CPD: A 2025 global growth equities outlook

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Understanding of the outlook for global growth equities in the year ahead can help better position clients’ portfolios.

It’s the question that greets every new year…what will be the investment landscape in the year ahead? Will bull markets prevail?

As 2025 ticked over and the strains of auld lang syne faded, the global investment landscape is likely to continue its transformation. In an era marked by uncertainty and volatility, understanding the underlying trends and opportunities within global equities will be crucial for investors seeking to navigate the market’s complexities. The confluence of economic recovery, geopolitical dynamics and technological advancements sees investors keenly assessing the potential of global equities. As globalisation faces new headwinds, how can investors identify growth stories across global markets?

This article delves into the factors identified by Munro Partners’ CIO Nick Griffin as most likely to shape global equity markets over 2025 and beyond.

Bull market set to continue

The bull market that began in 2023 continued in 2024. Equity markets experienced a year of solid gains across the board last year, despite ongoing challenges from global economic conditions. However, inflation and interest rates ultimately peaked, and the much heralded global recession failed to transpire. The upshot was that markets returned to focus on corporate earnings growth.

Conditions are favourable for further corporate earnings growth and consequently, equity market growth in 2025. Interest rates have stabilised, inflationary pressures eased, and central banks are now well positioned to support a stable economic upcycle via interest rate cuts if required. After a period of slower growth, developed economies should move into economic recovery mode, which should ultimately broaden earnings growth beyond the technology champions.

Equity markets have moved to price in some of this recovery already, but there is ample room for corporate earnings to catch up, with most companies running below normal capacity and likely to exhibit further operating leverage as the economy improves. 

As illustrated in figure one, there have been several bear markets during the period 1995-2023 (purple bars); in 2000 to 2002, 2007 to 2009, during COVID and a significant bear market in 2022.  While this was not felt as strongly in the Australian market, in the growth equities world, 2022 represented a significant bear market in which the NASDAQ fell more than 33 percent and the median stock in the NASDAQ fell more than 50 percent.

Like any bear market, this most recent episode has effectively cleansed the system. Interest rates went from zero to five percent very quickly, which effectively removed much of the excess valuation from markets. However, the anticipated recession did not eventuate, and markets transitioned from bear to bull. According to Munro Partners, bull markets generally last longer than bear markets; we are most likely two years into a bull market that should last at least five years because of the afore-mentioned cleansing of excess valuations.

Central banks are now in a position to manage a long and sustained up cycle. This can be done by cutting rates or not cutting rates…whether central banks cut rates or the speed at which rate cuts may occur does not matter. What matters is that banks can now use rates as a tool to better manage monetary policy and fiscal stimulus.

Consequently, the outlook for global growth equities in 2025 is positive. It’s important to remind your clients that although the economy may not look robust, the market is not the economy. The Australian market reached new highs in 2024 while, at the same time, many struggled with an upward spiral in the cost of living. In Australia, the S&P/ASX200 represents the 200 largest public companies and not the economy. Likewise, in the United States, the S&P500 is the best 500 companies in the United States, not the economy.

Figure two illustrates the performance of four companies that have increased earnings despite the economy: Nvidia because of AI, Amazon because of AI, Eli Lilly because of GLP1s and Google because of cost cuts. Each of these companies is growing again because of accelerating earnings and not economic factors.

Trump 2.0

There’s been a plethora of predictions about the economic impacts and effects on markets under a second term of a Trump presidency. It has the potential to radically shift the productivity equation in favour of corporate earnings, the ultimate driver of equity markets.

President Trump won a strong mandate, winning the House, Senate, Presidency and the popular vote. Consequently, the second Trump presidency is shaping up to be a radical shake up of the status quo. He has already created ‘DOGE’ – the Department of Government Efficiency – headed by Elon Musk and Vivek Ramaswamy, designed to cut wasteful government expenditure. The addition of several high-net-worth cabinet appointments indicate a raft of corporate-friendly policies ahead.

It is also expected a sustained effort to reduce the regulatory burden on business should be expected under President Trump. This was a hallmark of his last presidency and all indications to date suggest it will be another area of focus this term.

In short, President’s Trump’s policies will focus on America first: shrinking government, reducing regulation, lowering taxes, approving more M&A and ‘unshackling’ corporate America to help grow out of the current US government deficit (figure three). While some mathematical upside from tax cuts, onshoring and mergers and acquisitions is expected, also anticipated is a large productivity upside from the predicted regulatory rollback (figure four).

