In this video, I look at where to invest in 2025: which countries, which sectors, and which asset classes—gold, bonds, or credit. Because it's forecasting season, we can take our annual look and make some fun of the broker forecasts for the end of

2025. And then finally, I'll tell you what I think are the best bets for the coming year. Don't forget that if you enjoy our content, please like this video and subscribe to our channel. Let's begin by looking at U.S. valuations. The reason for

that is that the U.S. market is so large that if you have a global index fund, it's going to be dominated by U.S. stocks. They'll make up 65% to 70% of your overall portfolio. So, here, for example, is the excess CAPE yield measure from

Robert Shiller. What this measures is the expensiveness of U.S. stocks, adjusted for interest rates. Because when interest rates are low, that tends to push up valuations. And what we can see here on the x-axis is expensiveness at the beginning of a

decade. So, expensive is on the left, and cheap is on the right. And then we track stock markets for the following decade and look at the total real return. And that's what we see on the y-axis. Now, notice the line is upward sloping, such

that when stocks start the decade expensive, you get lower returns; and when they start off the decade cheap, you get higher returns. Valuations right now are the dashed yellow line, and you can see that that suggests that returns won't be great for the U.S. market, at least over

The next decade. Now, notice there's a lot of uncertainty in that forecast; there's a huge dispersion of points around the slice that we're in currently. But if we look at the time series of expensiveness to gauge how extreme the current expensiveness is, you can see that the US

has only been more expensive 20% of the time since 1880. So, not the most expensive it's ever been, but still high valuations. Now, it's always good to look at more than one valuation measure. The Shiller CAPE yield is backward-looking; this

is a forward-looking measure. It looks at the price of the S&P 500 today divided by its forecast earnings. It's the forward price-to-earnings multiple, and investors are currently willing to pay $22 for every dollar of profit. Now, this is roughly where we were at the euphoria

stage after the pandemic when people were buying lots of meme stocks and cryptocurrency was going crazy. It looks like we're kind of there again. The reason why that matters is that if we start off with expensive stocks today, usually that reduces future returns. The only way

stocks can climb higher is either by rating even further upwards—in other words, becoming even more euphoric—or for earnings to really tear upwards. So now let's take a look at those broker earnings forecasts to see what analysts expect. So here in blue, you can see the

historic earnings generated by the S&P 500, and in yellow you can see the forecast for the two years ahead. And this is an aggregated forecast from multiple brokers. The good news is that it's a fairly brisk rate of growth; earnings are not going to stall; they're

Going to carry on growing fairly briskly for the next two years at least; that's the expectation. If we convert that into a year-on-year growth rate for US earnings, you can see that that growth will be pretty brisk again. The historic growth rates here are shown in blue, and the

forecast for the next two years is shown in red. In fact, what we're seeing is an acceleration of that growth rate towards the end of this two-year period. Now, what has many people worried at the moment is that the US market is very

concentrated in a handful of stocks. Some people call this the Magnificent Seven; here we've got the Magnificent Eight because that's what Ed Yardeni calls it. And there is a slight concern here, which is to do with the amount of profit and

revenue which these companies are generating. Now, as a proportion of the index, these stocks make up about 30% of the S&P 500. However, they only generate about 12% of the revenue and about 22% of the profits for the S&P 500, so they are punching

above their weight, albeit slightly, when it comes to profit. So that suggests that people are overpaying for the Magnificent Eight, and there could be a correction ahead. But it's certainly not the case that all markets are expensive, or that all parts of the US market are

expensive. So let's start by looking across countries to see where valuations are more reasonable. Now, what I'm showing here is a CAPE measure, so this is Robert Shiller's cyclically adjusted price-to-earnings ratio, but I've compared each country with its own history to see what

