Best Ideas for 2025

BEST IDEAS for 2025

advisors asset management's

2024 was an extraordinary year from many different viewpoints.

Expectations for 2025

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Federal Reserve Rate Cuts

Gross Comestic Product

What is a bond ladder?

TAX-EXEMPT INCOME

Trump Administration

How It Works

Assuming an initial investment of $100,000, an investor purchases five bonds with staggered maturities extending out every two years. The laddered bond portfolio has a combined average annual yield of 3.42% and an average duration of 6 years.

2-Year

4-Year

6-Year

8-Year

10-Year

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

2.05

2.65

3.60

4.15

4.65

At the end of year two, the shortest bond matures and the four remaining bond investments are now two years closer to their maturity date. Proceeds from the maturing bond are reinvested back into the 10-year bond. The combined average annual yield of the new laddered bond portfolio is 4.05% and the average duration would remain at 6 years.

Original Ladder

2-Year

4-Year

6-Year

8-Year

10-Year

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

2.05

2.65

3.60

4.15

4.65

BOND A $20,000

BOND B $20,000

BOND C $20,000

BOND D $20,000

BOND E $20,000

ladder two years later

BOND MATURED

2-Year

4-Year

6-Year

8-Year

10-Year

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

6.00%

0.00

2.65

3.60

4.15

4.65

5.20

BOND A $20,000

BOND B $20,000

BOND C $20,000

BOND D $20,000

BOND E $20,000

ladder two years later

BOND MATURED

2-Year

4-Year

6-Year

8-Year

10-Year

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

6.00%

0.00

2.65

3.60

4.15

4.65

5.20

BOND A $20,000

BOND B $20,000

BOND C $20,000

BOND D $20,000

BOND E $20,000

Ladder Two Years Later >>

<< ORIGINAL LADDER

This hypothetical example is for illustrative purposes only and does not represent the performance of any specific investment. Bond income is not guaranteed and may be subject to call risk as well as default risk, which increases with lower-rated bond securities.

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* Based on the S&P 500 Index and its precursor. Other years include 1927/1928, 1935/1936 and 1954/1955.** As measured by the S&P 500 sector return, Russell 2000, MSCI EAFE and MSCI Emerging Markets (EM) Indexes respectively. Past performance does not guarantee future results. It is not possible to invest directly in an index. This commentary is provided for informational purposes only. The indexes referenced in this publication are not available for direct investment. It is not an offer or solicitation of an offer to buy or sell any product or service. Unless otherwise stated, all information and opinions contained in this publication were produced by Advisors Asset Management, Inc. (AAM) and other sources believed by AAM to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and best interests. All expressions of opinions are as of January 8, 2025 and are subject to change without notice. All AAM employees, including research associates, receive compensation that is based in part upon the overall performance of the firm. AAM may make a market in or have other financial interests in any given sector or security with which this analysis suggests may be benefited from its conclusions. Investors should seek financial guidance regarding the appropriateness of investing in any security or investment strategy discussed in this report andshould understand that statements regarding future prospects may not be realized. Past performance does not guarantee future performance. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future. Not FDIC Insured. Not Bank Guaranteed. May Lose Value.

