2025 investment strategy: Look for ‘babies that get thrown out with the bathwater’

Investing.com — Oppenheimer Asset Management is advising investors to maintain focus on long-term opportunities amid market volatility, suggesting the year ahead will present compelling chances to capitalize on overlooked assets.

In its latest report, the investment management firm outlines the importance of staying resilient and diversified as markets navigate a complex transition from elevated interest rates to a more normalized economic environment.

The equity markets in 2024 displayed remarkable resilience despite intermittent pullbacks triggered by inflation concerns, rate hikes, and geopolitical tensions. These pullbacks, often viewed as “trims” or “haircuts,” have allowed the broader bull market to remain intact.

Oppenheimer strategists led by John Stoltzfus argue that such periods of market downdrafts create opportunities for investors. “We suggest investors look for ‘babies that get thrown out with the bathwater’ when market downdrafts occur in the markets,” the note emphasizes.

The report identifies key drivers for 2025, including the Fed’s measured pace of rate cuts, technological advancements, and consumer resilience.

The Fed, which began unwinding restrictive monetary policies in September 2024, is expected to cut rates further, albeit cautiously. The stock market declined last week as the Fed’s updated projections indicated only two rate cuts in 2025, down from three previously forecasted and fewer than the four to five cuts expected by the futures market.

Nevertheless, Oppenheimer commends the central bank for its efforts to balance inflation control with employment stability, describing its actions as critical in achieving a “relatively soft landing after some significant periods of turbulence in the economy and the markets.”

In terms of sector preferences for 2025, the firm favors Technology, Communication Services, Consumer Discretionary, , and Industrials.

“Technology today, including AI, is likely parallel to the automobile in the early 20th century,” the strategists highlight.

For investors seeking broader diversification, Oppenheimer points to opportunities in small and mid-cap equities, which are expected to benefit from easing rates. Moreover, maintaining some exposure to cash is recommended to “offset equity portfolio risk.”

Oppenheimer also holds a small position in , reflecting purchases by emerging market central banks to support their currencies and by investors hedging against persistent inflation in the U.S. and globally.

Overall, while geopolitical risks, domestic policy shifts, and the global economic recovery remain potential headwinds, Oppenheimer’s outlook suggests that the resilience of the U.S. economy, driven by strong consumer demand and innovation, will continue to support equity performance.

“Even as things improve there can be setbacks or unrealistic expectations that stir the pot; but a detour does not usually a journey end,” the report concludes.