The proportion of the time it's been cheaper. So, for example, if we're at 100%, then the country's been cheaper 100% of the time. This is its most expensive valuation. And for the countries at the top of this table, you can see that they're not far

off that. So, for example, Taiwan, India, the US—all of those have been cheaper 90% of the time or more. Then at the other end of the table, if we look at the cheap countries, you can see the UK's been cheaper 39% of the time, and then at the

very bottom end of the table, the really cheap countries—we're looking at Hong Kong, Poland, Mexico, Turkey, South Africa, and of course, China—those countries are at very low valuations compared to their own histories. So, if you are contrarian and you think, 'Well, I'll just buy the

cheap countries,' remember that they're always cheap for a reason. So it's never the case that a really attractive country with great prospects is at the cheap end of the table. But perhaps there's unfair pricing here in some cases. So if we look at the time series

for the expensiveness measure, and here we're doing it for two expensive countries—that's India and the US—and also for two cheap countries, which is China and the UK. Notice that the ones which are expensive have been expensive for some time, and the ones which are

cheap have also been cheap for some time. So if you are a contrarian, you also have to be patient. So firstly, there's got to be a catalyst for improvement for cheap countries to get more expensive, and you've got to wait around for that to happen. And of course, there's always the

The possibility that the country will stay cheap forever is low. That cap measure is backward-looking, so we're going to look at the forward price-to-earnings multiple by country. It tells a very similar story: India is very expensive, as are the US and the UK. Mexico, Italy, and China are all relatively cheap. So, if it is the case that these cheap countries can turn things around and generate good earnings growth, then there is a case to be made for buying these cheap, perhaps underpriced, countries. But that's a big if. Now let's look at US sectors because there, as well, there's a big difference in valuation.

Here, I've ranked US sectors by forward price-to-earnings multiple—that's the forward-looking measure—and you can see that the usual suspects are expensive; that's tech and communication services.

Remember that Google is treated as a communication services company, for example. Then the unsexy sectors, which are nothing to do with tech—perhaps they're defensives—are at the bottom of the table. So that's sectors like energy, basic materials, and financials. So again, what we see is quite a big dispersion in valuation according to different sectors and according to country.

So there is value out there if you're willing to look for it and if you're patient enough to wait for a turnaround. Now, if we look at the returns of the sectors over the course of 2024, you can see that, despite the fact that financials are still cheap, they've had a very good run this year; they're up by the most of any sector.

But if we look at what's languishing at the bottom of the returns table for 2024, you can see...

Have a lot of defensive sectors, things like consumer staples and healthcare. So if you think there's going to be a value turnaround in 2025, those could be interesting to look at. So that's the equity market. How about other asset types? And we can start with

gold. Now it's been a great year in 2024 for gold; in fact, it's risen by more than the NASDAQ index, and that's very unusual. Now, why is that? Well, it's certainly the case that central banks did a lot of buying of gold over the course of the

year, certainly early on in the year, and of course we've seen the Federal Reserve start to cut interest rates, and that tends to be good for gold. Now, if you have a PensionCraft Premium website membership, you get access to these trackers, and one of them is a valuation

model for gold. So this uses various inputs; it looks at CPI inflation, it looks at real interest rates, and it looks at the strength of the dollar. And from those three variables, it tries to work out what the fair price of gold should be. Now currently, the fair price

of gold is something like $2116, and that's about 24% below the actual price of gold, which you can see here in blue. Now that does suggest that people are overpaying for gold right now, and that would tend to put me off putting too much into the yellow metal

right now. But we'll see at the end of the video why you may still want to put money into gold because it is a defensive asset class, and depending on the scenario for 2025, you may want that safety. Another safe asset class is developed market

Government bonds. Now, what we've started to see with government bonds in the UK, but also in the US and elsewhere, is we're finally starting to see investors get some compensation for taking more duration risk with longer-duration bonds. So here's the yield curve as I make this

video. Now, it's still the case that you get a dip down to about 5 years, but then we start to see the term premium, as it's called, kick in, and you are starting to be compensated for taking more duration risk. But you have to go all the way out

to about 15 years before you start to get rates which are above those really short-term rates which you could also earn with a money market fund. But whichever bond you choose, you can see that across the whole yield curve you're generating about 4, 4.6, maybe even up to

