Asset allocation views: balancing U.S. equities and trade risks

The evolving policy situation in the United States will take center stage in 2025 amid continued rate cuts from key central banks, including the U.S. Federal Reserve. We look at the highlights of our latest asset allocation outlook.

A new administration in the United States and a pause on rate cuts from the U.S. Federal Reserve (Fed) have characterized the first month of 2025. However, with the United States marching ahead with new trade policies and the fear of rising inflation not completely behind us, investors might need to brace for turbulence.

Equities remain strong amid global shifts

While overall financial conditions are expected to remain stable, most major economies will experience below-trend growth due to pressured consumers and high borrowing costs. Central banks globally will continue to lower interest rates prompted by multiple factors. Canada, the United Kingdom, and Europe face weak growth. Meanwhile, the Fed could ease rates at a slower pace than earlier expected, affecting dollar-dependent emerging markets.

That said, strong earnings growth and comparatively stable economic factors should prove favourable for equities. Postelection stability will promote market growth and boost investor confidence within the equities market. However, policy uncertainty in the United States, led by tariffs, poses a potential risk to robust equity market performance this year.

Given the economic outlook and the potential for upward pressure on inflation, we’ve shifted our stance on equities to overweight from neutral and are underweight fixed income. 

United States vs. other developed markets

U.S. equities performed well in 2024, with the S&P 500 Index surging 23.31% in the year. The market should continue to be a focus for investors in 2025, and we remain overweight U.S. equities.

Despite fears of potential policy effects, we prefer U.S. equities due to a stable job market, accommodative monetary policy, and steady inflation levels. Total nonfarm employment has shown positive month-over-month growth throughout 2024¹. The U.S. Personal Consumption Expenditures price index, which is the Fed’s preferred measure of inflation, has consistently remained below 3%, although still not near the Fed’s 2% target.

Despite improvement, U.S. inflation remains above the Fed's 2% target

Personal Consumption Expenditures price index, change from month one year ago (%), January 2024–December 2024

Additionally, while valuations remain high, they’re supported by strong earnings growth. U.S. equities could also receive a boost from plans of tax cuts and deregulations announced by the new administration, if implemented.

In contrast, we remain neutral on Canada and have shifted our stance on developed international equities outside North America to underweight. 

Real assets: a hedge against inflation

Inflation trends over the past decade have resembled those of the 1970s. After the first oil shock in 1973, inflation initially eased, but new inflationary pressures compounded by another oil shock led to a second surge in inflation.

Similarly, although the first high-inflationary wave is behind us, several pressures are starting to build. A potential increase in the money supply due to global central banks easing interest rates, along with impending tariffs and geopolitical developments, could drive inflation higher.  

In such an environment, we believe that real asset investments, such as commodities, real estate, commodity-linked equities, and infrastructure, can help provide a hedge within diversified portfolios.

Besides their inflation-hedging qualities, real assets are being supported by several other factors. The energy, infrastructure, metal and mining sectors are experiencing increased demand from power generation needs to fuel artificial intelligence. Gold and other commodities became attractive because of geopolitical risks and central bank buying. Lastly, the real estate market remains strong outside of the commercial sector.

In recent times, sectors such as energy, infrastructure, and real estate investment trusts have become undervalued, with tech stocks, leading markets higher. We believe that a strategic allocation to these sectors could allow investors to benefit from their favourable valuation.

For more details, read the latest asset allocation views from the Multi-Asset Solutions Team at Manulife Investment Management.

1 U.S. Bureau of Labor Statistics, as of 1/10/25.

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