2025 kicked off with solid performance across markets in January, carrying forward the strong momentum from last year. Global share markets posted gains of 1.8% in January, and our funds also had a strong start to the year. There has been plenty of discussion around economic growth, whether it’s Prime Minister Chris Luxon outlining plans to boost the New Zealand economy or President Trump pushing pro-growth policies in the US. After a strong market rally in 2024, a key question for 2025 is whether this growth will continue – or fall short of expectations.
Weighing political uncertainty against economic fundamentals
Much of the market’s focus at the end of last year was on Trump’s return to office and the potential implications of his policies. While policy details remain unclear (and in constant flux), some moderation from election campaign rhetoric emerged in December and January – and markets decided to focus on the potential benefits of pro-growth policies and deregulation.
That changed late in the month when Trump announced new sweeping tariffs on Canada, Mexico, and China, reigniting concerns over global trade disruptions. Markets initially reacted with caution as investors assessed the potential impact on supply chains and economic growth. However, the swift decision to pause the tariffs on Canada and Mexico just days later suggests this may be more of a negotiation strategy rather than a lasting policy shift.
Longer term, economic fundamentals remain a bigger driver of market direction than short-term policy changes. Recently, despite the policy uncertainty, US consumer spending has been unstoppable, confidence indicators have been strong, and inflation has been close to the Federal Reserve’s target range. These tailwinds have all been supportive of the share market.
Rotation in market drivers
With the new year underway, market leadership has notably shifted. After dominating last year, technology and AI-linked stocks have paused, while economically sensitive sectors – such as financial services and consumer industries – have taken the lead. This rotation is a healthy shift. Concerns around technology sector concentration and AI hype had been building, and a broadening of market leadership into some of the more unloved sectors is a promising development. Early signs from earnings season have reinforced this trend – banks and other consumer facing companies, like Netflix, have reported solid financial results, highlighting strength in the broader economy and growing business optimism (not just in selected high growth areas).
Outlook for share markets
Share markets enter 2025 following a strong two-year run, setting a high bar for further gains. Investors are now looking for evidence that growth justifies this optimism. Lower interest rates should provide support, but markets will need more reassurance to sustain momentum. The current corporate earnings season will be a key test. So far, results from major companies suggest that the economic backdrop remains solid, but expectations are high, and any signs of softness could challenge market sentiment.
With valuations elevated and uncertainty around trade policy rising, markets may face a pick-up in volatility at some point this year. In this environment it becomes increasingly important to focus on finding businesses with strong fundamentals and long-term growth drivers, rather than trying to pick short term market moves driven by geopolitical or macroeconomic developments.
Fixed Income looking more attractive
Despite a falling OCR (Official Cash Rate) and lower term deposit rates, long-term bond yields have been rising in recent months – reflecting the economic optimism discussed above. With yields near decade highs, fixed income is becoming increasingly appealing for more conservative investors. For those looking to capitalise on this unique interest rate environment, now may be a good time to talk to an adviser and review fixed income strategies.
Talk to us
If you have any questions about your investment or would like to make sure you have the right investment strategy to reach your ambitions, get in touch with us – our team are always happy to help.
