Schroders Releases 2025 Investment Outlook: Opportunities and Risks in US Stocks, US Dollar, and Artificial Intelligence

According to the Zhitong Finance APP, Schroders Investment stated that in 2024, the U.S. stock market will benefit from the leadership of the seven tech giants, resulting in extraordinary market performance. Looking ahead, the investment environment may become more nuanced and volatile, with stock market returns facing greater volatility. The firm believes that in 2025, the high concentration of the U.S. market will continue, the returns from global diversified investments will become more attractive, but the outlook for the U.S. remains positive, expecting U.S. stocks to maintain their dominance. The dollar is in a balanced state, with short-term momentum offset by long-term concerns. The main beneficiary of the Federal Reserve's inability to significantly cut interest rates will again be the dollar, and its policies will further boost the dollar in 2026. For artificial intelligence enthusiasts, whether substantial corporate investments can yield returns and the practical application of AI will be the challenges faced in the future.

Schroders anticipates that the investment themes for 2025 will include:

Expectations of greater volatility in stock market returns

Many positive news in the market have already been digested, and there are signs of excessive optimism in the investment market. This increases the risk of greater volatility in the future investment market, with multiple potential catalysts, especially the outlook for the global trade war and the return of "bond vigilantes" after decades.

Despite the current macroeconomic and geopolitical outlook being exceptionally uncertain, or even nearly impossible to predict, a more pressing question is whether there will be a change in market leadership, moving away from the themes that dominated 2023 and 2024.

The concentration of the U.S. market will continue, which may not be a bad thing

The current high concentration of the U.S. market is not uncommon by long-term standards or in global comparisons. Although from a risk perspective, a portfolio may be overly concentrated, the performance of the index may not reflect the same situation. For investors, the most important factor should be potential mispricing rather than concentration.

Based on this, there is no strong evidence to suggest that large-cap index stocks have formed a bubble. While the excess returns of large-cap stocks will likely become increasingly difficult to sustain at the same pace as before, the high concentration of the market seems likely to persist. However, this does not rule out changes in market leadership.

U.S. stocks are expected to maintain their dominance, but the returns from global diversified investments will become more attractive

The strong productivity growth in the U.S. is often seen as a key driver of the American exceptionalism narrative. Evidence shows that over the past few decades, the performance of the U.S. market and stock market has been markedly different from that of the rest of the world, and forecasts indicate that this trend will continue.

Valuation-based arguments are the strongest evidence for a reversal of U.S. stock dominance, as no matter how influential the "seven giants" stocks are, the U.S. stock market appears expensive relative to other regions and its own historical standards.

However, the higher profitability of U.S. companies seems to justify the valuation premium, although this does not mean that the U.S. stock market is cheap. In any case, most of the positive news has already been reflected in prices, and other regions have also presented attractive potential investment opportunities, which enhances the rationale for regional diversification Artificial Intelligence Enthusiasts Are About to Face a Test

Artificial intelligence has become mainstream in recent years, with the promise of generative AI significantly enhancing productivity prompting companies to invest approximately $1 trillion in capital expenditures over the next few years. As for whether these investments will yield returns, there is currently no conclusion, with various opinions, all based on highly uncertain assumptions.

Comparing it to other inventions like the internet may be overly exaggerated. The internet provided low-cost solutions from the outset to replace more expensive options. In contrast, developing AI technology still requires substantial funding to operate, and related costs may not decrease over time to make workflow automation cost-effective. While long-term productivity (and corporate profits) will undoubtedly be higher than in scenarios without AI, it has yet to be confirmed how much productivity will actually increase and when the effects will manifest.

The institution believes that more specific case studies of AI applications that enhance productivity need to be seen to more accurately estimate the benefits it brings. Meanwhile, the institution is skeptical that expectations may have already reached excessive levels.

After 2025, High Interest Rates and Volatility Will Persist

In addition to de-globalization, decarbonization, and demographic changes, a major long-term theme may be that investors' returns on investment will decline. Equity investors need to get used to nominal returns being below 5%, primarily due to the current high valuation starting point, especially in the U.S. market.

Global equity returns outside the U.S. will likely be more attractive in the future due to more appealing valuations, and a potential decline in the dollar could provide a currency tailwind. However, after years of ultra-loose monetary policy, the likelihood of returning to a higher interest rate environment in the post-pandemic period is very high