Investing.com - US equity markets are expected to deliver greater returns than their peers across the rest of the world in 2025, although this outperformance faces risks from Federal Reserve interest rate decisions and incoming President Donald Trump's policy plans, according to analysts at Barclays (LON:BARC).
Stocks on Wall Street were partly boosted in 2024 by the Fed -- and many other central banks around the globe -- beginning to ratchet rates down from multi-year highs, with policymakers pointing to signs of easing inflationary pressures. Earnings from US corporations also remained resilient, buoying investors' confidence and fueling inflows into cyclical stocks and US equity funds.
The so-called "Magnificent Seven" group of big-name technology players were some of the major beneficiaries, driving the broader stock market higher and putting US equities "well ahead of the pack," the Barclays analysts led by Emmanuel Cau said in a note to clients on Friday.
Indeed, "Magnificent Seven" member Nvidia (NASDAQ:NVDA) emerged as the largest global gainer in terms of market capitalization in 2024, thanks in large part to soaring demand for its AI-focused chips across a range of industries. The company added more than $2 trillion in market value in 2024, closing out the year at $3.28 trillion, giving it the second-highest valuation among the world's listed businesses.
Such exhuberance is tipped to keep the US "in the lead in 2025," the Barclays analysts said, but they flagged that this advantage compared to stocks outside of the US is seen shrinking. Overall returns, meanwhile, are expected to become "more normal."
They noted that "significant risks" face US stocks, including whether the Fed, which has signalled that it will take a more cautious approach to potential future rate reductions, "will manage to keep" US Treasury yields below 5%. Last week, the benchmark US 10-year Treasury yield rose to 4.641%, its highest level since May.
"Uncertainty" also surrounds how Trump will approach his second term in the White House, the Barclays analysts said. The incoming president has vowed to roll out sweeping new tariffs and mass deportations, both of which have raised some worries over a possible reignition of inflationary pressures.
At the same time, they noted that crowded investment positions and lofty stock valuations in some parts of the US stock market have left "little margin for error." They argued that European equities could subsequently stand to benefit this year.
"[D]epressed valuation/positioning, a weaker euro, as well as potential for reforms in Germany, peace in Ukraine and more stimulus in China, could improve risk-reward for Europe and see some of the current risk premium to EU [versus] US stocks dissipate," the analysts said.