Should the Trump agenda prove successful, it could result in a global movement towards smaller government and deregulation as other economies seek to escape their own debt troubles.

A step change in productivity

As well as supportive policies from the new Trump government, productivity growth will be supported by the emergence of large language models that see companies attempting to apply AI to nearly every industry.

Unlike previous technology revolutions, such as the mobile revolution or the shift to the cloud, AI is unique in that the machine learning technologies can be applied broadly. As human language, text, and video become the means by which we can program applications, and those applications learn as they become used, significant breakthroughs are likely to be achieved. We can already see digital agents and chatbots that are now more efficient than humans; soon physical robots could achieve similar levels of competence as training them is as simple as showing them a video of the task.

Elsewhere digital twins of buildings, warehouses and assembly lines can save substantial time and money in the construction process and how facilities operate. Autonomous vehicles can learn their surroundings to improve safety, while protein models can rapidly accelerate drug discovery. We expect significant savings and improved customer outcomes for those companies that leverage this technology to their advantage. Where the leaders go, their competitors will follow, and the potential for a step change in labour productivity for the whole economy is real and likely to translate to higher corporate earnings over time.

The importance of productivity to markets is illustrated by recently published data from the Bank of America. It demonstrates productivity to be the natural elixir for market strength. On the left hand side of figure four, revenue per worker is inflecting for the first time in 20 years. While there is an argument that this is being driven by other factors – such as artificial intelligence or spending on software – it can also be argued that President Trump’s policies will support productivity.

The right hand side of figure four depicts the earnings of the S&P500, normalised over a long period of time. This demonstrates that the share market is not the economy; it is the earnings growth you want to own in the US, described as “a warrant on human innovation”.

Figure four also illustrates that during the 1980s and 1990s, earnings growth accelerated ahead of periods of productivity growth. So, with an anticipated uptick in productivity, there is a case to be made that US markets may experience a period of accelerating earnings growth, even ahead of the normal averages.

The magnificent seven

Not only is the second Trump presidency likely to be supportive for US markets, it is likely to support continued innovation by exceptional US-based companies. Digitalisation has created huge companies in the United States, the most talked about being the ‘magnificent seven’ (figure five).

These companies are effectively winning from the rest of the world. Microsoft isn’t the software company in the United States, it’s the software company for the world.  Google isn’t the search engine for the United States, it’s the search engine for the world. Nvidia isn’t solely powering artificial intelligence in the US, it is dominating AI worldwide.

While these companies trade on high multiples, it is justified by the high earnings growth exhibited by each. As illustrated in figure five, the combined earnings of these seven companies is drawing up the multiple of the entire S&P500 to 22 times earnings. But, as shown on the right hand side of figure five, the S&P500 equal weighted index over the last 10-15 years without the effect of these stocks is roughly 18 times earnings. As such, the broader market is not expensive and, unlike some claims, is not in a bubble.

To summarise the outlook for 2025, there’s an economic recovery that is just beginning and consequently, Munro Partners believes this provides the ideal setting for the third year of what should be a five year bull market. In a bull market, growth companies tend to perform well – but not all growth companies are created equal. Those poised to benefit from structural tail winds are best positioned to deliver positive outcomes for investors; these structural trends include high performance computing, climate and innovative health.

High performance computing

As emerging technologies such as artificial intelligence, cloud computing and self-driving vehicles become more mainstream, they will demand ever greater computing power that only a handful of companies will be able to supply.

A McKinsey report published in October 2024 noted the expectation that AI could generate up to US$23 trillion annually by 2040[1]. Companies are building thousands of AI applications that are going to run on the cloud, and the cloud is going to need to invest heavily in semiconductors to run these products. Many of these applications are massively disrupting industries or allowing certain companies to better their competitors. Consequently, companies will continue to invest in technology over the next three to five years. So, from that perspective, the semiconductor market is entering its fourth era: the era of AI (figure six).

Semi-conductor manufacturer NVIDIA has now become the largest company in the world, taking the mantle from fellow ‘mag seven’ incumbent Apple. Despite this growth, there is a long runway ahead.

To get AI applications and models to work effectively, companies are building large graphics processing units (GPU) clusters. To provide some perspective, in 2022, Chat GPT-3 was built using approximately 10,000 NVIDIA A100s costing $150 million capex. Chat GPT4.0 was built on roughly 25,000 H100s, which required $1.5 billion capex.

