High U.S. valuations haven’t deterred forecasters such as the BlackRock Investment Institute, a U.S.-based affiliate of Canadian ETF market leader BlackRock Asset Management Canada Ltd.

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“Robust economic growth, broad earnings growth and a quality tilt underpin our conviction and overweight in U.S. stocks versus other regions,” BlackRock said in its 2025 outlook. “We see valuations for big tech backed by strong earnings, and less lofty valuations for other sectors.”

Brompton Funds Ltd., for another, believes fears about buying into the U.S. market at current levels are overdone. The Toronto-based provider of ETFs and other exchange-listed securities noted that the average annual return of the S&P 500 over the three years ended Nov. 30 was 9.7%. 

That’s closer to the low end of the range in the years since the 2008–2009 financial crisis.

The three-year rolling return, said Brompton, typically peaks above 20%. Even after two strong years, the U.S. market can continue to perform well in 2025, Brompton’s outlook concludes.

The broader U.S. market

While noting that there’s plenty of optimism priced into the U.S. market, Toronto-based Guardian Capital LP said valuations still appear “generally reasonable” outside the small group of mega-cap market leaders. “There is no reason to anticipate that the momentum will not be maintained in the near term.” 

Lower interest rates should encourage a rotation in the U.S. away from companies like the Magnificent Seven mega-cap growth stocks and toward value stocks and small-caps, according to the 2025 outlook by the U.S.-based Invesco organization whose subsidiaries include Invesco Canada Ltd. “Improving revenues coupled with lower interest rates and expenses should result in greater earnings growth for value and small-cap companies in 2025.”

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Even those fund managers that overweight the U.S. agree, there are potential policy risks for the world’s largest equity market. Threats by the incoming Donald Trump administration, notably steep tariffs and mass deportations, could impede economic growth and reignite inflation. 

Though GDP growth in the U.S. should outpace other developed countries, and current expectations for earnings growth remain strong, there are headwinds, said Ian Riach, senior vice-president and portfolio manager with Franklin Templeton Investment Solutions (FTIS) in Toronto. The FTIS team’s multiple roles include managing portfolios that are available in mutual fund and ETF series. 

In the near term, FTIS is overweighting the U.S. and Canada in its asset allocation. However, its 10-year projections call for U.S. equities to lag with an expected annual return of 6.5%, versus 7.6% for international and emerging markets and 6.7% for Canadian equities.

A contrarian view

Taking a contrarian stance on the U.S. is Forstrong Global Asset Management Inc., whose newest offering is the Forstrong Global Balanced ETF. Forstrong observes that “most asset allocators are now firmly committed to a structural U.S. equity overweight, assuming this positioning will continue to drive superior returns.” 

Forstrong casts doubt on whether the technology-led outperformance of the U.S. market is sustainable. “Corporate America must deliver exceptional results to meet market expectations, leaving little room for error. Disappointments, even modest ones, could shake confidence and weigh heavily on valuations.” 

As for the Canadian market, investment strategists tend to be wary of the risk of punitive U.S. tariffs and sluggish economic growth. Taking a more hopeful view is Mackenzie Investments, citing prospects for continued interest-rate relief. Mackenzie expects that a deteriorating domestic economy should “accelerate the Bank of Canada’s path toward a neutral policy stance, supporting domestic demand and improving corporate earnings prospects.” 

Elsewhere among developed markets, Japan is viewed as a bright spot, with the country’s central bank having shifted in 2024 from its long-time deflationary stance. 

“Rising wages, increased inflation expectations and improved corporate pricing power support a more robust economic backdrop,” said Stephen Way, senior vice-president and head of global and emerging-market equities with AGF Investments Inc. “Companies are now able to pass on rising costs to consumers, which is enhancing profitability.” 

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Among emerging markets, India is one to watch. FTIS projects real GDP growth of 6.2% there, more than double its 2.5% projection for global markets as a whole. 

India is benefiting from government investments in infrastructure and a supportive business environment, said AGF’s Regina Chi, manager of the exchange-traded AGF Emerging Markets ex China Fund. “Growing corporate profitability, reduced debt levels and strong local investor interest, as well as increasing domestic demand, are also contributing to the positive outlook.” Chi said. 

AI-driven productivity growth

Along with geographic diversification, fund managers seek to identify the most promising themes of 2025.” We think investors should focus more on themes and less on broad asset classes as mega forces reshape whole economies,” said the BlackRock Investment Institute. 

High on many thematic lists is artificial intelligence (AI), with explains why so many strategists remain bullish on the U.S. market. AI is still in the build-out phase, said BlackRock, which estimates that spending on AI-related infrastructure could surpass US$700 billion by 2030, equivalent to 2% of U.S. GDP. “Investment on this scale creates a vital role for capital markets — and an opportunity for investors.”

While acknowledging the immense potential of AI, Vanguard cautions that widespread adoption is years away. “Significant productivity growth from AI utilization likely wouldn’t occur until the late 2020s, even in our most optimistic scenario.” 

Also wary is Forstrong, which contends that the AI boom “bears all the hallmarks of a mania: astronomical valuations, narrative-driven momentum and a tenuous grounding in economic fundamentals.” Forstrong’s approach is to focus on “adopters” of AI, such as logistics, health care and financial companies, rather than AI hardware builders. 

Meanwhile, expected returns for fixed income have become slightly less attractive, according to the Franklin team’s outlook, as yields have moved lower in the past year. Over a 10-year horizon, Riach and his colleagues expect equities to outperform bonds. The team’s portfolio positioning heading into the new year, versus its neutral allocation, was overweight equity, underweight fixed income and neutral cash.

Vanguard stated that the long-term case for bonds remains solid. Yields are sufficiently high to cushion bond returns in the event of rising rates in 2025, while still allowing investors to take advantage of falling rates. “We continue to believe fixed income plays an important role as a ballast in long-term portfolios.”

For their part, the BlackRock strategists favour short- and medium-term investment-grade credits, which offer similar yields but with less interest-rate risk than long-dated issues.