5 keys to investing in 2025

by Jared Franz, Lara Pellini, Mark Casey, & Cheryl Frank, Capital Group

As we enter 2025, market optimism is high amid a strong United States economy, interest rate cuts and advances in artificial intelligence.

The S&P 500 Index ended 2024 up 25% in U.S. dollar terms, after topping 26% in 2023. Whether this year will be a three-peat of stellar market gains is unclear, but a handful of promising investment themes could support long-term gains. Here, our economist and portfolio managers highlight five key insights for investors in 2025 and beyond.

1. Welcome to the Benjamin Button economy

If you’re a fan of Brad Pitt movies or Capital Group’s 2025 Outlook, you’re probably familiar with the concept of aging in reverse. And while the Benjamin Button character is a work of fiction, the reversal of the U.S. business cycle has very real implications for investors.

The U.S. business cycle appears to be aging in reverse

Sources: Capital Group, MSCI. Positions within the business cycle are forward-looking estimates by Capital Group economists as of December 2023 (2024 bubble) and December 2024 (2025 bubble). The views of individual portfolio managers and analysts may differ. Returns data is monthly from December 1973 to August 2024 and includes all completed cycle stages through November 30, 2024. Data is Datastream U.S. Total Market Index from December 31, 1973 to December 31, 1994, and MSCI USA Index data thereafter. Past results are not predictive of results in future periods.

“Instead of moving through the typical four-stage cycle that has defined the post-World War II era, the U.S. economy appears to be shifting from late cycle back to mid cycle,” says Capital Group economist Jared Franz. The U.S. economy is benefiting from rising corporate profits, accelerating credit demand, softening cost pressures and a shift toward neutral monetary policy. “We saw all four of those in 2024,” Franz notes. “Going forward, I believe the U.S. is headed for a multi-year expansion period, perhaps fending off a recession until 2028.”

This also provides a favourable backdrop for stocks. Based on an analysis of returns during previous business cycles, we found that stocks posted a robust 14% return during the mid-cycle stage. This is notably higher than returns during a late-cycle environment. The move back to mid cycle also effectively postpones the start of the next recession — periods when stock returns have historically been their worst.

2. Industrial renaissance in the U.S. is fueling a new era of growth

From the heartland to the arid desert, an industrial renaissance is underway in the United States. Capital expenditure (capex) projects are popping up across the U.S., boosting local economies and creating opportunities for select companies.

Taiwan Semiconductor Manufacturing Company’s US$65 billion build-out of a production facility in Arizona is one notable example. It is expected to create thousands of manufacturing and construction jobs. But for every megaproject, there are dozens that remain under the radar.

Scorpius BioManufacturing, for example, has broken ground on a 500,000-square-foot structure to manufacture biodefence molecules that will bring hundreds of jobs to Kansas.

Investing in America: Grassroots manufacturing has surged

Sources: Capital Group, AreaDevelopment.com, Clean Investment Monitor, U.S. Census Bureau, Whitehouse.gov, company reports. Map markers reflect current and upcoming projects that have been announced as of November 30, 2024. Data reflect a sample of infrastructure and manufacturing investments across the U.S., and estimated investment amounts are expected to occur over various timelines. Capital expenditure (capex) is money invested for acquisitions, upgrades, renovations and adoption. It can be tangible (i.e., real estate) or intangible (i.e., licenses, software).

Investing in America: Grassroots manufacturing has surged

To be sure, this activity is happening outside America, too. The build-out of data centres, rising travel demand and the development of new energy sources are creating growth opportunities for Europe’s industrial titans. In emerging markets, the nearshoring movement is leading to a rewiring of supply chains and the construction of new trade hubs.

“These trends represent multi-decade investment opportunities, and we are only in the early innings,” says Lara Pellini, equity portfolio manager. “Industrial powerhouses in the U.S. and Europe are solidifying their foothold in areas ripe for long-term global growth.”

3. AI megatrend could boost stocks for years

Artificial intelligence has captured the minds of the public and investors, conjuring images of a futuristic world completely reshaped by intelligent machines. Overhyped? Probably. Even more opportunities ahead? Also probably true.

