Turning the Page: WisdomTree’s 2025 Investment Outlook

December 30, 2024

3 minute read

“Big stock market leadership changes need some ruction, some big change in the system,” WisdomTree’s team observes in their 2025 investment outlook, titled Turning the Page.

And indeed, the stage is set for a pivotal year, with geopolitical shifts, central bank recalibrations, and evolving market dynamics converging to create a unique investment landscape. Let’s unpack the story WisdomTree tells about the year ahead.

The Macro Backdrop: A Resilient Economy, but Inflation Plays Hardball

2025 opens with a sigh of relief: no recession looms, a marked departure from the gloom of recent years. “The financial markets will be entering a new chapter in the ever-evolving policy story,” writes WisdomTree. U.S. economic growth, albeit modest, is expected to hover around 2%, buoyed by a resilient labor market and investments in artificial intelligence. Yet, inflation remains a sticking point, with core CPI anchored stubbornly around 3.3%. Chair Powell’s words—describing the path to the Fed’s 2% inflation target as “bumpy”—resonate as markets brace for prolonged price pressures.

After a dramatic 100 basis points of rate cuts in 2024, the Federal Reserve has shifted to a more cautious stance. “Powell & Co. seem to be operating under the assumption that neutral is somewhere north of 3.5%,” the report notes, suggesting further rate cuts will be incremental at best. This restraint, coupled with an end to quantitative tightening, points to a “pause mode” as the Fed recalibrates to a less restrictive policy framework.

Equity Markets: A Changing of the Guard?

The team at WisdomTree detects tectonic shifts in equity leadership, driven by breakdowns in correlations between large- and small-cap benchmarks. “The last time a correlation breakdown of this magnitude occurred,” they point out, “small caps embarked on a 14-year run of outperformance.” With small- and mid-cap stocks poised for a resurgence, the report argues that “corporate America’s appetite for M&A could target these segments,” amplifying their upside potential.

Value stocks, too, might reassert dominance. While mega-cap technology names have powered recent market gains, WisdomTree reminds us of the enduring undercurrent of Value’s outperformance since late 2021. “Despite the ruthless dominance of Growth,” they write, “Value has outperformed Growth since that turning point.”

Internationally, Europe remains a wildcard, its equity markets plagued by “political sclerosis” and sovereign debt stress. Japan, by contrast, shines as WisdomTree’s top pick in developed markets. “Corporate governance reforms and shareholder-friendly policies,” they write, “make Japan an appealing opportunity for equity investors.”

Fixed Income: A Return to Normalcy

The bond market has turned a corner. Gone are the days of zero and negative interest rates. Instead, WisdomTree sees a “normal” interest rate environment, with U.S. Treasury yields anchored around 4.5%. “All the attributes we look for in bonds are back,” the report exclaims, pointing to income streams above inflation and a subtle upward-sloping yield curve.

Within fixed income, agency mortgage-backed securities (MBS) and securitized debt emerge as favorites. “Burgeoning bank demand and limited mortgage production create a supportive demand backdrop,” they note, highlighting opportunities for spread compression and income generation. Meanwhile, high-yield corporate bonds, while still offering income, are less compelling after spreads tightened to historical lows in 2024.

The Global Chessboard: Opportunities and Risks

The U.S. dollar remains king, bolstered by interest rate differentials and the imposition of tariffs by the Trump administration. Emerging markets, however, tell a more complex story. “China’s Japanification,” WisdomTree warns, could weigh on the yuan, while India and Brazil offer brighter prospects thanks to attractive carry and favorable economic fundamentals.

China, always a controversial play, is reserved for the most tactical investors. “Today’s market valuations price in slower growth and the threat of Trump’s 100% tariffs on Chinese goods,” the report states, making China an entry point for contrarians with an appetite for volatility.

Navigating 2025: A Balanced Approach

Across asset classes, WisdomTree emphasizes balance and adaptability. Their recommended strategies include:

Equities: Favor U.S. stocks, particularly dividend payers and profitable companies, with targeted overweights in Japan and India.
Fixed Income: Employ barbell strategies combining short-duration bonds and securitized assets to optimize returns in a volatile rate environment.
Alternatives: Allocate to trend-following and liquid alternative strategies that deliver uncorrelated returns.

Closing Thoughts

WisdomTree’s outlook is cautiously optimistic, rooted in a deep understanding of shifting dynamics. “History suggests that disciplined, factor-based approaches can thrive when investors stop taking past regimes for granted,” they conclude. The message for 2025 is clear: adaptability, precision, and an eye for emerging trends will be critical as investors turn the page on an era of uncertainty.