A changing macroeconomic backdrop could create new pockets of leadership in global equity markets, according to Janus Henderson’s head of Americas equities Marc Pinto and head of EMEA and Asia Pacific equities Lucas Klein.
The dominance of the Magnificent Seven tech stocks could give way to new market dynamics this year 2025 as valuations diverge, geopolitical uncertainty grows, and policymakers focus on balancing inflation and growth, they write in their 2025 outlook.
Expectations have grown that president-elect Donald Trump will introduce a more business-friendly environment – from lower corporate tax rates to deregulation – that could propel domestic economic growth. In addition, the Federal Reserve is still projected to make two additional 25 basis point cuts by mid-2025.
Concurrently, many non-US markets are also pursuing policies to drive growth and/or anticipate geopolitical changes, while the effects of artificial intelligence on the broader economy, create investment opportunities that go beyond the Magnificent Seven.
“All of this could be good news for active investors,” argued Janus Henderson.
Their research shows that when the S&P 500 EW has outperformed the cap-weighted S&P 500 Index over a one-year period, the top-performing quartile of actively managed, large-blend US equity funds has also outperformed 93% of the time. Similar advantages continued over three- and five-year periods.
An area of their particular appeal is small caps.
“Historically, small- and mid-size firms tend to outperform during periods of declining rates since these companies often have levered balance sheets and therefore benefit from lower interest expense, boosting earnings. Reduced borrowing costs can also spur mergers and acquisitions or help minimize concerns about company liquidity,” Pinto and Klein write.
Meanwhile, the relative outperformance of large caps could also be getting “long in the tooth”. In the past, cycles of large- and small-cap outperformance typically alternate every six to 14 years, they note, yet the current run of large-cap dominance is butting up against the far end of that range.
Small caps also have large weightings in industrials and materials and could benefit from the onshoring of supply chains. And globally, small caps now trade at relatively attractive valuations.
In addition, innovation is opening up new end markets, including in non-tech sectors such as healthcare. Improvements in scientific understanding and research tools are leading to the launch of groundbreaking products, such as GLP-1s for obesity.
“It’s just one example of the many innovations that we think could drive returns in the year ahead and lead to a more dynamic playing field for equity investors,” write Pinto and Klein.
