As we enter 2025, investors face an environment of mixed economic signals, where resilient corporate earnings and easing inflationary pressures are balanced by geopolitical uncertainty and uneven global growth. Central banks in key economies are easing monetary policy, creating both challenges and opportunities. Against this backdrop, developed market equities stand out as a potential bright spot for diversified portfolios. This article explores opportunities for investors in the year ahead, focusing on US, European, and Japanese equity markets.
US equities – looking beyond mega caps
The outlook for US equities remains robust2, underpinned by resilient earnings expectations, particularly when compared to other international markets. However, the stretched valuations of mega-cap companies have left these stocks vulnerable to potential corrections, emphasising the importance of diversification.1
In this environment, small-cap equities stand out as a compelling opportunity for investors. With their earnings growth projected to outpace that of large caps, small-cap stocks are trading at significant valuation discounts. For example, the 12-month forward price-to-book ratio for US small caps remains near multi-decade lows, even after the market's recent rallies.2 This combination of favourable valuations and earnings growth potential creates a potentially attractive entry point for investors seeking exposure to domestic-focused companies.
Additionally, the broader economic trend of increased domestic production, driven by higher trade tariffs and supply chain re-shoring, is likely to benefit small caps more directly than their larger counterparts. For investors seeking to balance risk and return, an equal-weight index approach offers a thoughtful alternative to traditional cap-weighted indices. By spreading exposure across a broader range of companies, equal-weight strategies can reduce concentration risks and capitalise on overlooked growth opportunities in the market.
European equities: Opportunities amid recovery
European equities showed modest gains in 2024,3 and cautious optimism prevails for 2025. While the region faces domestic and geopolitical challenges, the European economy is projected to experience slow but steady growth over the next few years.4
One key tailwind for European equities is the anticipated decline in inflation toward the European Central Bank's (ECB) 2% target. As inflation moderates, the ECB is expected to gradually ease monetary policy, which could boost household spending and economic activity. Additionally, European equities currently trade at a substantial discount compared to their US counterparts,5 offering a potentially more attractive valuation backdrop for investors.
From an investment perspective, value stocks stand out as a compelling opportunity in this environment. These stocks, often characterised by strong fundamentals and lower valuations relative to their intrinsic worth, offer potentially attractive entry points for investors looking to capitalise on Europe's recovery.
In addition to value stocks, we see potential in the financial sector, which could benefit from the improving macroeconomic backdrop and accommodative monetary policies. Financial institutions, in particular, may experience increased profitability through higher lending activity and improved asset quality as economic conditions stabilise. This dual opportunity in value stocks and financials provides a balanced approach for investors seeking exposure to European equities.
Japanese equities for value and diversification1
We are optimistic about Japanese equities, viewing them as both a strong value proposition and a compelling diversification1 opportunity. Japan's long-term trends of rising capital efficiency and increasing shareholder returns remain robust, even in the face of recent headwinds such as the equity sell-off during the summer.
Adding to the appeal, Japanese companies have been actively implementing reforms to enhance transparency, fostering a more investor-friendly environment. These factors position Japanese equities as a potentially attractive option for global investors.
Conclusion
In 2025, developed market equities present a diverse1 range of opportunities, from the growth potential of US small caps to the recovery-driven prospects in European value stocks and financials, and the long-term appeal of Japanese equities. These markets provide a solid foundation for portfolio diversification1 and growth amid ongoing global economic shifts.
For investors seeking an efficient way to access these opportunities, exchange-traded funds (ETFs) offer a simple and convenient solution. ETFs provide broad exposure to developed market equities while maintaining flexibility, transparency, and cost efficiency, making them a potentially excellent choice for navigating the year ahead.
1: Diversification does not guarantee a profit or protect against a loss.
2: Source: Bloomberg, Amundi. Data as at 15/11/2024. Past performance is not a reliable indicator of future performance.
3: Past performance is not indicative of future returns.
5: Source: Bloomberg, Amundi as at 29/11/2024. Past performance is not a reliable indicator of future performance
