The Gasima Global 2025 Outlook on the Markets: In It to Win It

After a nonstop bull market for the last two years, we’re now at valuation levels across all major asset classes where it’s time to think about if these returns are sustainable. Some might misjudge valuation as a reason for profit-taking on winners, but that’s not exactly true for what I think could be another positive, albeit more normalized, year of returns in the major stock markets around the world. Investors do need to re-underwrite and re-balance ideas is the point. The soupy start to the year and downright risk-off direction of things lately have reminded us that in the markets, high correlations across different asset classes have persisted for some time now.

At one point, everything had become the SAME trade under the SAME macro theme, pulling markets higher. In the case of last year, it was the AI theme that led the way, with the process of the Federal Reserve loosening monetary policy and the Trump bump after the election providing the last leg up. Now, all that momentum has slammed into the threat of lingering inflation, tariffs, and a lack of further rate cuts by the Fed.

An easy answer typically to avoid getting hurt in any potential downdrafts is diversification. However, what the last few years has taught us about thoughtful portfolio diversification is not only must you get the themes right, but you also have to get the names right within those themes. Take, for example, none other than Nvidia (up 171% in 2024) vs. everything else in the chip sector, or worse, Intel (down 60%). Same sector, but clearly a technology star vs. a technology stinker. There were a lot of catch-up trades that happened in the back part of the year in 2024, and everything in risk markets started to look like a one-way trade.

Now, the perception versus reality trades post-election are gone and even the mighty have fallen. It’s now a New Year where the rubber has to meet the road on individual ideas and themes beating out the market. Leadership by sectors or individual ideas can always drive performance, but merely buying broad-based exposure to risk assets is not going to get it done. That said, broad-based exposure in the right places can be self-correcting; more on that below.

I’ve been tiptoeing into the market this year in terms of asset allocation. As the saying goes, it’s the things we don’t know that we don’t even know that truly surprise us and I’m not wholly convinced that large gains like we’ve seen over the last few years will continue. I really like the AI theme still, for example, and it has all the makings of a multi-year capital investment arms race, yet I know that the dot-com bubble burst after massive capital investment, and the infrastructure to feed it was overbuilt.

And yes, I also know the most famous last words in investing are the missive “that this time it’s different” and that this always ends badly. There’s also something called getting in early, though, and sticking with what’s working, buying things that are self-financing. There is something to be said for selling too early. The famous investor Peter Lynch once famously said that selling great companies whose prospects remain bright just because they’ve had big moves in their stock is equivalent to “cutting the flowers and watering the weeds.” So, although a tall order, pick the themes, pick the sectors, pick the right ideas, and stick with them. Let’s dig into this concept a little more.

AI Still Has Room to Run

Vinod Khosla, a storied venture capital and early OpenAI investor, estimated that “a typical model in 2025 will cost $5-10b to train.” The likes of Google, Meta, or Microsoft are the only ones in the game that can afford this arms race, and it is said they are already spending $25B+ in CAPEX per year, according to a recent report by Goldman Sachs. The report, titled “Gen AI: too much spend, too little benefit?” cites around $1 trillion of capital expenditures set to be spent across a broad swathe of industries in the coming years to build out and support AI initiatives. Nvidia has been the biggest beneficiary of this build-out, with them going from around $26 bln in revenue in fiscal 2022 to now looking to end fiscal 2025 with $129 bln in revenue as forecast by Street consensus and going to potentially around $200 bln by next year. And that’s just ONE company. Now, not all that revenue is AI revenue, but clearly, the lift-up has come from the AI arms race.

Nvidia Revenue Growth (in Billions USD)

Despite all this, the stock has essentially gone nowhere in the last 6 months and, in fact, was subject to some violent pullbacks of 25% last year. Which brings me to a great point, that indexers and active managers alike can heartily agree. Dip buyers with a long enough time frame are usually rewarded in the stock market. So, YES, we are entering into potentially treacherous times, in the short term in the stock market. And yes, potential bans on exports and exhausted budgets for AI capital expenditures could be hiccups along the way.

My conclusion is not so much to buy, sell, or hold Nvidia (we are making no recommendation here, but for full disclosure, we do hold the stock in various customer accounts). The point is potentially everything is now a tech stock and levered to the AI theme given the massive amount of money spent in the space. We shouldn’t be so much arguing about the direction of a $3.2 trillion market cap company, but what their supply of products to a new technology has done for the industry, the stock indices, and what are the second wave winners.

This is how I see things playing out

As I sit here now, the Nasdaq sinks to start the year almost down 2%. Sometimes people in the financial press mention stocks like they have nowhere to go but up. These are what some call “dangerous stocks”, that is, stocks that are high risk because of too much of the rosy future being priced into it, with none of the potential pitfalls. Then, when they crater for whatever reason, everyone is all over talking about the disastrous idea the stock had become. What isn’t mentioned typically, though, because it doesn’t make for as good of a story, is the danger of NOT being invested in some risk ideas all the time in your portfolio; the danger of not having some risk in the context of your entire portfolio. To give an example of what I mean by this, take a look at the history and the self-correcting mechanism of broad-based exposure I mentioned above.

