Our 2025 Outlook offers our highest conviction investment ideas for 2025.
President, Wells Fargo Investment Institute,
Chief Investment Officer, Wealth & Investment Management
In its “2025 Outlook: Charting the Economy’s Next Chapter,” Wells Fargo Investment Institute considers the investment implications of a new economic chapter that features a modified trajectory of Federal Reserve interest-rate cuts, a new and still evolving policy landscape in Washington, and ongoing and potentially volatile geopolitical risks.
To help investors prepare for what we see down the road, we present highlights of our top five portfolio ideas for 2025:
1. Prepare for abundant liquidity to broaden opportunities
We expect abundant cash available for spending and investment as fiscal spending and monetary policy both support economic growth. Bank reserves have declined from their peak but remain plentiful, supporting credit growth. Additionally, ample cash on the sidelines and continued elevated federal-government spending levels and Fed interest-rate cuts bolster the case for a full allocation to equities, including our outlook for broader sector participation.
We also think it is important to avoid areas of the market that are defensive in nature and may detract from performance.
2. Position for a cyclical recovery but remain tilted toward U.S. assets
As the new chapter develops, we favor beginning to establish positions in economically sensitive asset classes and building more sizable positions as economic conditions likely improve in 2025. We expect market leadership in large-cap equities to broaden to Industrials, Financials, and Energy. Small-cap equities also should benefit from the economy’s quicker pace and lower interest rates.
We believe the U.S. will lead the global economy in 2025, so we continue to favor U.S. markets over international as well as developed markets over emerging markets.
3. Rethink investment income
Money market funds and other short-term fixed-income instruments will likely see a diminished spread between income from yield and inflation. For those clients looking to lock in higher rates for income purposes, we favor extending bond-portfolio maturities through a laddered strategy. We recommend investing first in intermediate and long-dated maturities and then in shorter maturities.
Besides fixed income, investors may earn dividend income from equities. When selecting companies for dividend-income potential, we favor those that offer a sustainable income stream and high-quality balance sheets. For qualified investors, Private Debt offers opportunities to increase income through exposure to often fast-growing, high-yield companies.
4. Consider expanding opportunities in artificial intelligence (AI)
While the direct investment in semiconductors and cloud services needed to build AI capabilities has been the driving force behind much of the investor excitement related to AI over the past couple of years, we think this direct investment growth rate will slow. We expect increased investor scrutiny and potential divergence among mega-cap technology companies in 2025 as investors start to question the large amounts of capital being dedicated to AI and how the technology will ultimately be monetized.
We expect the AI theme to broaden, benefiting companies across many sectors and industries typically more removed from the more traditional technology-oriented sectors. Over the long term, energy infrastructure and industrial equipment are needed to build the foundation to integrate AI further into the economy. These core inputs to the growth trend in AI look more attractively priced than the big names in the Information Technology sector. This spillover effect from Information Technology into Industrials and energy infrastructure we believe will be themes into the future but with opportunities today.
5. Keep extreme risks in perspective
We remain cautious of the risks that adverse geopolitical events pose to global market conditions. However, the opportunity cost of allocating a portfolio solely to prepare for low-probability events is considerable. Our guidance focuses on the highest-probability outcomes but includes strategies to protect against low-probability, high-impact risks.
We prefer to avoid positioning portfolios for extreme risks that tend to garner headlines. Instead, we favor overweight allocations to a broad basket of commodities for their hedging properties against geopolitical events as well as the Industrials equity sector, in part due to its potential to offset geopolitical risks that may induce faster growth in defense spending. In addition, investors may want to hold allocations up to strategic weights of high-quality fixed income as protection against market volatility. For qualified investors, alternative investment strategies can also help limit downside participation when equity markets flounder.
Download our 2025 Outlook report for further insights
Notably, 2024 marks the 10-year anniversary of Wells Fargo Investment Institute. During that time, I’ve been proud to lead a group whose research, guidance, and advice have helped investors make more informed decisions as market landscapes shift.
With that in mind, I encourage you to obtain more detailed information regarding our top portfolio ideas and find out what we see ahead for the economy and the markets by downloading our “2025 Outlook: Charting the Economy’s Next Chapter.”
Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. Investments in fixed-income securities are subject to interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity. Alternative investments, such as hedge funds, private equity/private debt funds (collectively referred to as private capital) and private real estate funds, are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of the U.S. securities laws. They are speculative, highly illiquid, and are designed for long-term investment, and not as trading vehicles. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, changes in interest rates or factors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
