Janus Henderson Investors is optimistic about 2025, although that view is tempered by a healthy dose of caution.
At a recent webinar the firm sponsored, its investment management team laid out multiple uncertainties that could determine how the economy and markets perform next year.
However, they agreed active management will be key to successful investing and markets likely will continue to rise and broaden in 2025.
“All systems go for now,” said Adam Hetts, CFA, global head of multi-asset and a portfolio manager at Janus Henderson. But it gets back into that positioning, he continued, which means not taking too much risk and not getting too excited about the “sugar rush” the stock market has experienced in 2024.
The election of Donald Trump — with his proposed policies including tariffs, tax cuts and deregulation — complicates predictions about 2025, the panelists said.
“I guess it’s going to be a pro-market, pro-business administration on the upside,” Hetts said. “On the downside, it’s the tariff risk … there’s probably a lot of change that’s going to get pushed through in the next two years. So, it will keep us on our toes.”
Jim Cielinski, global head of fixed income, said Trump’s pledge to conduct large-scale deportations would have a negative effect on the labor supply. But campaign pledges may not be fulfilled, and initiatives that seem positive may turn out differently, he warned.
“We have to really focus on what’s actually getting done, at what speed, and how the pluses and minuses play out. Because right now, everything is just seen as a plus, and I don’t think that’s an accurate perception,” Cielinski said.
What should investors be watching next year? The team identified some key points.
Inflation
Although inflation has become less of a threat, Hetts questioned whether it has been fully tamed.
“While the Federal Reserve has prevented a recessionary hard landing, it may not be able to bring inflation down to its target — 2%, he said. “That’s the debate now. Over a year ago, it was hard landing versus soft landing. Now it’s soft landing versus no landing. So whichever side you fall on, there’s a lot of reasons to be optimistic.”
Cielinski said he is skeptical the Fed will achieve its 2% inflation target. “I don’t think we keep falling. I think we’re seeing some stickiness in services, things like that,” he said. “But it’s not going to reignite.”
If it did, however, all bets are off, he added. And the exact course of future Fed easing can’t be predicted, he noted.
“The intricacies of how fast do they ease? What are the various prints? That’s the kind of volatility that we see month by month,” Cielinski said. “I think the key to that is to be an active manager.”
U.S. Equities
One of the biggest questions on investors’ minds: Can stocks extend their strong performance?
Laura Castleton, CFA, U.S. head of portfolio construction and strategy, noted that the economy exceeded expectations in 2024, avoiding a hard landing while stock markets repeatedly surged.
The median expectation was for the S&P 500 to end the year modestly up at 4,875, she recalled. “And while equity valuations very much remain in focus, the S&P hit 55 new market highs and is hovering around 6,075 today,” Castleton said during the Dec. 6 webinar.
“The environment is good for equities,” said Marc Pinto, head of Americas equities. “Equities have been resilient, notwithstanding rising bond yields, geopolitical tensions and a lot of other things that cause people to worry. So, that tells me that the underlying market structure is pretty strong.”
Hetts echoed Pinto’s optimism. “This is a market that’s been able to thrive in the face of some of those headwinds, so it leaves us risk-on and pretty optimistic. I’m not sure that we can expect another 20%, even 30% next year, but that’s what we’ve seen so far, and so, so far, so good. And we think the upside can continue to grind higher,” Hetts said.
‘The Other 493’ Equities
Pinto predicted that the stock market also will continue to broaden, focusing less on the Magnificent 7 tech stocks. “We really started to see — we call them the other 493 — stocks start to perform,” he said, referring to the S&P 500. Equal-weighted indices have become more competitive against market-cap-weighted indices, noted Pinto, and “valuations are attractive.”
But which stocks? Small-cap equities, both growth and value, were “left behind” during the rush of the mega cap stocks and now look attractive, Pinto said. The asset class lends itself very well to active management, he said.
Small caps perform well during a credit-easing cycle and “not so well” in a tightening cycle, Pinto explained. “The tailwinds are at your back here in terms of getting small caps,” he said, referring to expectations that the Federal Reserve will continue cutting interest rates in 2025.
Hetts concurred, saying that small and mid-cap stocks will be a good bet in 2025. “We don’t feel like we’re picking up the pennies in front of the steamroller there. We think that we’ve got a good horizon here in terms of time for these rate cuts to transmit into a stable economy and then pass through into more of these interest rate sensitive sectors,” said Hetts.
Hetts said that Janus Henderson is recommending a small adjustment to the traditional portfolio. Instead of a 60/40 stock-bond ratio, it’s looking at “something more like 63-64% equity … That’s what slightly cautiously risk-on means to us right now,” Hetts says.
U.S. Fixed Income
Despite the slightly greater emphasis on equities, fixed income remains an important hedge in the face of uncertainty, Hetts said. “With a wide range of outcomes, or, what if we’re a bit wrong? A margin of safety, that’s what fixed income is for.”
But the panelists said the outlook for bonds depends on whether inflation and interest rates remain in check. However, Cielinski said that if Trump imposes inflationary tariffs, the markets will shrug.
“Markets probably can look through that, because those tend to be one-off price adjustments,” he said. “It’s really whether or not services or wages, those more fundamental drivers of inflation, take off,” he said. And despite a lot of cross currents, the overall situation is “quite constructive,” for bonds, he added.
Cielinksi observed many people are worried the U.S. deficit will become unsustainable, but he believes that’s unlikely next year. As long as the economy is strong, unsustainable deficits pose no immediate threat, he said.
“Lean to shorter duration if you’re worried at all about the reignition of inflation,” Cielinski counseled. “I think that’s a safer, risk-adjusted place to probably hang out.”
“There’s been a lot of rate volatility this year, of course, but in core plus fixed income, you’ve got mid-single-digit yields. It’s a great cushion for that rate volatility,” Hetts said. “So bonds are back, definitely, compared to five years ago.
International Outlook
Pinto threw cold water on hopes for a big improvement in international stocks in 2025. “People keep waiting for the year when international is actually going to outperform the U.S., and maybe that day never comes,” he said. However, international stocks have been broadening, similar to U.S. stocks, he said, and there could be some opportunities.
“It’s hard to make a blanket statement about international developed markets, emerging markets,” he said. “Our style is to look at the individual companies, as opposed to making country bets,” although assessing emerging-market countries is necessary too.
On the international bond front, “the other G7 markets look quite attractive, but also emerging markets, which have been left behind, look attractive,” added Cielinski, who recommends being diversified internationally.
Ed Prince is a writer with Rethinking65. In a four-decade career in journalism, he has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News.
Most women are comfortable taking risk in their investments and cite patience and discipline as their top investing strengths, a Schwab survey reveals.