4.8% currently. And given that inflation is about 2%, that's not a bad real return for safety. If you like the look of that yield curve tool that you just saw, or perhaps the fair value model for gold, you get access to that as part of our

premium website membership. Plus you get lots of other goodies; you get lots of members-only videos and, of course, our chat application so you can ask a question whenever you like. If you want to learn more about that, just go to our website, pensioncraft.co.uk. Find a link to that in the

description below. So that was government bonds. What if you want to take a bit of credit risk and earn a bit more than you would with those very safe investments? Then you turn to corporate bonds. I still think this market is not attractive, and you can see the reason for that if you

Look at the credit spread; that's the additional income you receive for taking credit risk. Now, this is for US bonds. The situation's very similar in the UK and Europe. The dashed yellow lines that you can see here are the average spreads over a long period of time. Notice that

currently, the blue lines—the current spreads—are below that dashed yellow line. You're really not being compensated much at all for taking credit risk, no matter what the credit rating, all the way from AA, the highest credit rating at the top, down to single B, the lowest credit

rating, which we show on this graph. The best time to buy credit, remember, is when those credit spreads are much wider and you're getting much better compensation for taking that risk. So, at the moment, I think credit is simply unattractive. The risk-free yield you can

earn is pretty good, and I'm not personally willing to take this risk in order to generate a slightly higher return. Now, monetary policy, which is the policy rate set by central banks, is also very important in driving asset class returns and, of course, bond yields, and to

characterize where we are right now, we've come through this inflation spike, which has abated and now almost every country is at the kind of sticky remnants of inflation, which is getting quite difficult to get rid of. That often comes in the form of services inflation

and it's due to high wage growth. The standard narrative by central banks in the US, the UK, and Europe is that they're going to have to be very cautious as they cut interest rates because they don't want inflation to flare up again, and that seems justified, given the fact

That this last remnant, the last mile of getting rid of inflation, has turned out to be very difficult. Furthermore, many economists expect that Donald Trump's policies, at least the ones we've heard so far, are very inflationary. That suggests, in turn, that the Federal

Reserve will have to keep rates higher for longer or may even have to increase rates at a certain point in the future if, indeed, those policies do turn out to be inflationary. And if we look at market expectations for what's going to happen

to the policy rate in the US, you can see that they're pricing in two cuts over the course of the next year: one of those will occur at the Fed's meeting in May and the other one in October. Now, previously we just had a slew of cuts

forecast for the course of 2025, but I think this is a reaction to Trump's electoral victory and also his inflationary policies. So inflation has certainly abated to a large extent, and central banks are starting to ease back on policy, but we'll just have to see how

sticky that long tail of inflation turns out to be. Now let's turn to some longer-term forecasts for the decade ahead. So these forecasts are from Vanguard UK, looking at various asset classes over the next 10 years. What's interesting is that the forecast for UK stocks is

pretty good; somewhere between 5 and 7% is what Vanguard expects, and that's actually a bit better than its global ex-UK forecast. The reason for that is that US stocks are so expensive, and that should lower their returns in the decade ahead, whereas UK stocks are very cheap.

and that acts in their favor, but even if we look at bonds, the returns there look pretty good because yields are now higher, as we saw in that yield table. So, something between 4.2 and 5.2% is what you'd expect with UK aggregate bonds.

And if we look at the bond market globally, something between 4.4 and 5.4%. So for a 60/40 portfolio, that bodes pretty well for the decade ahead. Vanguard US also produces a forecast in dollar terms, of course, and what's really

interesting here is that if you look at US equities as a whole, the return forecast is very poor indeed. But if we look at US growth stocks, the forecast is completely disastrous. In fact, the dashed red line which I show here is the lowest forecast for US Treasuries, and in fact,

US growth stocks are forecast to have a much lower return than US Treasuries. So this is the mega-cap tech stocks which have done so well and consequently which have grown extremely expensive. So this is the cost of euphoria at the moment in AI and in those mega-cap growth stocks.