The last several decades of the index investing boom have taught us to just set it and forget it. The leaders of yesteryear, Exxon, Phillip Morris, GE have been replaced by the Magnificent Seven tech names. And yet regardless of market leadership and concentration risk in a sector, the major stock indices have worked; they’ve self-corrected their sector and company leadership to produce returns. The days of picking the right ideas are dead, and just buying and holding are the way to go, say some.

I can agree with taking a long-term view, but what isn’t mentioned by many a pundit I follow is the need to constantly rebalance and adjust a portfolio, whether it is actively managed or indexed. I follow many intelligent content creators on various social media platforms and their push into indexing is powerful, intoxicating almost. I think it works well when you’re talking about deferred tax retirement accounts with holding periods of long timeframes. What I find in the approach that isn’t mentioned, and in fact is stressed by the inventor of the space himself, John Bogle from Vanguard, is a thoughtful timing strategy. AND what index or indices are you actually going to pick?

The Magnificent Seven Tech Companies
Company Ticker Primary Focus
Apple AAPL Consumer Technology & Services
Microsoft MSFT Software & Cloud Computing
Alphabet (Google) GOOGL Search & Digital Advertising
Amazon AMZN E-commerce & Cloud Services
NVIDIA NVDA AI & Graphics Processing
Meta (Facebook) META Social Media & Metaverse
Tesla TSLA Electric Vehicles & Energy

The S&P 500 is the most classic choice for index investing, and with all the bad news on potential Trump tariffs, persistent inflation, and the Fed on hold, it’s worth taking a look at other periods in time where there were notable periods of high inflation, low growth, and political upheaval. The Fed has a stated inflation target of 2.0% and is having trouble getting back to that level even after all the rate hikes of the last few years. Besides the disruption of 2022, the market has started to look forward and rally in anticipation of the Fed hitting its goals. Well, what if they don’t? What if they change the goalpost from 2% to a 3% inflation target? What does that mean for the stock market?

Market Performance Metrics (1950-2007)
Key metrics during the nuclear arms race through housing bubble period

A good long period through wars, inflation, and political upheaval was the start of the nuclear arms race around 1950 to the bursting of the housing bubble in 2007. Over that period the 10-year Treasury yield averaged 6.2%, with home mortgages priced much higher than that. Inflation was 3.8%. The government invested heavily in infrastructure and the military. The Arab Embargo occurred, and inflation skyrocketed with the Fed hiking rates dramatically. The commercial real estate crash of the last 80s and the Dotcom bust came and went. Through all that, the S&P 500 averaged an 11.9% annual total return. When it all ended the market hit a top before the Great Financial Crisis of 08-09. In fact, even if you had invested at the top of the market before the failures of Bear Stearns, AIG, and Lehman and bought into the S&P 500 in July of 2007, you’d actually be up 428% as of today, including reinvested dividends. Skeptical of the S&P? Thought you could have done better than the market, or want high returns uncorrelated to the market? Look no further than private equity investments, which, in the aftermath of the breakdown of the markets, have averaged 14.3% a year for the last 15 years. The point is staying invested over long periods, picking the right assets, and looking through near-term volatility are the recipe for success.

Components of Total Market Return

And it can get even better than these results if the right plan is put in place. The timing of new purchases with the use of a cash reserve and investing in quality, to name a few. Additionally, now that a new interest rate regime has taken hold, dividends should matter to investors again, and in fact, studies over many different time periods show that dividends typically account for 40% of the U.S. market’s total return over the long term. And let’s not forget housing. Until the system broke down, the post-WWII push by the government for homeownership and the availability of credit made home price appreciation the longest-sustained rally in modern history. Post Great Financial Crisis, people were throwing the key back to the bank, and now, with the lock in effect and not enough inventory, people are getting into bidding wars, albeit not as many as when rates were lower, but still shocking when the mortgage rate is at 7%.

Conclusion: The Tortoise Wins the Race

The incoming administration might induce high growth in the U.S., but this must be balanced between the potential of sticky inflation and interest rates and the effect on company profit margins. Fundamentals will drive the market’s results in the long run, but we all know too well that sentiment will run high this year with the change of administration and markets that seem like they have come a long way in a short amount of time.

SO, what am I saying to people this year in terms of their portfolios? Well, number one, as I always say, watch your risk. These are treacherous times indeed in the markets, but they ALWAYS are treacherous times. Risk, as measured by near-term volatility of the VIX index or the fear gauge, can take the pulse of the market in the short term, but that shouldn’t matter if you’re fully invested; what should matter is what you are invested IN.

Over the long run, equity markets will be fine. The economy is trucking along, as seen by the latest jobs report, and the potential for less regulation in corporate America could lead to continued business investment in the areas of onshoring and AI as corporations pivot their capital expenditures to be in line with the incoming administration’s policies. This could even unleash the potential “animal spirits” that some have spoken of recently as pro-growth investment takes hold.

The good news could actually be the good news, with higher interest rates being overcome by ever-increasing corporate profits as businesses shift to the new paradigm, or maybe better said, the old one where businesses learn to finance themselves regardless of the term structure of interest rates and new business investment is based on the net present value of the project, not projects that are financed simply because rates are near the zero-bound.

Moral of the story; stay invested, know what you own, and stomach the volatility to hit your long-term return goals.

The information contained in this article is for educational purposes only, this is not intended as tax, legal, or financial advice. One should always consult with the tax, legal, and financial professionals of their choosing regarding their specific situation.
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