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Last year, markets proved resilient in the face of global challenges, but will this momentum persist in 2025? As fiscal policies shift and trade dynamics evolve, diversification will be key to managing risks and capturing new opportunities.

At a glance
- The post-election landscape remains complex;
- We observe an extremely narrow market where returns are concentrated in a few mega-tech stocks;
- By focusing on asset classes priced cheaply at extreme levels, we aim to uncover the hidden opportunities within these extremes.
In 2024, markets demonstrated resilience amid dynamic global conditions. Equity markets saw robust returns, driven by technological innovation and a decisive US election outcome. Tightening spreads in bond markets, while offering higher yields than much of the past decade, highlighted the importance of navigating credit risk in a prudent manner.
As we enter 2025, the post-elections macroeconomic backdrop remains complex. This evolving landscape demands a nuanced approach where diversification, discipline and flexibility are paramount.
SJP Market Outlook
Through 2025, we expect the economic landscape to be shaped by fiscal policy, evolving trade dynamics and divergent regional growth trajectories. As governments balance election pledges against debt sustainability, trade frictions, tax policies, and protectionist measures are adding layers of uncertainty. Tariffs are likely to be inflationary, prompting a slower easing of interest rates. Some of the more heightened risks include higher-for-longer interest rates, which could create a negative credit conditions feedback loop, and US fiscal concerns, which could also keep US bond volatility elevated.
We may also see the euro area coming under more economic pressure, boxed in between deficit concerns and headwinds in manufacturing, including high energy prices and competitive pressures from China. Stock valuation levels—at deep discounts to US markets—do already reflect the weak sentiment to some extent, however, and some quality global players can be picked up at very reasonable prices.
Navigating fat tails
The concentration of the US equity market into a select group of companies reached near all-time high levels in 2024, with the top 7 stocks of the S&P500 (collectively known as the “Magnificent 7”) making up 34.6% of the S&P500 as of the start of 2025 (i.e. the other 493 companies only make up around 66% of the S&P500 index). In fact, it is calculated that the S&P500 – more recently seen as the proxy benchmark of global equity returns - would have grown at just 4% and 6%, respectively, in 2023 and 2024 without the Magnificent 7. In such a narrow market, any attempt to beat the index required overweight positions in effectively these mega-tech stocks, compromising diversification and increasing volatility.
In a normal market environment, extreme and concentrated losses and gains are rare, and most returns sit somewhere in the middle. However, extreme outcomes – known as “fat tails”- become more likely in uncertain environments.
History offers valuable lessons on navigating fat tails. Take Trump’s first term: initial fears of economic turmoil and geopolitical disruption were widespread. Yet markets defied expectations, with the MSCI China Index nearly doubling during the period despite tensions in US-China relations.
The lesson? Predictions fail, but diversified portfolios succeed in the long term.
The power of diversification: opportunities and risks
Diversification remains critical to minimising the risks of fat tails and positioning portfolios to weather any market environment.
In 2024, valuations for companies listed outside the US were trading at a 38% discount relative to those in the US, levels rarely seen throughout history.
Emerging markets (EM) equities, in particular, are at an intriguing crossroads. After years of underperformance relative to developed markets, EM equities are trading at near historic lows – valuations seen only a quarter of the time over the past two decades. Urbanisation, favourable demographics, and an expanding middle class are some key structural drivers making this asset class particularly compelling.
Meanwhile, a shift towards higher-value sectors such as technology and consumer goods further strengthens the long-term case for EM equities. Asia is home to some of the world’s most dynamic technology firms, which are driving innovation and commanding significant market share in areas like semiconductors, e-commerce, and renewable energy.
Challenges remain, including geopolitical tensions, high US interest rates and a strong dollar. However, history shows that prolonged underperformance often sets the stage for significant rebounds. As global monetary policy eases and geopolitical risks are repriced, EM equities could deliver robust returns.
In the US market, smaller companies and value stocks are priced at historically high discounts relative to their larger and more growth-oriented counterparts. The last time we saw such discounts was in the lead-up to the dot-com bubble in the late 1990s.
Beyond valuation, small caps possess structural advantages, including domestic focus, innovation and earnings growth.
Navigating the path ahead
The challenges investors face today include geopolitical risks such as tensions in the Middle East and unpredictable US foreign policy, which are accompanied by an increased likelihood of fat-tail events in 2025. Preparation is key. Diversifying across asset classes and regions remains the cornerstone of defending against the unexpected and seizing opportunities as they arise.
In an environment rife with exuberance and the fear of missing out, focusing on achieving long-term goals rather than chasing short-term gains is more important than ever. The best climbers are those who go steadily, ensuring every step is taken with purpose and every risk is minimised with preparation.
While we can’t predict the precise shape of the market landscape, we can prepare for its many possibilities. The terrain may be steep, but preparation ensures the summit is always within reach.
This article is a general communication that is provided for informational purposes only. It should not be relied upon as financial advice, and it does not constitute a recommendation, an offer or solicitation. No responsibility can be accepted for any loss arising from action taken or refrained from based on this publication. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.
Please note that past performance is not an indicative of future performance, and the value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
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