3 keywords for stock market in 2025: Trump, rates and AI says Barclays

Investing.com — Trump, rates, and AI are the three keywords that could shape the stock market in 2025, according to Barclays (LON:).

Trump’s approach to economic policy, often conveyed through provocative rhetoric, will likely continue introducing volatility into the markets.

“How and when Trumponomics materialises will likely have a major impact on the macro outlook and financial market dynamics, in our view,” strategists led by Emmanuel Cau said in a Friday note.

While his earlier presidency created market volatility through frequent tweets and mixed signals, global equities still performed well, with the US leading gains. Tariffs, though a concern, were mainly used as negotiation tools rather than harsh economic measures.

Recent indications suggest that Trump may initially adhere closely to his campaign promises if re-elected. However, it is likely that a pragmatic approach will eventually dominate, with policies designed to prioritize equity market stability and manage inflation and yields effectively.

Still, the path toward that “may be bumpy,” strategists said, “and investors stay in wait-and-see mode until we get more clarity on his policy agenda.”

“Inauguration day on 20 Jan may give us some clue on how Trump will play his cards,” they added.

Interest rates are also expected to remain a significant driver of the equity market performance this year. Early 2025 has already seen a rise in rates volatility, influenced by strong US data, hawkish Federal Reserve rhetoric, and reflationary policies.

According to Barclays, the US and UK yields nearing 5% signal potential risks for equity valuations, particularly affecting longer duration and rate-sensitive stocks.

The UK market has recently demonstrated the potential consequences of slipping confidence, including surging long-end Gilt yields, a declining GBP despite higher yields, and underperformance of rate-sensitive equities like Small Caps.

“Having been relatively more positive on UK domestics in 2024, we see more challenges for 2025 and advise caution on the space for now,” Cau and his team noted.

Lastly, Barclays highlights AI as a third key factor for 2025, especially regarding US exceptionalism.

The substantial investments in space continue, such as Microsoft (NASDAQ:)’s $80 billion in spending on data centers. However, there are concerns over a valuation bubble after an exceptional run in 2024 and the recent rebound in rates.

While Europe may be poised for positive surprises, Barclays’ strategists remain skeptical about it outperforming the US, particularly given the significant role of Big Tech in US indices.

Still, the concentration of returns in the US equity market, driven largely by Big Tech companies, remains a dilemma for investors. Those managing benchmarked portfolios, particularly with limits on individual stock weights, “have felt the performance squeeze,” strategists said.

At the same time, they caution that the US market’s strong performance is heavily dependent on the continued success of the Big Tech sector, leaving it “highly vulnerable” to any potential downturn in that space.