2025 Global Equity Outlook
First Quarter
Key Takeaways
Developed Markets: Fed easing and the Trump administration's approach to taxes and deregulation could be positive, but policy details are still to be determined, and geopolitical risk remains high.
Emerging Markets: Despite potential tariffs and a strong U.S. dollar, emerging markets could be resilient due to favorable growth dynamics and the potential for further monetary easing.
Developed Markets
2025 Outlook: Questions Answered, Uncertainties Persist
As we enter the new year, many key questions about global markets in 2024 have been answered. Inflation continued its decline, giving the Federal Reserve (Fed) and other central banks confidence to begin cutting rates. And so far, we’ve avoided recession.
Though turmoil continues in France and Germany, elections have resolved some of the world’s political uncertainty. Still, knowing who is in charge doesn’t necessarily tell us which policies will come to fruition. This includes the U.S., where Donald Trump returns to the White House with his party in control of Congress, albeit with a slim majority in the House of Representatives.
Trump’s approach to taxes and deregulation could further bolster the outlook for businesses and resilient U.S. consumers in the near term. However, it remains to be seen whether his policy priorities will be fully implemented and how they will affect the companies we own in our developed and emerging markets portfolios.
The Fed’s path is also less clear. Expectations for rate cuts have been pared back after Chair Jerome Powell's recent comments that the Fed was in no hurry to ease.
Meanwhile, geopolitical events remain a threat to trigger volatility. If Trump follows through on promised tariffs, trade tensions could rise, and countries could institute retaliatory policies. In addition, the ongoing wars in Ukraine and the Middle East continue to take a high humanitarian toll and pose the risk of becoming broader conflicts.
Expanding AI Opportunities Beyond High-Profile Names
We expect artificial intelligence (AI) to remain a prominent theme, and our growth teams are finding opportunities to invest in the AI buildout beyond the most high-profile names. One example is the utility sector. It’s an area of the market historically known for steady dividends and often times lower volatility. Still, we believe select companies in this sector are poised for accelerating growth due to the rising demand for energy to power AI.
The data centers that comprise the backbone of AI infrastructure consume massive amounts of power, and the electrical grid system can’t keep up. For growth investors, this creates investable opportunities in companies that make power transmission and grid equipment and natural gas companies that supply the fuel for electrical plants.
Even as utilities upgrade their networks, so-called hyperscalers are considering building their own microgrids to power their data centers. One example is Amazon, which recently purchased an on-campus nuclear-powered data center from Talen Energy.
Economic Headwinds from China Affecting European Auto Sales
China’s ongoing economic weakness and years-long property slump continue to weigh heavily on consumer-oriented businesses. The uncertain backdrop has dampened consumer sentiment, causing China’s middle-class shoppers to scale back their discretionary purchases and making even wealthy shoppers reluctant to spend. Europe-based companies such as Estée Lauder, LVMH and Hermès, which have targeted the Chinese market, are struggling in this environment.
Meanwhile, European carmakers are caught up in a cyclical slowdown in automobile demand, encountering tough price competition from less expensive Chinese vehicles. Europe’s largest auto manufacturers, including Mercedes-Benz and BMW, have reported disappointing results. Meanwhile, Volkswagen, which has never closed a plant in its native country, recently reported a major drop in operating profit and announced plans to close three factories in Germany.
Japan’s Economic Growth and Inflation Boost Market Trends
Demand and inflation are rising in Japan after decades of deflation. The new environment has caused many companies to emphasize productivity more. This has been positive for IT services companies working with businesses seeking to shore up weaknesses in their technology infrastructures and gain efficiencies through digitization.
Japan is also home to some of the world’s leaders in power transmission and grid equipment. These companies benefit from the need to upgrade power infrastructure globally, including the rising demand for electricity to power data centers. In addition, these and other Japanese companies are attracting more investor interest by adopting such shareholder-friendly practices as returning excess capital to investors through dividends and share repurchases.
Emerging Markets
Emerging Markets Show Resilience Amid Economic Headwinds
Since the U.S. election, the backdrop for emerging markets (EM) has become more complex amid concerns about tariffs, the potential for higher-than-expected U.S. interest rates and a strong U.S. dollar.
Despite these headwinds, we believe EM stocks may prove resilient and maintain our constructive view. We think EM growth dynamics remain relatively favorable. We favor markets that have the flexibility to adjust policy or are insulated from U.S. politics and can rely on strong domestic backdrops.
There is room for further monetary easing by major central banks, and we don’t think Trump’s win in the U.S. election will change that in the near term. Though the Fed chair’s recent comments indicate a cautious path, we still expect the Fed to lower interest rates in the new year. This would allow EM central banks to ease monetary policy further, creating a supportive environment for stocks.
Impact of Proposed U.S. Tariffs on Emerging Markets
There’s no denying that the threat of tariffs and rising trade tension loom as potential threats to emerging markets. Trade is an area where the incoming Trump administration can implement significant policy through executive action. But it’s still not clear if the headline rhetoric will find its way into policy or whether it’s the starting position for trade negotiations.
Even with these concerns, EM economies are forecasted to grow at more than twice the rate of their developed counterparts. Notable markets include India, South Africa and Brazil, which may be less vulnerable to trade tensions due to their diverse economies, strong domestic markets and strategic trade relationships. Furthermore, some EM economies could benefit from shifting supply chains if U.S. tariffs are country-specific rather than universal.
Trade tensions also threaten Mexico. In addition to threats of across-the-board tariff hikes, the country faces uncertainty surrounding the 2026 review of the U.S.-Mexico-Canada (USMCA) trade agreement. Mexican President Claudia Sheinbaum has announced plans to encourage companies to replace Chinese parts with locally made components, which could help maintain Mexico's standing in the USMCA agreement.
China’s Fiscal Stimulus Plans and 2025 Economic Outlook
After bottoming, China’s growth recently regained momentum. Any new tariffs the Trump administration imposes would likely be met by reciprocal tariffs from China’s government. It’s also possible that China could devalue its currency to make its goods cheaper for overseas buyers, as it did in 2018 and 2019.
We think the biggest question for China’s stock market will be whether the government follows through with its fiscal stimulus plans. Although U.S. tariffs could be a drag on the country’s economic growth, a more challenging global environment could encourage Chinese policymakers to consider additional domestic stimulus programs.
The economy is weighed down by the ongoing downturn in the property market and weak consumption and consumer sentiment. A renewed trade war could prompt the government to implement much-needed structural reforms supporting domestic demand and local markets. Such a shift could foster domestic growth and potentially improve investor confidence.
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.