This week in the markets: three in a row?

Happy New Year. Markets are back in full swing this week after the break and there’s plenty for investors to focus on as 2025 gets underway.

2025 Outlook

This is the week when we publish our first Investment Outlook of the year. As usual I will be sitting down with Ed Monk to answer questions from our investors about where we think the markets are heading this year. After two years of 20%+ gains for the US stock market, the question is whether 2025 will make it three in a row.

Momentum is on the side of investors and there are plenty of tailwinds for markets this year. Trump 2.0 promises a positive boost via tariffs, tax cuts and deregulation. Earnings growth is positive. Interest rates are heading in the right direction. That’s led to an unusually positive consensus, with every single strategist polled by Bloomberg this week looking for a further rise in markets this year.

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The risks to set against those positives include: historically high valuations (in the US anyway); the risk that inflation refuses to lie down; the negative impact of Trump’s America First approach on Europe and China in particular; earnings not living up to high expectations; and a reversal of the market broadening that we enjoyed through much of 2024.

The rally is still highly dependent on the performance of a narrow subset of companies. Just over a quarter of US stocks actually outperformed the index last year, no better than in 2023. And only just over half of stocks have positive momentum, being above their 200-day moving average. For most of 2024 that was closer to 80%. The equal weighted index of S&P 500 stocks rose by only around half as much last year as the headline index. Same story with smaller companies.

But markets continue their previous trend more often than they reverse course. For now, it seems sensible to assume another positive year, but possibly one with below-average returns.

Watching the data

The economic numbers never really stop, and the first full week of the year provides plenty to analyse. Perhaps most important will be the US non-farm payroll data at the end of the week. The buoyancy of the US labour market has been a notable feature of the past couple of years and December is expected to have seen another 150,000 new jobs created. Unemployment is forecast to have held steady at 4.2%.

The Eurozone economy is also in the spotlight, with inflation data on Tuesday expected to confirm ECB President Christine Lagarde’s optimism that inflation is under control and interest rates can fall further this year. A first quarter point cut is pencilled in for later this month, with another three or four expected this year.

China also has inflation data out this week. The problem there is less rising prices than deflation as the country battles with an ongoing property slump. CPI is expected to have risen by just 0.2% year on year in December. Chinese shares rose sharply in September on hopes for more stimulus, but it is clear that more is needed.

• Read: Top 10 best-selling ISA and SIPP funds of 2024
• Read: 5 stocks to watch in early 2025

2025 Fund Picks

This is also the time of year that we publish my fund picks for the 12 months ahead. After a reasonable year in 2024 when two global funds rode the equity wave higher, I’m cautiously optimistic with this year’s picks.

First up is Brown Advisory Smaller Companies Fund, which I expect to benefit from Trump 2.0’s deregulation, tariffs and tax cuts. Cheaper valuations for smaller companies argue for a rotation away from the tech stock leaders this year.

Second is a global fund with a US underweight. Dodge & Cox Worldwide Global Stock Fund favours cheaper UK and European markets and has a value bias. The team has long experience through many cycles and its portfolio is valued at just 12 times earnings.

Third, I’m repeating a pick from last year. Fidelity Global Dividend is a conservative income-focused fund that should benefit as interest rates fall and investors look beyond cash. It has a strong valuation discipline. 

Finally, something of a wild card. International Public Partnerships is an investment trust that focuses on essential infrastructure - things like schools, hospitals, transport, and renewables. The stuff of everyday life and a focus for the new Labour government. The trust trades at a discount to net assets and has grown its dividend every year since 2006.

• Read my full article here: My fund picks for 2025

Important information - The value of investments and the income from them can go down as well as up so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Eligibility to invest in an ISA/SIPP and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Past performance is not a reliable indicator of future returns. The Brown Advisory US Smaller Companies Fund, Dodge & Cox Worldwide Global Stock Fund, Fidelity Global Dividend Fund and International Public Partnerships Limited (INPP) Investment Trust invest in overseas markets so the value of investments could be affected by changes in currency exchange rates. The Dodge & Cox Worldwide Global Stock Fund and Fidelity Global Dividend Fund use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The Dodge & Cox Worldwide Global Stock Fund invests in emerging markets which can be more volatile than other more developed markets. The Fidelity Global Dividend Fund invests in a relatively small number of companies so may carry more risk than funds that are more diversified. This Brown Advisory US Smaller Companies Fund invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. The Brown Advisory US Smaller Companies Fund and Dodge & Cox Worldwide Global Stock Fund, have or are likely to have, high volatility owing to its portfolio composition or the portfolio management techniques. The shares in the International Public Partnerships Limited (INPP) Investment Trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. The Key Investor Information Document (KIID) / Key Information Document (KID) for Fidelity and non-Fidelity funds is available in English and can be obtained from our website at www.fidelity.co.uk. Please note that Tom’s picks and Select 50 are not a personal recommendation for you. If you are unsure about the suitability of an investment you should speak to one of  Fidelity’s advisers or an authorised financial adviser of your choice.