From a capital markets perspective, the S&P 500 Index gained 25.0%, on the heels of a 26.1% gain in 2023. The Index has generated back-to-back years of 20%-plus gains only a handful of times in its history, last achieving this milestone in 1997/1998.* Investors’ optimism over artificial intelligence drove the tech-heavy Nasdaq Composite to a nearly 30% gain. Cryptocurrency also had a banner year as the price of Bitcoin topped $100,000 before falling at year end, while prices for several commodities including cocoa, gold and coffee, moved dramatically higher. These eye-popping returns masked more muted, albeit still positive, returns for Energy (+5.7%), Health Care (+2.6%), and US Small Cap (+11.5%) stocks, as well as International Developed (+4.4%) and Emerging Markets (+8.1%).** On the fixed income side, the Bloomberg US Aggregate Bond Index — a measure of the broad fixed income market — gained 1.25% in 2024. The world became a more uncertain place in 2024. From a geopolitical perspective, Russia’s war against Ukraine hit its third anniversary with no tangible end to the conflict in sight. Israel expanded its attacks against Hamas, and in Syria, the Assad regime collapsed in shocking fashion. Trade tensions between the US and China further escalated with President-elect Trump’s talk of tariffs adding fuel to the "already burning" fire. Economically, the US Federal Reserve (Fed) has seemingly engineered a “soft landing” with 2024 growth estimated to be 2.7% and inflation stabilizing, despite remaining higher than the Fed’s 2% target. The labor market has been surprisingly resilient albeit slowing. This environment enabled the Fed to reduce interest rates a total of 100 basis points during the last three meetings of the year.

2024 was also an historic year for elections, with over 70 nations and roughly half the world’s population eligible to go to the polls. Incumbents bore the brunt of voters’ unease, as evidenced by the defeat of US Vice President Kamala Harris and the end of 14 years of Conservative rule in the UK. In addition, the governing parties in India, France, Japan, Germany and South Africa experienced noteworthy losses of support although remained in power. Other notable events from 2024 (in no particular order) include: ► A change at the top of the Democratic ticket from President Joe Biden to Vice President Kamala Harris just four months before election day.► Two assassination attempts on, as well as several felony convictions of, now President-elect Donald Trump.► Baltimore’s Francis Scott Key Bridge collapsed into the Patapsco River after being hit by a container ship.► Solar eclipse mania swept across the US.► Extreme weather events continued across the globe.► Women’s sports came into their own.► Notre-Dame Cathedral in Paris reopened five years after a devastating fire.► Taylor Swift cemented her status as pop royalty, as her Eras tour grossed a whopping $2 billion in ticket sales. Now that we’ve briefly covered 2024, let’s take a look at our expectations for 2025.

World Economic Growth Leader?

Federal Reserve Rate Cuts

Trump Administration

Gross Domestic Product

Top Investment Themes for 2025

We believe that the concentrated performance in the US large cap indices will continue, but moderate, as markets broaden; quality and dividends should once again matter.

We are not market timers and firmly believe that investors should be fully invested at all times.

Within US equities, we believe investors ought to diversify outside of the areas that we view as fully priced or even frothy. We do not believe investors should fully abandon the technology sector but should focus on those companies with more attractive fundamentals. We also see value in healthcare given strong earnings potential and attractive valuations. The huge need for power generation growth in the US could benefit utility companies, particularly in a benign interest rate world. Lastly, materials and cyclicals could thrive if global demand begins to grow in response to economic stimulus.

Given the new administration in the United States, as mentioned above, we expect financials and energy companies to benefit from policy changes focused on deregulation. We also expect small and mid-cap companies could benefit from an “America First” agenda, as these companies tend to be more US-centric.

We believe investors should consider adding lower-correlated alternative investments, including private credit, to their portfolio, since these asset classes can play an impactful role in enhancing outcomes for diversified portfolios. Private market alternatives have the potential to increase yields, add stability and generate additional alpha.

Globally, we expect the European and Chinese economies to respond positively to stimulative measures from their governments, and since the start of an economic recovery is generally a good time to invest, we favor adding international exposure to your diversified portfolio. (While we acknowledge there are elevated risks around investing in China, we think those have been adequately priced in for bolder investors.)

As the markets digest the impact of new policies from changing administrations globally, and we slowly gainvisibility into the success of these governments to spur growth, we think equity markets could be volatile with fixed income and private market investments potentially acting as worthwhile buffers against volatility.

Overall, we are cautiously optimistic on asset price growth continuing in 2025 with a “good” year following a “great” year. Our outlook favors US equities over international — although we do think that there are compelling reasons to consider an allocation abroad.

