Market Outlook 2025

The past year has, in many ways, been as normal as we had hoped. The global economy is running at a slow pace, inflation is largely under control, and short-term interest rates are on a downward trajectory—aligning with our and most analysts' predictions. However, the unexpected strength of stock market performance, particularly in the United States, has been a standout feature. An election year in the US, combined with a business-friendly outcome, is perhaps the simplest explanation for this trend. Geopolitical factors appear to have had less impact on the economy, especially given that oil prices are lower than at the start of the year.

Inflation has gradually fallen back to central bank targets of 2%, with the drivers of core inflation clearly subdued. Consumers have remained cautious, although there are signs of a turnaround as purchasing power improves in several regions due to lower interest rates. Industrial companies have experienced weak order volumes, and production points to low-capacity utilisation. Here, too, lower interest rates are supportive, improving cash flows. The International Monetary Fund's (IMF) forecasts for 2025 suggest growth of 2.2% in the US and 1.2% in the Eurozone.

The risk of higher inflation is most pronounced in the US, given the expected growth-oriented policies of the incoming president. Increased tariffs also have an inflationary effect as prices rise, although the ultimate outcome remains uncertain. Current expectations are that US short-term interest rates will be at 3.5% in three years, compared to the current level of 4.5–4.75% (early December 2024).

In Europe, the challenges are different, with growth remaining low. While inflation is more or less fully under control, productivity improvements are insufficient to support corporate profitability. As a result, profit growth is weaker for businesses in the region. That said, listed companies are often global and/or possess very strong market positions, which mitigates the impact of these challenges. The Nordic region is a positive exception, thanks to open economies and a more dynamic business environment.

Global Equities

Equity markets have performed well, with US stock markets leading the way. The S&P 500, for example, has risen by over 35% (in Swedish krona) so far in 2024 (as of December). Japan has also performed strongly, with the Nikkei 225 index up by approximately 18% (in Swedish krona), while Europe has lagged behind, with the Eurostoxx 600 index in the EU up by 10% (in Swedish krona). The single most important factor influencing the markets, beyond macroeconomic developments, is undoubtedly the transformation driven by artificial intelligence (AI) and the growth it has stimulated.

US tech companies have led the rise, with a focus on the “Magnificent 7” stocks (the seven largest US companies by market capitalization). Collectively, these account for roughly one-third of the S&P 500 index. As in 2023, the AI trend has gained strength, driven by investments in both hardware and software. Growth has been strongest in this area, which has been rewarded with high and ever-increasing multiples for tech stocks.

Companies lacking a clear technological growth driver have generally seen low sales growth, regardless of sector, leading to relatively weak share price performance. Only companies with clear market leadership positions compared to competitors and a growing offering have been rewarded. These are primarily found in IT and Communication Services’ sectors, but also to some extent in Industrials and Consumer Goods. The picture for pharmaceutical companies (within Health Care) is more complex, with future sales largely dependent on patents and product approvals, with successful innovation as a key value driver. Valuation in this area is largely governed by expected success and its predictability.  

We anticipate that 2025 will be characterised by two key factors: near-term growth and the normalisation of profitability and margins. The bottlenecks caused by the pandemic and supply chain disruptions are now a thing of the past. The economic slowdown has helped address these issues. Instead, anticipated trade barriers and semiconductor stockpiling, particularly in China, have created over-demand. Even as this subsides, we believe structural factors within tech-heavy industries will support growth in the coming years.

Simply put, companies with growth and/or strong margins deserve high valuations, provided earnings growth is robust. Companies with low or no growth are usually valued lower. With few exceptions, we expect this to remain true moving forward. Our focus on quality companies leads us to invest primarily in growth and in businesses with undervalued earnings potential and strong margins in a "normal" year. 

Identifying the right companies within each sector will likely be a critical success factor in 2025, where we aim for high certainty in our assessments.        

Nordic Fixed Income

The bond market has continued to show strength this year, delivering solid returns. Both long and short-term rates have fallen, reflecting an economic slowdown as a result of globally coordinated central bank rate hikes aimed at combating inflation. During the year, central banks have started to normalise short-term rates through rate cuts, with further reductions expected in 2025.

Historically high interest rates and relatively wide credit spreads have attracted record levels of capital to the credit market. This has led to a gradual narrowing of credit spreads and increased bond issuance from companies during the year. At the same time, expected future returns have slightly decreased, while risk has also been reduced. The primary reason for this risk reduction is the decline in interest costs, which has a direct positive impact on corporate earnings. Additionally, lower interest rates positively affect demand for products and services among both producers and consumers. These factors do not immediately influence bond pricing, creating opportunities for attractive investments. 

As we approach 2025, we note that the pricing of corporate bonds has normalised across sectors, with sector variance in credit spreads indicating similar pricing regardless of industry. However, earnings expectations vary significantly between sectors, with Energy, Materials, and Telecommunications expected to generate higher profits than, for instance, the Automotive and IT sectors. We continue to see the greatest opportunities in identifying mispriced bonds within sectors rather than between them.

Trade wars involving tariffs could have consequences that are difficult to predict, but many of Sweden's large companies have already established manufacturing facilities in the US. This likely makes them more resilient to the direct effects of US tariffs compared to companies from many other countries. From a European perspective, the macroeconomic environment appears weak, but the Nordics stand out with higher expected GDP growth in the coming years. Overall, the macro environment limits companies' ability to grow or significantly strengthen margins. We believe that in the coming year, there will be an increased number of mergers and acquisitions as a way for companies to achieve growth and economies of scale. From a credit perspective, a macro environment with restrictive characteristics is generally positive.

In this environment, we prefer bonds with short to medium maturities and coupons that adjust to prevailing interest rates. Bonds with slightly higher credit risk, but with visibility on future earnings and margins, are often particularly attractive investments. In each case, we conduct our own credit assessment of companies to ensure the best possible outcomes.

Summary

The outlook for equity markets differs between the US and Europe. 

We expect US growth to remain at a healthy level, with relatively low inflation supported by a dynamic labour market and improved productivity in businesses. The macro risks lie in protectionist measures that could drive inflation and therewith reduce the scope for rate cuts. US stock markets have demanding valuations, justified by earnings growth that remains at high levels. Technology companies play a significant role in the indices, significantly influencing market trends. While earnings need to catch up with valuations, we cannot expect outperformance like in 2024. A stock market return in line with the cost of equity in 2025 should be considered a good outcome.

Europe faces a weaker economic cycle with very low growth and structural challenges. Here, inflation is under control, and further rate cuts are likely. The now-inverted yield curve is gradually normalising. The economy is near a bottom, and a gradual but modest recovery is expected for 2025. European companies are often global and adaptable, which mitigates challenges posed by low growth within the region. Valuations of European companies are attractive, providing fundamental support for future development and good conditions for returns exceeding the cost of equity.

Our focus remains on market-leading companies across different sectors, with strong drivers such as innovation and sustainable development. By ensuring good diversification across holdings in both number and size, we create a well-balanced equity exposure with an emphasis on quality companies.

For Nordic corporate bonds, we see continued good and stable development. With economies in a recovery phase supported by falling short-term rates, companies benefit from improved cash flows—a positive factor for bond investments when capital needs or refinancing are relevant. With lower policy rates in the Nordics, we assess that returns on fixed-income securities are likely to be solid, although perhaps slightly lower than in the past year.

¹ Based on 2025 EPS expectations from MSCI Europe