That’s because we tend to overestimate megatrends in the short term while underestimating them in the longer term. With some megatrends, such as smartphones or driverless cars, we could reasonably create estimates based on known quantities like global populations or number of cars.

Investors tend to underestimate the long-term impact of new technology

Sources: Morgan Stanley AI Guidebook: Fourth Edition, January 23, 2024; Next Move Strategy Consulting, Statista. Initial forecast dates were February 1996 for PC and internet users; January 2010 for smartphone shipments; March 2017 for cloud revenue; and January 2023 for AI market size. Values in USD.

“But how do we measure the value of better intelligence?” asks equity portfolio manager Mark Casey. “One of the most interesting things about AI is that it’s hard to predict how big it will become. Because it can take on a multitude of human tasks, I consider the AI market to be unknowably massive.”

Outside of its tech applications, AI will also create opportunities in some unexpected places. The build-out of data centres requires vast physical resources, including copper, capital equipment and a lot of electricity. Soaring demand for these resources has been a boon for old economy industries including utilities, industrials and mining companies.

4. Drug discovery is creating a golden age of health care

Following last year’s U.S. election, uncertainty over the industry’s regulatory outlook sparked a slump in health care stocks, further pressuring a sector that had lagged throughout the year. But following the sell-off, many companies are trading at attractive valuations, creating opportunities for investors with a long-term approach.

“That includes forgotten pharma, or drugmakers that don’t offer weight loss treatments,” according to Cheryl Frank, equity portfolio manager. “I am looking for opportunities to invest in dividend payers that have been left behind by the market.”

Advances in medicine likely to continue with hundreds of drugs in development

Source: Statista. Pipeline data is as of November 30, 2024.

While weight loss drugs, such as GLP-1s, tend to capture the spotlight, advances are being made on many other fronts. The largest pharmaceutical companies have more than two hundred drugs in their pipelines.

As these companies tackle some of the world’s most debilitating ailments, patients have experienced lower mortality rates and longer life expectancies. Over the next decade, we could see effective treatments for ALS, sickle cell and muscular dystrophy. Risks are always present when investing in biotech and pharma companies, but we could be at the start of a golden age of health care — for patients and investors.

5. There are always reasons not to invest

Imagine going back in time to New Year’s Day 2020 and learning in advance about the biggest events over the next five years. The COVID-19 pandemic. A steep bear market. Inflation above 9%. Wars in Ukraine and the Middle East. A trade war with China. Political uncertainty in the U.S. With that knowledge, would you want to invest in stocks? Probably not.

There may never be a perfect time to invest. But it doesn't follow that there is never a good time to invest, nor that market timing is a good practice. What is true is that markets move on.

Markets have remained resilient in the face of turmoil and uncertainty

Sources: MSCI, RIMES. As of December 31, 2024. Data is indexed to 100 on January 1, 1987. Shown on a logarithmic scale. Markers refer to the starting year of each event. Past results are not predictive of results in future periods. Based in USD.

The point is there are always reasons not to invest, and that’s no different today than it was in 2020 or 1981. But markets have been resilient over time. And investors have typically been rewarded for overlooking near-term uncertainty and keeping focus on their long-term investment goals.

So, going back to New Year’s 2020, what would have happened if you ignored all the troubling events on the horizon and stayed invested? Since then, the S&P 500 Index has risen more than 100%.

Jared Franz is an economist with 19 years of investment industry experience (as of 12/31/2024). He holds a PhD in economics from the University of Illinois at Chicago and a bachelor’s degree in mathematics from Northwestern University.

Lara Pellini is an equity portfolio manager with 23 years of investment industry experience (as of 12/31/2024). She holds a master’s degree in economics of labor & industrial relations from the London School of Economics and a laurea in public relations and economics of information from the IULM University, Milan.

Mark Casey is an equity portfolio manager with 24 years of investment industry experience (as of 12/31/2024). He holds an MBA from Harvard and a bachelor’s degree from Yale.

Cheryl Frank is an equity portfolio manager with 27 years of investment industry experience (as of 12/31/2024). She holds an MBA from Stanford and a bachelor’s degree from Harvard.