As the sun sets on another year, one key reflection that carries into this current year is whether the remarkable market resilience of 2024 — and the post-COVID era more broadly — can be sustained as we assess key risks and trends for 2025.
US exceptionalism was the hallmark of both economic and financial market resilience during 2024. This outperformance can be explored through three key dimensions. First, cyclical economic trends supported robust US growth, with the economy expanding nearly 2% in the first three quarters of 2024. Solid consumption, investment and government spending helped the US significantly outpace other G7 economies, widening the gap between its performance and that of its peers.
Refresh this chart in your browser | Edit the chart in Datastream
Second, the US benefitted from its position as a global leader in technological innovation, particularly advancements in artificial intelligence. While the economic benefits of AI are probably not yet reflected in economic data, the structural theme of AI has driven sentiment and boosted valuations of US technology companies. This has fuelled the S&P 500’s rise, making it the best-performing large-cap developed market index of 2024.
Third, US exceptionalism is partly a reflection of economic struggles elsewhere. Europe, in particular, remains beset by anaemic growth, presenting increasing social and political challenges. Governments’ inability to inspire confidence or find durable solutions has shifted the political centre of gravity towards populist and extreme parties. The risk is that Europe’s core economies are converging downward towards peripheral ones, rather than lifting them up. Political instability in France and Germany — unprecedented for decades — has begun to weigh on investor sentiment, with French credit default swap spreads surpassing Spain’s, a notable inversion of traditional core-periphery dynamics.
Refresh this chart in your browser | Edit the chart in Datastream
Want more charts and analysis? Access a pre-built library of charts built by Fathom Consulting via Datastream Chartbook in LSEG Workspace.
As fiscal constraints tighten and electoral challenges escalate, the deterioration in Europe’s institutional framework could accelerate. Mario Draghi’s call for €800 billion in (additional annual) pooled spending, to drive innovation, highlights the scale of the reform needed, however political appetite remains limited.
Geopolitical uncertainty was a defining theme of 2024, and its importance is a symptom of the complicated interplay between the structural and cyclical trends currently in play. Liquidity, however, has been one important story driving markets that remained relatively hidden from plain sight. Many expected markets to remain vulnerable to the prospect of continued quantitative tightening (QT) and high interest rates.
Refresh this chart in your browser | Edit the chart in Datastream
Instead, market liquidity remained ample and a key supporting force behind global markets as abundant fiscal policy largely offset higher interest rates and shrinking central bank balance sheets. However, the coming year may see conditions tighten more noticeably. Early signs of resurgent inflation are already prompting revisions to expectations about the timing and pace of interest rate cuts. Moreover, markets have priced in much of the positive sentiment around the new US administration’s likely fiscal proclivity, leaving little room for further upside surprises if policy developments fall short or shift in tone. In addition, the new leadership’s propensity to challenge established multilateral institutions and norms could introduce heightened levels of uncertainty, potentially raising risk premia, and curbing liquidity in 2025 and beyond.
Looking to Asia, there is a sharp contrast between China’s repeated underperformance and Japan’s surprising resilience. Hopes for a robust and sustained Chinese economic rebound have been repeatedly dashed, with growth stifled by the overhang of a debt-fuelled real estate market and broader macroeconomic malaise. The global economy, once ready to bank on strong demand from China, has seen these expectations dampen. Japan, however, has emerged as a bright spot on the continent. Its economy continues to defy pessimistic forecasts as it navigates a gradual shift in policy that is grounded in deeper structural adjustments, rather than mere cyclical upticks, signalling a more durable recovery than many had anticipated.
It is often stated that the importance of geopolitics may be overstated in market analysis. Yet, gold and Bitcoin were the best-performing assets of 2024, even in a resilient economic year dominated by interest rates at cyclical highs and equity indices posting double digit returns across many markets.
Refresh this chart in your browser | Edit the chart in Datastream
Gold delivered returns above 25% for only the ninth time since 1970. Bitcoin also crossed the $100,000 mark, underpinned by a pro-crypto stance from the incoming US administration. The performance of both assets certainly should give rise to a reflective pause regarding the enduring appeal of perceived safe-haven instruments in a world where uncertainty is likely to remain a constant.
The views expressed in this article are the views of the author, not necessarily those of LSEG.
______________________________________________________________________________________
LSEG Datastream
Financial time series database which allows you to identify and examine trends, generate and test ideas and develop viewpoints on the market.
LSEG offers the world’s most comprehensive historical database for numerical macroeconomic and cross-asset financial data which started in the 1950s and has grown into an indispensable resource for financial professionals. Find out more.
