 Feb 2025).

Markets in Europe might see a rebound (especially after 2 years of sluggish growth), but this is something that we have to wait till further developments.

US and China: The AI Arms Race:

Data Centers stock in China such as VNET and China Telecom, together with large technology companies such as Alibaba and Tencent, absolutely smashed earnings and are currently experiencing a massive surge. The catalyst is linked to the announcement of China’s LLM Deepseek.

Deepseek demonstrated the ability to train high-performance AI models using significantly less computational power compared to traditional methods, raising concerns that companies might not need to rely as heavily on Nvidia’s high-end GPUs to develop advanced AI, potentially impacting future demand for their chips and causing a drop in their stock price; essentially, DeepSeek presented a potential disruption to Nvidia’s dominant position in the AI hardware market by showing that powerful AI models could be built with less expensive hardware.

The AI hype is important, considering that the combined value of Magnificent Seven U.S. tech stocks accounts for around a fifth of MSCI’s world share index, raising market threat levels if their earnings or AI technology disappoint. We saw the disappointment is NASDAQ’s selloff (which has now recovered), which highlights how volatile technology stocks can be. After reading Deepseek’s research paper (DeepSeek-R1: Incentivizing Reasoning Capability in LLMs via Reinforcement Learning), I believe it is something evolutionary but not revolutionary — we have to remember that DeepSeek is essentially being built on top of models (i.e OpenAI ChatGPT & Meta’s Llama) that have been developed using high-end Nvidia computing GPUs. The so-called “revolutionary” methods that DeepSeek used have already existed (i.e Read section on Cold Start & Reinforcement Learning through Reasoning). The confusion stems to the following anaology: A man who has discovered a way to use his toolkit more optimally and effectively, but keep in mind that he was not the one that invented the toolkit.

Given the potential of AI and Data Centers, together with increased levels of competition, software companies (i.e Meta, Google etc.) and consumers would heavily benefit from this. We can expect lower cost of production from automations and using AI to monetise certain functions in software companies. Consumers are also able to experience a greater variety of LLM options that is tailored to their needs. We should expect solid growth and room for technology stocks to run, especially in software and data centers.

If one were to invest in China, however, one should note that aside from its technology sector, its productivity has been stagnating for more than a decade. The country is suffering from slowing growth, stagnating productivity, a malfunctioning property sector, the misallocation and inefficient use of capital, debt-capacity constraints and weak household and income demand. Before the DeepSeek hype, the recent stimulus measures look underwhelming and the market is disappointed as they were expecting strong fiscal support (the expectation was that China was going to launch an economic bazooka), yet we still continue to see structural problems in the Chinese economy, especially in its housing sector. China still holds political risk due to its governance — Remember China’s cracked down on its tech sector and banned exports of certain materials.

Conclusion: Best Move Forward?

In conclusion, a recommended position is to stay neutral and continue to hold until something out of the ordinary happens (i.e Watching out for YoY Corporate Margins and leverage flying through the roof).

We always need to take note that Markets are always path-dependent game whereby the sequence of events and how they unfold would dictate what will happen.

In terms of country, I believe that the US is still a preferred destination for investment due to its relatively strong economy, growing productivity, limited geopolitical risk, having the strongest currency that is globally dependent on, and ease of access to all commodities, which is considerably much better than EU and Asia.

Stay calm and happy investing! I hope you find the article insightful :)

Disclaimer:

The comments and analyses in this article are provided purely for information purposes and do not constitute any investment recommendation or advice. Should you require any advice, in relation to any legal, financial matter, please consult an appropriate professional. Insofar that external data is used to establish terms of this article, these data are from reliable sources but whose accuracy or completeness is not guaranteed. The author is thus cannot be held responsible for any errors, omissions or interpretations of the information contained in this document. This article is only valid at the time of writing of this report.