Keep on truckin’: Will the US continue to outperform other markets?
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Deep Dive
Why did the Investment Strategy Group (ISG) choose "Keep on Truckin’" as the title for their 2025 outlook?
The title reinforces the ISG's long-held conviction in U.S. preeminence as an investment theme, signifying their belief that the U.S. economy will continue to outperform other markets.
Why does the ISG maintain its recommendation to stay invested in U.S. equities despite stretched valuations?
While acknowledging expensive valuations, the ISG believes that strong U.S. GDP growth (around 2.3%) will likely generate robust earnings, making current valuations manageable. They also dismiss the idea of equity valuations reverting to a long-term post-World War II mean.
What is the ISG's outlook for U.S. equity returns in 2025?
The base case is an 8% return, slightly up from the previous year's 6% due to a recent market downdraft. They see a reasonable probability of returns exceeding this, suggesting attractive returns are likely despite the high valuations.
How does the ISG view the potential impact of rising interest rates on U.S. equities?
Their base case anticipates interest rates coming down. They believe the impact on U.S. companies will be negligible due to the low interest burden from previously low rates. While higher rates could affect the discount rate for forward earnings, this is not their primary scenario. They also downplay concerns about the U.S. debt trajectory as a near-term risk.
How has the ISG adjusted its asset allocation strategy for 2025?
To maintain a sufficient overweight position in U.S. equities, they slightly reduced allocations to non-U.S. equities and shifted those funds into private assets, specifically buyout and growth equity, anticipating better returns from these primarily U.S.-oriented investments over the next 10 years.
Why doesn't the ISG consider seemingly cheap valuations in non-U.S. developed markets a compelling buying opportunity?
They argue that superficial comparisons are misleading due to sectoral differences. The U.S. market's heavy weighting in high-valuation technology stocks skews the comparison. After adjusting for sector composition, these markets appear less cheap. Furthermore, the ISG highlights the U.S. economy's faster growth, diversity, and limited exposure to China's slowdown as factors justifying a valuation premium.
Why is the ISG pessimistic about investing in China despite recent stimulus efforts and low valuations?
They believe China will, at best, experience a Japan-style slowdown due to demographics and other headwinds. While short-term rallies are possible due to stimulus, they are not considered sustainable, making China a trading environment rather than an investment one.
Does the ISG recommend gold as an inflation hedge in 2025?
No, they do not. They argue that gold has not historically been an effective inflation hedge, with U.S. equities performing better in inflationary periods. Current gold price movements are attributed to central bank and Chinese purchases, not inflation concerns. They remain agnostic on gold's future price and advise against tactical allocation.
What is the ISG's view on Bitcoin and other cryptocurrencies?
They maintain that cryptocurrencies are not investment assets but rather speculative trading instruments. They lack fundamental characteristics like cash flows, earnings, and diversification benefits. The recent price rally is dismissed as self-fulfilling speculation, and they see no reliable way to determine value.
What is the ISG's recommended approach to hedging portfolios in the current environment?
Instead of expensive hedging strategies like put options, they recommend a robust strategic asset allocation with sufficient high-quality fixed income. This approach provides downside protection while avoiding the costs and potential upside sacrifices of active hedging.