Capital Ideas^TM

As we enter 2025, market optimism is high amid a strong United States economy, interest rate cuts and advances in artificial intelligence.

The S&P 500 Index ended 2024 up 25%, after topping 26% in 2023. Whether this year will be a three-peat of stellar market gains is unclear, but a handful of promising investment themes could support long-term gains. Here, our economist and portfolio managers highlight five key insights for investors in 2025 and beyond.

1. Welcome to the Benjamin Button economy

If you’re a fan of Brad Pitt movies or Capital Group’s 2025 Outlook report, you’re probably familiar with the concept of aging in reverse. And while the Benjamin Button character is a work of fiction, the reversal of the US business cycle has very real implications for investors.

“Instead of moving through the typical four-stage cycle that has defined the post-World War II era, the US economy appears to be shifting from late cycle back to mid cycle,” says Capital Group economist Jared Franz. The US economy is benefiting from rising corporate profits, accelerating credit demand, softening cost pressures and a shift toward neutral monetary policy. “We saw all four of those in 2024,” Franz notes. “Going forward, I believe the US is headed for a multi-year expansion period, perhaps fending off a recession until 2028.”

This also provides a favourable backdrop for stocks. Based on an analysis of returns during previous business cycles, we found that stocks posted a robust 14% return during the mid-cycle stage. This is notably higher than returns during a late-cycle environment. The move back to mid cycle also effectively postpones the start of the next recession — periods when stock returns have historically been their worst.

2. Industrial renaissance is fueling a new era of growth

From the American heartland to the arid desert, an industrial renaissance is underway. Capital expenditure (capex) projects are popping up across the US, boosting local economies and creating opportunities for select companies.

Taiwan Semiconductor Manufacturing Company’s $65 billion build-out of a production facility in Arizona is one notable example. It is expected to create thousands of manufacturing and construction jobs. But for every megaproject, there are dozens that remain under the radar.

Eli Lilly, for example, is investing $4.5 billion to create a new drug development and manufacturing centre that could bring hundreds of jobs to Indiana.

To be sure, this activity is happening outside America, too. The build-out of data centers, rising travel demand and the development of new energy sources are creating growth opportunities for Europe’s industrial titans. In emerging markets, the nearshoring movement is leading to a rewiring of supply chains and the construction of new trade hubs.

“These trends represent multi-decade investment opportunities, and we are only in the early stages,” says Lara Pellini, equity portfolio manager. “Industrial powerhouses in the US and Europe are solidifying their foothold in areas ripe for long-term global growth.”

3. AI megatrend could boost stocks for years

Artificial intelligence has captured the minds of the public and investors, conjuring images of a futuristic world completely reshaped by intelligent machines. Overhyped? Probably. Even more opportunities ahead? Also probably true.

That’s because we tend to overestimate megatrends in the short term while underestimating them in the longer term. With some megatrends, such as smartphones or driverless cars, we could reasonably create estimates based on known quantities like global populations or number of cars.

“But how do we measure the value of better intelligence?” asks Mark Casey, equity portfolio manager. “One of the most interesting things about AI is that it’s hard to predict how big it will become. Because it can take on a multitude of human tasks, I consider the AI market to be unknowably massive.”

Outside of its tech applications, AI will also create opportunities in some unexpected places. The build-out of data centers requires vast physical resources, including copper, capital equipment and a lot of electricity. Soaring demand for these resources has been a boon for old economy industries including utilities, industrials and mining companies.

4. Drug discovery is creating a golden age of health care

Following last year’s US election, uncertainty over the industry’s regulatory outlook sparked a slump in health care stocks, further pressuring a sector that had lagged throughout the year. But following the sell-off, many companies are trading at attractive valuations, creating opportunities for investors with a long-term approach.

“That includes forgotten pharma, or drugmakers that don’t offer weight loss treatments,” according to Cheryl Frank, equity portfolio manager. “I am looking for opportunities to invest in dividend payers that have been left behind by the market.”

While weight loss drugs, such as GLP-1s, tend to capture the spotlight, advances are being made on many other fronts. The largest pharmaceutical companies have more than two hundred drugs in their pipelines.

As these companies tackle some of the world’s most debilitating ailments, patients have experienced lower mortality rates and longer life expectancies. Over the next decade, we could see effective treatments for ALS, sickle cell and muscular dystrophy. Risks are always present when investing in biotech and pharma companies, but we could be at the start of a golden age of health care — for patients and investors.

5. There are always reasons not to invest

Imagine going back in time to New Year’s Day 2020 and learning in advance about the biggest events over the next five years. The COVID-19 pandemic. A steep bear market. Inflation above 9%. Wars in Ukraine and the Middle East. A trade war with China. Political uncertainty in the US With that knowledge of the outlook, would you want to invest in stocks? Probably not.

“In my 25 years in the mutual fund business, I have never known a good time to invest. There are always a dozen reasons why it makes sense to wait. We have a new president, strife in the Middle East, excessive government regulation, oppressive tax rates and a Congress that is more part of the problem than the solution,” said former Capital Group executive Graham Holloway.

Although that may sound like a reflection of the current environment, Holloway’s quote is from 1981.

The point is there are always reasons not to invest, and that’s no different today than it was in 2020 or 1981. But markets have been resilient over time. And investors have typically been rewarded for overlooking near-term uncertainty and keeping focus on their long-term investment goals.

So, going back to New Year’s 2020, what would have happened if you ignored all the troubling events on the horizon and had stayed invested? Since then, the S&P 500 Index has risen more than 100%.