Ultimately, the price you pay is lower forward-looking returns. But if we turn elsewhere, so if US investors were to invest in global equities (ex-US), in emerging markets, or even US small caps, those should offer higher returns, at least according to Vanguard's model, and

if we look at the US fixed income space, asset types like US high-yield or junk bonds are forecast to have a pretty good return, as are emerging market sovereign bonds. Now we've talked about forecasts here, but it's always good to look at

Base rates: What's a base rate? Well, if you look at superforecasters, what they tend to do is look at the long-term average. In this case, we're looking at long-term average returns by asset class, and then they adjust it based on new

information like valuation, geopolitics, or perhaps monetary policy. This should always be your starting point: the long-term average returns. And it's worth writing these on a Post-it note and sticking it on your wall. These are taken from Dimson, Marsh, and Staunton,

three great researchers who've looked at long-term returns across different asset types. Now, these are total returns, which means that the dividends are reinvested; they're real returns, which means they're inflation-adjusted downwards, and they cover a period of about a century. Now,

these are for the US, and you can see that the real, inflation-busting investment has been stocks over that period. They've returned about 6% above inflation; bonds about 4% less; and bills or money market funds about 1% less than that. So if you are

going to be investing over the long term, these are the returns to remember. So now, the comedy segment! Let's turn to the analyst forecast for the year ahead. Now, trying to forecast US equity movement, or any equity movement, over the course of one year is kind of like flipping a coin.

Stocks become predictable over the long term—certainly not over the short term, as this graph testifies. So here you can see the value of the S&P—that's the blue line—and I've fitted a yellow dashed line to show you the mean path, assuming a

a return of about 13.2%. If we simply extrapolate that to the end of 2025, you can see that it reaches about 6100. And as I make this video, that's about 2% above where the S&P 500 is right now. What I've also shown here are

the clusters of horizontal yellow lines; these are the forecasts made by brokers, usually investment banks, for the level of the S&P 500 at the end of the year ahead. So, for example, in 2020, during the pandemic, you can see the forecast that brokers made for the end of 2020, and

unsurprisingly, they were pretty glum about the prospects. Remember, this was a very volatile period, and people were really worried that things would not recover. As it turned out, the S&P 500 ended the year above even the most optimistic forecast. So, brokers revised up their

forecast for the following year, but not quite enough, as it turned out, because again, the S&P 500 came above even the most optimistic forecast. So analysts learned their lesson, and the following year, for the end of 2022, they really revised things up a lot. Then we had the tech

wreck. So that year, the S&P 500 ended below even the worst forecast. You're probably seeing the pattern here now. Brokers then revised things down a lot following the tech wreck, and surprise, surprise, the equity market roared back to life, such that by the end of 2023, the S&P 500 ended

above even the most optimistic forecast. Then, for this year, the expectation was that we'd be well below where we are already, and that's as I make this video at the end of November. So you can probably guess what they did to the forecast for 2025: yes, they made it

Much more optimistic, so that immediately worries me about the prospects for the year ahead. In conclusion, then, I think the backdrop for equities for 2025 is still quite good. Policy rates are falling, so central banks across the world are still cutting interest rates.

And that's good for equities. Inflation's come under control; we've got past the big spike in energy prices, at least for now. And if we look at those earnings forecasts, they look very good for the US, certainly.

There are still some reservations, of course. If we look at valuations in the US or India, say, they look very stretched, but it's certainly not the case that everywhere is expensive. In the US, small caps are still reasonably priced; the UK is cheap; Germany's cheap; and if you're very brave, so is China.

So certainly, for me, I think the year ahead looks pretty good. And that's assuming that some of the policies which Donald Trump is talking about don't get fully implemented, but that requires that we don't get a huge escalation of the trade war.

So, for example, if we have huge counter-tariffs to the US tariffs, then we could see a big break on global growth and on corporate profits. But if that doesn't happen, then I think things could be pretty good. And if that's the case, then risky assets like stocks would do well, as they have done this year and the

previous year also. Government bonds would still be okay, given the high yields that we're currently seeing. And if you look at styles of investing, then a continuation of what we've seen previously, which is mega-cap growth tech stocks doing particularly well, that'll probably continue, and those would

