Where to invest for 2025 Part 2

US equities – is the S&P 500 overvalued?

“While it is easy to create a narrative in favour of US equities, there are several scenarios which could quickly turn markets in a different direction,” Dan Coatsworth, investment analyst at AJ Bell, tells MoneyWeek.

So far they have responded positively to news of Donald Trump’s re-election, based on the assumption that he will throw his weight behind the stock market and adopt a pro-business, low-tax and low-regulation approach.

“It is well known that Trump views the US stock market as one of the most important barometers of economic performance and, as such, he will look to implement supportive policies,” says Morrisey. This could include reducing corporate taxation, and slashing regulations across the economy. Morrisey believes this “could facilitate greater innovation and efficiency with a resulting boost in productivity”.

However, a more pessimistic read on his upcoming second term complicates the picture. “Bears say many of his policies threaten to push up inflation and cause heightened geopolitical tensions, such as through a trade war,” says Coatsworth.

“We’ve had a very strong year for markets,” said Kyrklund. “The question is, can equity prices, in particular, continue to rise in 2025?”

Kyrklund believes that equities will continue to be “the main source of returns” in 2025, but says that the current stretched valuation of the S&P 500, in particular, poses a challenge.

“We need to be a little bit careful there – a lot of good news has been priced in,” she says. Similarly, Raithatha suggests “a cautious approach towards US equities due to elevated valuations”.

There could be potential in smaller US stocks. “Deregulation, tariffs and tax cuts should favour smaller, domestically-focused US companies,” says Stevenson. “These stocks have underperformed the tech giants over the past two years and valuations are less stretched as a result.”

Global equities – are UK stocks undervalued?

Equity markets could, though, finally rotate away from the US megacaps that have dominated for the last two years. “I’d argue that if you move away from the megacaps in the US and look internationally, the valuations do look more attractive,” says Kyrklund.

Raithatha views UK equities, non-US developed markets, and emerging market equities as the best potential sources of . Emerging markets could, however, be dented by the headwinds facing China, including rising trade tensions and an insufficient fiscal stimulus.

The UK stock market is “cheap, offers attractive dividends, and contains lots of companies that might be in demand if the US market disappoints,” says Coatsworth.

Similarly, despite her concerns over the inflationary impacts in the UK, Seath highlights t UK stocks and shares are “cheaply valued”. Britain is also relatively stable politically compared to Europe’s other large economies, which could make it an attractive proposition to investors.

There could also be a tailwind for UK infrastructure stocks, driven by renewed emphasis on public investment. This, says Stevenson, could offer “steady, inflation-linked returns”.

Besides the UK, investors may want to consider Japanese stocks. As of 19 November, the Nikkei 225’s earnings yield stood at 4.9%, compared to the S&P 500’s 4.1%, according to Bloomberg data compiled by CME Group. Other valuation metrics such as price-to-sales and price-to-book valuations support the view that Japanese stocks areundervalued, especially compared to US counterparts.

While Japan looks interesting, “Europe looks more challenged, and recovery in China will be muted”, says Stevenson.

In general, Stevenson advocates avoiding US megacaps where possible due to stretched valuations. This could mean allocating to global income funds rather than tracker funds as a source of income, as the latter will be oversaturated with the tech megacaps.

Bonds – income or diversification benefits?

Giulio Renzi-Ricci, head of asset allocation at Vanguard Europe, believes that “bonds are still back” and that yields are likely to remain above 4% across the curve in the US during 2025. He believes that bonds can act as a ballast for any long-term portfolio to offset fluctuations in other investments (particularly shares).

These high yields make bonds a particularly attractive investment at present, as they can provide a ‘coupon wall’, protecting positive returns even in the event of a modest interest rate rise, says Raithatha.

Kyrklund recommends holding bonds in a portfolio – but for income, rather than for diversification.

“Yields are still very attractive in bonds. [They are a] great source of return [and] income for clients,” she says. She also believes that they are currently “tactically cheap”.

Raithatha expects UK bonds to return 4.3%-5.3%, and global ex-UK bonds 4.5%-5.5%, to sterling investors over the next decade.

Commodities – should you invest in gold?

Rather than bonds, Kyrklund recommends commodities as a more effective means of diversifying away from equities in the current environment.

“Compared to the last decade, when commodities really offered no diversification, in this decade we have typically seen benefits from owning commodities from a diversifying standpoint.”

Investing in gold appears to be one particularly savvy route to diversification via commodities.

Gold has had a stellar year, and some could be forgiven for thinking this now isn’t a good time to buy gold. However, Kyrklund believes that it offers a solid hedge against currently elevated levels of fiscal spending as well as offering superior diversification from equities compared to bonds.

“Gold can be another hedge against any negative news from the US and inflation remaining sticky,” says Coatsworth. “Just look back to the 1970s, when commodities, notably gold and oil, did better than everything else during a period of lofty inflation and geopolitical tension, most notably in the Middle East.”

Copper is another commodity to keep an eye on in 2025. “The copper market is entering 2025 with a widening supply-demand deficit,” Jacob White, ETF Product Manager at Sprott Asset Management, says in HANetf’s outlook. This is driven by the combination of increasing structural demand for copper, given its importance to electricity transmission, and “persistent supply-side constraints”.