2025 Market Outlook

As we step into 2025, the market finds itself in a unique position following two consecutive years of 20%+ returns. While such strong performance might typically warrant caution, history shows that periods of sustained momentum are not uncommon, occurring roughly one in every four years. This context suggests opportunity, not excess, as we enter the new year.

A Constructive Monetary Landscape

The monetary policy framework appears poised to support markets effectively in 2025. Rather than aggressive rate cuts, a prolonged and measured easing cycle is likely to balance economic momentum and mitigate policy risks. While current projections suggest two rate cuts this year, the duration of the easing cycle will be more impactful than the total number. A thoughtful approach could create a favorable backdrop for sustained market growth.

Small Caps and Financials: Positioned for Growth

Small Cap Equities

The Russell 2000, with its significant cyclical exposure, is well-positioned to benefit from economic reacceleration. Projected earnings growth of 18% far outpaces the S&P 500’s 10%, presenting compelling catalysts. Following a decade of underperformance relative to large caps, history suggests small caps are primed for multi-year outperformance, offering an exciting window for investors.

Financial Sector

Falling capital costs, potential regulatory changes, and a recovery in investment banking activity create an appealing setup for financials. As funding costs stabilise and net interest margins recover, the sector stands to gain. Additionally, increased M&A activity under the new administration could serve as a meaningful growth driver.

Technology Evolution: Beyond the Obvious

Technology remains a cornerstone of market leadership, but sector success in 2025 will present many opportunities away from the index as a whole. Selective tech exposure could be the winner for this sector.

• Microsoft and Google: Both companies are leveraging AI innovation to enhance enterprise solutions. Microsoft’s Copilot and Google’s advancements in quantum computing exemplify sustainable value creation. Both of these companies had periods of good performance in 2024, but against their peers, there is upside.

• Emerging Opportunities: Companies like Palantir and Rigetti highlight the evolving potential in areas like AI and quantum computing, where early volatility can translate into long-term growth.

Quantum Computing: Hype and Opportunity

Quantum computing remains an emerging frontier with vast long-term potential, but its current trajectory mirrors the early hype cycles seen in AI. Sentiment and FOMO (fear of missing out) are driving much of the current momentum, with valuations running ahead of immediate utility. However, the tangible advancements from companies like Rigetti and Google suggest this is more than just speculative fervour. The practical applications—such as solving complex logistics problems, accelerating drug discovery, and enhancing encryption—will likely transform industries over the next decade. While significant breakthroughs are still years away, early movers could benefit from being well-positioned when quantum computing scales to commercial viability. Investors should balance near-term caution with long-term optimism as this space matures.

Bullish on KKR: Benefiting from Strategic Positioning

KKR’s diversified business model and focus on capturing growth in private equity, credit markets, and infrastructure make it a standout in 2025. The firm’s adaptability to market dynamics, coupled with its robust capital deployment strategy, positions it to benefit from rising M&A activity and infrastructure modernisation trends globally. Additionally, KKR’s focus on technology and sustainability-driven investments aligns well with key growth themes. Its ability to manage downside risks in a complex macro environment while continuing to deliver strong returns for investors solidifies its status as a compelling long-term play.

Indian Tech Sector: A Growth Powerhouse

The Indian technology sector offers one of the most exciting opportunities in global markets for 2025. With a thriving start-up ecosystem, a growing pool of skilled engineers, and increasing foreign direct investment, India is solidifying its position as a global tech hub. Key drivers include government initiatives like Digital India, a rapidly digitising economy, and expanding exports of IT services and software solutions. Companies leading in artificial intelligence, cloud computing, and fintech are at the forefront of this transformation. With domestic demand for digital services surging and international competitiveness rising, the sector offers compelling growth potential for investors looking to capitalise on a high-growth market in the coming years.

Digital Assets: Gaining Maturity

The digital asset market is maturing, with institutional adoption driving momentum. Bitcoin’s trajectory toward $200,000 is supported by the halving cycle and increasing acceptance as a store of value. Long-term projections remain bullish, with significant upside potential as the sector integrates further into traditional financial frameworks.

Broad Market Trends and Risks

Technical indicators provide encouraging signals for 2025. With 80% of stocks trading above their 200-day moving averages, market breadth contrasts sharply with the narrow leadership seen in prior years. The breakout of the Dow Jones Transportation Average signals industrial strength, while discretionary sectors maintain momentum.

International markets present selective opportunities, though U.S. equities continue to benefit from technological and innovation advantages. My mid-year S&P 500 target of 7,000 reflects a strong first half, while a year-end target of 6,600 accounts for potential second-half moderation.

Key risks include potential fiscal tightening or tariff adjustments, which could create short-term volatility. However, the current administration’s market-aware approach suggests any disruptions are likely to be temporary rather than structural.

Staying Focused Amid Evolution

The natural inclination toward pessimism often leads investors to miss periods of sustained growth. Historical evidence favours maintaining appropriate exposure through cycles, with a focus on stocks trading near their 12-month highs and above key moving averages. Rather than attempting to time peaks, 2025 offers a chance to focus on sustainable opportunities within an evolving landscape.

I look forward to navigating these market dynamics with you throughout the year.

Dan Sheehan

dan.sheehan@teloswealthadvisors.com

This newsletter is for informational purposes only and should not be considered investment advice. Please consult your financial advisor for guidance tailored to your situation.