Is the bull market working out of steam? How buyers can shield AND revenue in 2025

‘The biggest mistake in 2024 was not to be bullish enough,’ says Fidelity’s investment expert Tom Stevenson. But after markets began 2025 with a wobble, investors are steeling themselves for a tougher year ahead.

Government bonds have been in the spotlight, both in the UK and the US, as concerns over inflation and higher-for-longer interest rates rattle investors. 

The S&P 500 grew 23 per cent in 2024 and now makes up 74 per cent of the global stock market, as measured by major indices such as the MSCI All World Index

Donald Trump’s thumping election win in November further set a positive course for markets. But hopes of a stellar Christmas and New Year evaporated and after reaching a record closing high of 6,090 on Friday 6 December, the leading US index is down 4.2 per cent.

In the context of S&P gains over the past few years this is a mere blip, but investors worry that the US bull market may finally be running out of steam and what the knock-on effect of that on other major global markets will be.

So, what can investors do to mitigate risks this year, while also not missing out on the opportunity to profit?   

Will Trump boost investors or bring more risks?

Incoming US President Donald Trump will prove a major influencing factor on the world economy, with investors awaiting which of the changes his presidency has promised will actually materialise.

Stevenson, investment director at Fidelity International, said: ‘Last year politics was also thrown into the mix and the re-election of Donald Trump was the defining event.’

There are undoubtedly concerns that Trump’s America First policies could hit global trade, but there are also hopes that US firms could benefit as a result of expected tariffs and regulation rollbacks.

Trump’s win might have raised eyebrows in all manner circles, but in financial markets the change in US government was greeted with enthusiasm by many.

Stevenson added: ‘Investors have responded positively to the new President’s pre-announced policy platform. The expectation is that Trump 2.0 will mean tariffs, tax cuts, immigration curbs, and less regulation.’

The belief among investors is that the fortunes of markets are likely to be driven, one way or the other, by Trump’s policies in 2025. 

The baseline forecast is that robust US economic growth will be on the cards, but there are concerns this combined with tariffs could lead to renewed inflation.

Its not yet clear which of Trump’s pledges will come to fruition once he takes office. In all likelihood, a Trump presidency will include some trade tariffs – with China set to be the worst hit by these – but whether policy depends more in implementation or threat remains to be seen.

While tariff forecasts vary, Reuters says median estimates from experts indicate a 38 per cent rate on goods from China could be incoming.

Stevenson said: ‘[Trump’s policies] could be inflationary and result in a more unstable environment for global trade – but it does argue for continuing economic growth, especially in the US.’

According to Stevenson, Trump’s presidency will benefit smaller US firms with a largely domestic focus as a result of tariffs. 

They should gain competitive edge and are less likely to suffer due to having major exposure to overseas markets, in terms of sales, revenue or components.

Unlike the US tech giants, such as the Magnificent Seven whoch posted huge gains again in 2024, smaller and medium-sized firms don’t have such stretched valuations. 

Traditional energy firms could also benefit from Trump’s policies with the expectation that he will favour oil and gas drilling, reducing green regulations that currently hinder these sectors.

Stevenson tips Brown Advisory US Smaller Companies Fund (ongoing charge: 1.6 per cent).

He said: ‘The Trump Trade is not played out yet. My fund picks aim to participate in it while tilting away from the higher-priced parts of the US market.’

> Read: Is it time to swap Magnificent Seven giants for smaller US companies?

Paul Angell, head of investment research at AJ Bell, tips Artemis US Select Fund (ongoing charge: 0.86 per cent), which he says benefits from ‘an extremely experienced lead manager in Cormac Weldon’.

He said: ‘The managers are style agnostic in their investment approach, assessing the fundamental strengths of businesses. Despite this style agnostic approach, their search for businesses which they assess to have a two-to-one risk/reward potential often results in the fund displaying a higher growth profile than the index.’

In a note of caution, however, Canaccord Wealth warns that investors’ expectations of the US stock market might be too high.

Tom Becket, co-chief investment officer at Canaccord Wealth, said: ‘We must guard against complacency and remain mindful that we are operating in what has been a turbulent decade – a trend that seems likely to continue.

‘The re-election of Trump and the Republican Party assuming control of both chambers of Congress introduces an even broader set of possible scenarios than we anticipated just a few months ago.’

Where to invest around the world

The US market may dominate the global index but investors are being urged to broaden their horizons in 2025.

The UK and Japan feature among markets tipped as undervalued, while even further along the unloved scale some experts advocate upping China exposure. 

Unmoved by Trump’s threats of debilitating tariffs, China is finally seeing the benefits of economic stimulatory efforts by its government, with the latest measure having seen millions of government workers receive surprise pay rises in a bid to create further spending.

