Perhaps, thanks to AI, we need to heed the words of American industrialist J. Paul Getty, who once asserted: ‘In times of rapid change, experience can be your worst enemy.’

Right now, investors who are sticking to long-held valuation disciplines are getting left behind, as US equities generally, AI-related names more specifically and cryptocurrencies are all on a roll. And once markets start rolling, then they can run for a long time, especially when their preferred narrative continues to play out, as it is right now, in the shape of cooling inflation, steady economic growth and falling interest rates.   

Valuation only really matters when a catalyst appears to change perception and persuade investors an asset class or individual security is too dear or too cheap, so investors need to be on the look-out for changes that might change the narrative, in the former of either hotter inflation, faster or slower growth, or interest rates that stay higher for longer (or even start to rise again). These five themes could have a major say on all fronts in 2025 and beyond.

DEBT

The new Labour Government in the UK still taking brickbats as it seeks to address Britain’s fiscal deficit, a French administration is in tatters after just three months as its efforts to raise taxes and cut spending get the thumbs down and, all the while, America’s federal debt continues to mushroom. President-elect Trump’s policy package could even accelerate growth in government borrowing from what is already a record-high of $36 trillion.

America’s annualised interest bill on that debt already exceeds $1 trillion, a sum that exceeds the defence budget. There could be trouble ahead, unless Elon Musk and Vivek Ramaswamy really do cut spending, or Trump’s tariffs really do raise income and boost domestic output.

Either bond yields rise in the face of growing supply, or interest rates stay higher for longer, or the Fed looks to cut rates and take a chance with inflation to lower the interest bill (contrary to the prevailing narrative of cooler inflation). This final scenario may be why gold (and Bitcoin, for that matter) are on a roll, as investors seek perceived stores of value.

WORLD TRADE

Trump talked loudly and carried a big stick on the subject of tariffs during his first term, but he only really wielded the stick at China. Other nations, such as France and Mexico, were spared, albeit only once they offered concessions. We may see the same again this time around given Trump’s propensity to seek a deal.

If all of the planned tariffs are imposed, it seems logical to assume this will boost inflation, as the price of imported goods will rise owing to the duties, or the higher cost of domestic production.

But the best cure for higher prices is higher prices, as they ultimately curtail demand (or stoke output), and tariffs are seen as a major contributor to the deep global downturn suffered in the 1930s, so the picture may not be so simple. Markets still think growth is set fair in 2025, and tracking world trade flows will help to gauge whether that is the case or not. At the moment, the picture looks healthy.

THE DOLLAR

If Trump’s tariffs succeed in reducing America’s trade deficit, that will mean fewer dollars leave America. If they produce America’s first trade surplus since 1975, dollars will actively flow back into the US. That could be a problem, according to professor Robert Triffin’s theories, because of the dollars status as the world’s reserve currency. In essence, greenbacks are the green grease that oils the global economy and financial markets and without them global liquidity could dry up quickly, with potentially deleterious consequences.

Emerging markets are traditionally very sensitive to the dollar, as many developing nations tend to borrow in bucks, and a strong US currency increases the cost of servicing that debt, to the detriment of growth and investment. Investors here will therefore be watching US trade policies with particular care.

OIL AND FOOD PRICES

Inflation continues to hover around the 2% target given to central bankers around the world, thanks to a marked easing in goods prices. Food and oil prices are helping here, but they remain highly unpredictable, thanks to the vagaries of the weather and geopolitics. It should be worth tracking both in 2025, especially as services inflation remains elevated and that could in turn yet stoke wage demands.

THE MAGNIFICENT SEVEN

The scientist and science fiction writer Arthur C. Clarke is on record that: ‘Any sufficiently advanced technology is indistinguishable from magic.’ Investors certainly seem as bedazzled as ever by the so-called Magnificent Seven. This year’s average 65% gain across the septet leaves them with an aggregate market capitalisation of $18 trillion, or 35% of the S&P 500. That powerful performance in turn means the S&P 500 represents 63% of the FTSE All-World’s market valuation, a level that exceeds even the high seen at the peak of the technology, media and telecoms bubble in 2000.

The share price and profit wobbles of 2022 showed that this group are not entirely immune to the economic cycle, so an unexpected recession could be one challenge. Sustained inflation could be another if it keeps rates higher than expected and boosts nominal growth from downtrodden cyclicals and value stocks. Again, only a perfect middle path may do.

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