Several companies, including Tesla and Meta, are building 100,000 GPU clusters. Further, there are now companies working towards building million GPU clusters, effectively creating supercomputers to train mega AI models to drive the applications that are coming.

Interestingly, this is where structural trends intersect, in this case high performance computing and clean energy. Because so many companies in the world are gearing up to build million GPU clusters, some are contracting whole nuclear power plants to do it. For example, Constellation Energy, the owner of the Three Mile Island nuclear power plant, has signed a deal with Microsoft to reopen the plant in 2028 and sell all of its power to the tech company for 20 years. That represents a whole gigawatt of power for Microsoft’s data centres. Similarly, Amazon has signed agreements for innovative nuclear energy projects to address growing energy demands for its data centres. These – and other large cloud service providers – are driving artificial intelligence related capital expenditure, something expected to increase well into the future.

Climate

Despite President Trump being a vocal climate sceptic, many US corporates will continue on their journey to decarbonise by 2050 as a result of pressure from fund managers, pension and superannuation funds, asset consultants and investment groups, each which engage in stewardship. It’s estimates that more than US$50 trillion will be spent to achieve this.

The global push to decarbonise the planet and achieve net zero emission targets will continue to increase demand for clean energy solutions. As countries and corporations commit to reducing their carbon footprint, renewable energy sources such as solar, wind, nuclear and hydropower are increasingly important, a trend that will continue into 2025 and beyond.

Many corporates are setting their own science based targets for decarbonisation, which are aligned with warming capped at 1.5 degrees. The number of companies putting out targets aligned to the science-based targets initiative is growing exponentially.

The clean energy sector is poised for robust growth, and is attracting investments in innovative technologies, infrastructure development and sustainable practices. Investors see renewable energy projects as not only environmentally responsible but also financially lucrative, driven by supportive government policies, technological advancements and growing public awareness of environmental sustainability. This confluence of factors creates a dynamic and promising landscape for investment in the clean energy market.

As demand for power rises, traditional baseload coal and gas-fired power sources are being decommissioned and the grid is transitioning to renewable energy sources. This transition is leading to growth in the order backlog for utilities and grid equipment, and increased demand from the industrial companies that provide these solutions.

There are three main drivers supporting the global demand for clean energy: data centre growth, electrification (including electric vehicles and electric heat pumps) and reshoring (to US from China); the latter will likely accelerate under President Trump.

Innovative health

Health is an industry facing unsustainably rising costs and inconsistent outcomes – and is therefore fertile ground for innovation across diagnostics and patient care and is a sector ripe to benefit from AI.

An example of this is RadNet, a radiology firm which operates outpatient diagnostic imaging centres and is the largest provider of outpatient imaging services in the United States. The company has implemented innovative AI solutions in all of its imaging centres across the US. Led by DeepHealth, its digital health division, RadNet has expanded its portfolio of AI software solutions to enable more accurate screening for the three most prevalent cancers: breast, lung, and prostate.

Its enhanced breast cancer detection can detect cancers approximately one year earlier than the naked eye. This enhancement finds 17 percent more cancers and at earlier stages, as well as reduces recalls and false positives. Given that earlier detection often results in a better long-term outcome, people are prepared to spend on the AI scan.

RadNet also leverages AI technology in neuroradiology, pivotal for new drug and treatment therapies for diseases such as Alzheimer’s. The company also uses AI across its operational processes such as patient outreach and engagement, which are highly impactful for cost and efficiency.

The 2025 outlook for global growth equities is one of optimism and opportunity, driven by transformative forces reshaping industries worldwide. Chief among these is the rapid adoption of AI, which is unlocking efficiencies, driving innovation and creating new growth avenues across sectors, from healthcare and technology to financial services and manufacturing.

As companies harness the power of AI to enhance productivity and deliver value, investors are well-positioned to benefit from this paradigm shift. While challenges such as inflation, geopolitical tensions, and regulatory hurdles remain, the resilience of global markets and the promise of technological advancements underscore a strong foundation for growth. As we move into the new year, the integration of AI into business strategies signals a compelling future for global growth equities, marked by progress, profitability and potential.

 

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References:
[1] https://www.marketingaiinstitute.com/blog/mckinsey-ai-economic-impact
The information included in this article is provided for informational purposes only and is general advice only. It does not take into account an investor’s own objectives. The information contained in this article reflects, as of the date of publication, the current opinion of Munro Partners and is subject to change without notice. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither Munro Partners, GSFM Pty Ltd, their related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article.

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