Canaccord says while all is far from financially rosy on home shores, the UK is also benefitting from some financial giveaways and a weaker Europe.

Becket said: ‘A recent survey suggested that US citizens are more convinced than ever that the domestic stock market will rise in the coming year. As a result, one of the greatest risks that we see is complacency – investors might be expecting too much. 

‘The risk is most pronounced in the US, where there is a great deal of excitement. 

‘In contrast, elsewhere investor sentiment is marked by apathy, with little confidence in the outlook for equity markets in the UK, Asia, and Europe. This divergence makes us constructive on the outlook, and we believe positive returns are possible.’

For those considering backing the UK and its cheaper shares, a simple FTSE All-Share tracker fund or ETF could suffice. 

Meanwhile, for those looking for a fund manager to actively pick out top opportunities, This is Money’s expert panel for our 50 best funds and investment trusts recommend value-orientated Temple Bar (ongoing charge 0.56 per cent) best ideas fund Artemis UK Select (ongoing charge 0.82 per cent) and Liontrust Special Situations (ongoing charge 0.81 per cent), among others.

One option for those concerned about over optimism in the US is to choose a global fund that eases back on its weighting. Stevenson tips the Dodge & Cox Worldwide Global Stock Fund (ongoing charge 0.63 per cent) which he says ‘gives us global equity exposure but with an underweight to the US.’

Two highly popular global funds among UK investors, Lindsell Train Global Equity (ongoing charge 0.67 per cent) and Fundsmith (ongoing charge 0.94 per cent), are also less exposed to the hottest parts of the US market than a tracker would be. 

This has meant that Lindsell Train and Fundsmith’s returns have lagged in recent years, but may do investors a favour in future if the Magnificent Seven come off the boil.

Investors may also like to dial back their core exposure to the US dominated global market and add some satellite investments for other cheaper markets. 

AJ Bell’s Paul Angell tips M&G Japan Fund (ongoing charge: 0.51 per cent). He said: ‘the fund offers investors access to a strong analyst team who view companies from a differentiated perspective, led by an experienced and considered investor in Carl Vine.

The fund uses a balanced approach to its portfolio focusing on stock selection to drive its returns and also limit volatility. As in China, Japan’s government has passed a stimulus program in the hope of further pushing back inflation and boosting wages.

Oxford Economics forecasts Japan’s economy to continue experiencing modest growth in 2025.

Interest rates vs the bull market

Interest rates finally came down in 2024 but there are questions over what comes next in the UK, US and eurozone.

Stevenson said: ‘The fall in interest rates that began in the autumn should continue through 2025, even if it is slower and goes less far than was initially expected. Inflation is clearly not beaten yet, but it feels like it is under control. Growth, disinflation and rate cuts are a healthy combination for investors.’

To that end, Stevenson tips investment trust International Public Partners Ltd (ongoing charge 1.19 per cent) which invests in low-risk essential infrastructure.

He said: ‘Things like schools and hospitals, transport and renewables. The stuff that people rely on for their daily lives and which the new UK government says it is focused on. The trust offers a good dividend yield, and it has been growing its payout steadily over many years.’

The infrastructure sector could benefit from incoming rate cuts due to lower costs of debt becoming available.

Canaccord predicts that rates in the US and the UK will continue to fall, with both central banks settling around 3.5 per cent by the end of the year, having made five rate cuts.

However, Stevenson warns that markets have already priced in these expected rate cuts, so there is little likelihood of rate-cut related boost further into the year.

In fact, he argues that the current bull market is reaching maturity. 

With so many major US stocks commanding sky-high values, it can be difficult to tell if they can continue to deliver of if they are wildly overvalued.

‘The rise in share prices since the financial crisis is now on a par with the two great bull markets of the post-war years. 

‘When shares start this highly valued, future returns have in the past tended to be unexciting. Valuations tell us little about the short-term outlook, but they are a good guide to longer-term prospects,’ Stevenson said.

He added: ‘The key risks to keep an eye on in the coming months are inflation and trade tensions. There are some striking similarities between the path of inflation in the past couple of years and its trajectory in the late 1960s and early 1970s.’

Stevenson tips Fidelity Global Dividend Fund (ongoing charge: 1.04 per cent).

He said: ‘As interest rates fall, investors will start to look beyond cash to generate an income. I’ve long been a fan of this fund, and its manager Dan Roberts. It has delivered steady growth despite being underweight the US market.

‘All said, 2025 could be another positive year for investors. But the challenge in the months ahead will be to maintain an exposure to the positive growth outlook while managing the increasing risks. Diversification is one good way of doing this.’