Bottom Line:

Remain patient, keep asset allocations focused on resiliency, quality, value and income generation. We do not believe what worked the past 10 years is necessarily the right formula for the next 10 years in this new regime.

Record liquidity can be seen in frothy equity pricing. The higher level of optimism may begin to cannibalize future growth at some point. To offset this, we tend to see higher levels of merger and acquisition (M&A) activity that may be cynically masking lower growth metrics. For those that suffer this blessing, massive stock buy backs will likely be needed to help boost the growth needed to support fundamental metrics.

Record liquidity can be seen in frothy equity pricing.

The higher level of optimism may begin to cannibalize future growth at some point. To offset this, we tend to see higher levels of merger and acquisition (M&A) activity that may be cynically masking lower growth metrics. For those that suffer this blessing, massive stock buy backs will likely be needed to help boost the growth needed to support fundamental metrics.

Bond market’s lack of price discovery likely misprices the asset.

With historically low interest rates and inflation lurking, the secular move in rates has generally obscured poor credit selection over the last 40 years. While several cyclical rate moves are needed to make one secular move, the mere length of time it may take for certain fixed income assets to recover may reverse the massive bond inflows witnessed in the last 12 years. This could shift investors’ expectations, making them reassess their income needs and where to get it.

Federal Reserve’s actions force investors to increase risk.

Should inflation rise as we expect, asset prices may rise to severe levels. Should history be a guide, investors are often forced further out on the risk spectrum, seeking better performing, albeit riskier assets. This could lead an apathetic investor to be caught off guard when the Federal Reserve is forced to ultimately react to an overheating economy by raising interest rates.

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You work closely with your financial professional to develop a winning financial game plan to meet your goals. At AAM, we are committed to helping you succeed. We remain as dedicated today as we were over 45 years ago to developing innovative investment solutions that investors can leverage to meet your needs.

World Economic Growth: U.S. May Not Lead in 2025

In 2024, the United States led the world in economic growth. That could change in 2025 however, as other countries look to stimulate their economies. In fact, apart from Japan, most global developed and emerging countries have been stimulating their economies with growth incentives and an easing of monetary policy.

Interest Rates: Fed Challenged to Cut Rates Significantly

For the United States, we anticipate the Fed will be challenged to cut rates significantly in 2025, given stubbornly resilient inflation pressures. More specifically, while the Fed will likely want to continue to cut rates to support the labor markets and economic growth, their ability to do so could be hindered by elevated inflation. In fact, the dot plot is currently forecasting only two additional cuts in 2025. Thus, we think short-term rates will fall with any reduction in the Fed Funds rate, but longer-term rates are likely to remain elevated.

World Economic Growth Leader?

Trump Administration: Generally Optimistic

We are generally optimistic about the incoming Trump administration who we expect will keep the fiscal spigots open, while also implementing several policy changes that could be beneficial for the markets, including lower taxes on both individuals and corporations, and deregulation, particularly in the areas of banking and energy. In contrast, talk of high tariffs and the potential for a tightening labor supply make us somewhat cautious, although we do think that fears over the possible impact of tariffs are overblown. In his first term, President-elect Trump was a pro-growth president who cared greatly about his record on the economy and the markets, and we expect the same in his second term.

Gross Domestic Product: Expect 2-3%

In this environment, we expect 2025 gross domestic product (GDP) will chug along between 2% and 3%, which would be a good harbinger for corporate profits.

Scott Colyer Chief Executive Officer

Cliff Corso President & Chief Investment Officer

Matt Lloyd Chief Investment Strategist

Given our thesis of “higher for longer” regarding both interest rates and inflation, we favor the short to intermediate areas of the yield curve and believe bond duration should be kept short of the benchmark.

Given extremely tight spreads of investment grade and high-yield bonds to Treasury securities, we favor short duration mortgage-backed securities (MBS) where spreads are much more generous, and which tend to carry some of the highest credit ratings available. We believe active management in your fixed income allocation is critical, with particular regard to careful security selection and sector allocation.

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