Capital Ideas^TM

As we head into 2025, it is hard not to notice several parallels with the past; it feels like we have seen this movie before.

The US will have a new president in 2025 but he looks familiar, and markets have rallied in anticipation of fresh leadership, much as they did in 2016. Meanwhile, the US economy remains a critical engine of global growth and some might even say is aging in reverse, much like Benjamin Button. Instead of falling into recession, as so many predicted just a year ago, we are headed Back to the Future in more ways than one.

While that plotline is hopeful, we must acknowledge the troubles we face today, which also bring echoes of the past. Ongoing conflicts in Ukraine and the Middle East, as well as increasing tensions with China and imminent tariffs from the new man in the White House, are threatening to disrupt the world. Populist movements are gaining momentum, fuelling a potential reversal of free-market policies that have shaped world trade for decades.

We have no way of knowing how these events will play out but we can say increasing geopolitical uncertainty is often associated with rising market volatility. We have seen this in 2024 as markets soared to record highs and then tumbled briefly in the third quarter amid fears economies might be stalling.

As we close the year, US equity valuations are high and prudent investors should be prepared for a correction. That is why we at Capital Group believe it is important to take a long-term approach to investing, seeking to achieve a steady balance between growth of capital and capital preservation.

While we have reasons to be optimistic about the outlook — whether advancements in artificial intelligence, an industrial renaissance in the US and Europe, health care innovation or opportunities in Japan as companies focus on shareholders — we must also be prepared for a downturn. In addition to stocks, bonds will play an important role as the normalisation of interest rates returns us to a time when fixed income can provide income, diversification and a cushion against stock market volatility.

So, the message for our latest Outlook is a familiar one: stay invested. When faced with market gyrations or geopolitical uncertainty, the biggest mistake investors can make is retreating to the sidelines. Successful investing is a long-term endeavour, requiring a focus on long-term goals.

In other words, despite the noise out there, write your own script and have the discipline to stick with it. Against this backdrop, here is our 2025 Outlook report.