2025 Investment Outlook Part One: Markets, Valuations, and More



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What this video's about:

In this edition of "The Market Share," Paul Gifford, Chief Investment Officer at 1st Source Bank, and Rob Romano, Director of Research, discuss their investment outlook for 2025. They cover topics such as stock markets, corporate earnings, valuations, and potential investment opportunities.

Stock Markets and Corporate Earnings

Paul and Rob highlight that 2024 has been a great year for equity investors, with corporate earnings growing around 10%. This growth is largely driven by the tech sector, especially investments in semiconductors and software for AI-supporting data centers. Rob mentions, "Microsoft's capital expenditures last quarter were almost equal to all of 2019." Looking ahead, analysts expect earnings to grow by 13% year over year, with record operating margins. However, Rob warns that economic growth is moderating, and the job market is showing signs of slowing. This could pose risks to these forecasts.

Valuations and Investor Sentiment

They then discuss high market valuations. The S&P 500 is trading at 21-22 times forward earnings, near the top of its historical range. Rob stresses that while high valuations might not matter short-term, they are crucial long-term. High valuations and lofty earnings expectations mean investors need to be aware of risks. He notes that investor equity positioning shows a somewhat euphoric sentiment, similar to peaks in 2001 and 2020.

Opportunities and Pitfalls for 2025

Rob talks about potential opportunities and pitfalls for equity investors in 2025. He avoids making specific predictions about the S&P 500, quoting Yogi Berra: "It's tough to make predictions, especially when talking about the future." However, he sees midcap stocks as promising, noting they offer faster growth than large caps and are less risky than small caps. Internationally, Rob is less optimistic about Europe due to its manufacturing-based economy, higher unemployment, and reliance on a weak Chinese market. Therefore, they continue to underweight European equities.

Conclusion

Look forward to growth opportunities in 2025, especially in midcap stocks. But investors should expect lower returns than previous years due to high valuations and potential economic headwinds.

This video is the first in a three-part series on our 2025 investment outlook. Stay tuned for the next installment, where we'll dive into investment strategies and the Federal Reserve. Subscribe to The Market Share today-you won't want to miss it!

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