Perform quality stocks, for example, but also value stocks. However, if we do see a trade war escalation—and this is the kind of bearish scenario—then that's not going to be so great for risk assets. So in this scenario, you'd have lots of counter-tariffs; global growth would slow

down; corporate profits would suffer. And in this kind of scenario, safe-haven assets like gold, maybe money market funds, maybe cash, and the style of investing that would do well would be things like quality, perhaps, and income more than growth. Now, perhaps I'm being overly optimistic, but I'd favor the blue

scenario in which the trade war doesn't escalate. And that's because if Donald Trump's presidency does veer into some policies which are going to damage the economy, then markets will punish that decision and probably change that decision. So that's both the equity

market and, of course, the US Treasury market. So with those checks and balances in place, in the form of market prices, I think that'll keep things on a steady course. But why don't you tell us what you think in the comments? I'd be interested to see which path you think

the economy will take, and markets as well, of course. Now, don't forget, if you did want to join our community and get access to those tools, lots of members-only videos, and of course the chat application so you can ask questions whenever you like, you can do that by

going to our website, pensioncraft.com/slmh. And as always, thank you for listening.

Where To Invest in 2025

My name is Ramin Nakisa and I started PensionCraft in 2016 as I felt strongly that I wanted to teach people how to invest well for themselves so they could stop making costly mistakes and losing their money through having to pay unnecessarily high fees.

Before starting PensionCraft, I worked in investment banking as a strategist and I was a frequent contributor on CNBC and Bloomberg TV. I have written two books about finance and investment: one for professional investors and one that explains how to buy and sell volatility using exchange-traded products.

I publish a new video on YouTube every Saturday and you can join me for a live Q&A on the 1st Thursday of every month at 7pm UK time.

If you want to learn how to become a better investor then why not join our friendly membership at pensioncraft.com?


PensionCraft

Investment Outlook for 2025: US Market Valuation and Broker Forecasts

Analysis begins with US valuations due to its dominance in global index funds.

Uses Shiller's excess CAPE yield to measure US stock expensiveness, adjusted for interest rates.

Current valuations suggest lower returns for the US market over the next decade, although with uncertainty.

Examines a forward-looking price-to-earnings multiple, indicating high valuations similar to post-pandemic levels.

Analyzes broker earnings forecasts showing brisk growth for the next two years.

Concerns about US market concentration in a few dominant stocks (Magnificent Eight).

Global Market Valuation Comparison and Sector Analysis

Compares CAPE measures across countries, showing some (Taiwan, India, US) are at historically high valuations.

Highlights relatively cheap countries (UK, Hong Kong, Poland, Mexico, Turkey, South Africa, China).

Analyzes US sectors by forward price-to-earnings multiple, showing tech and communication services as expensive.

Notes a significant dispersion in valuations across sectors and countries, indicating potential value opportunities.

Discusses sector returns in 2024, with financials performing well despite being cheap, and defensive sectors lagging.

Alternative Asset Classes: Gold, Bonds, and Credit

Gold's strong performance in 2024 is analyzed, considering central bank buying and interest rate cuts.

A valuation model suggests gold is currently overvalued.

Examines developed market government bonds, noting the emergence of term premiums for longer-duration bonds.

Corporate bonds are deemed unattractive due to low credit spreads.

Monetary Policy, Inflation, and Long-Term Forecasts

Discussion of monetary policy and its impact on asset class returns, focusing on persistent inflation.

Considers the potential inflationary impact of Donald Trump's policies on interest rate decisions.

Presents Vanguard's long-term forecasts for various asset classes, highlighting positive outlooks for UK stocks and bonds.

Notes poor return forecasts for US equities, particularly growth stocks, contrasting with other asset classes.

Base Rates, Long-Term Average Returns, and Analyst Forecasts

Emphasizes the importance of long-term average returns as a starting point for investment decisions.

Analyzes the accuracy (or lack thereof) of short-term analyst forecasts for US equity markets.

Summarizes the positive backdrop for equities in 2025, considering falling policy rates and controlled inflation.

Highlights relatively cheaper markets (small caps in the US, UK, Germany, and potentially China).

Presents optimistic and pessimistic scenarios based on potential trade war escalation.

Favors an optimistic scenario where market forces mitigate negative economic policies.