2025 Outlook: Buy Gold, Commodities, 5% US Bonds

As November comes to a close, it becomes increasingly clear that certain speculative assets have generated lucrative returns. As we look to December and beyond into 2025, the big question looming overhead is: what’s next for the global market? Recently, Michael Hartnett, the Chief Investment Officer at Bank of America Securities, offered some insights in his investment outlook report for 2025. Hartnett believes that the overarching themes of "big policies, big actions, and big tail risks" will dominate the markets. He forecasts a further economic bifurcation where the U.S. may experience an "inflationary boom," while other regions could face potential risks of "deflationary recession."

When it comes to investment choices for 2025, Hartnett suggests taking bold steps and has outlined five major strategies.

1. Long the "American Boom" and Short the "Global Recession" Theme in Q1

Hartnett points out that the presence of "American inflationary boom" versus "global deflationary recession" may likely create an overheated scenario for the dollar and U.S. equities in the first quarter. Investors have already positioned themselves heavily in favor of the rising dollar, U.S. stocks, and increasing bond yields. He believes that small-cap U.S. stocks, particularly within the Russell 2000 index, present the best opportunity for an upward shift influenced by factors like U.S. tariffs, immigration controls, deregulation, and tax cuts.

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In contrast, Hartnett notes a significant weakening in economic momentum across Europe, Asia, and emerging markets as we move into 2025, especially within the manufacturing sector. Even prior to the trade conflict, the PMI readings hovered around the 45-50 mark. The banking and financial sectors in 2024 are expected to shine in Europe, Japan, and China but will face the highest vulnerability heading into the first quarter, presenting the best shorting opportunities as investors are forced to priced in a "global deflationary recession."

2. Buy Non-U.S. Stocks in Q2, Betting on a Shift to Looser Policies in Europe and Asia

As we head towards spring, Hartnett anticipates a transition toward hawkish policies from the Federal Reserve, coupled with "policy panic" in Europe and Asia. "American exceptionalism" is likely to peak in the second quarter, foreshadowing significant adjustments in the U.S. stock market, given that 30% of the S&P 500’s earnings stem from overseas. Consequently, this could prompt a significant capital allocation shift towards cheaper international stocks and currencies, driven by increased fiscal easing in China and Europe.

Expect to see a favorable financial environment in Asia and Europe in Q2, characterized by lower rates and cheaper currencies, encouraging investment in cyclical European stocks and emerging market currencies.

3. Go Long on Gold and Commodities, Anticipating Inflation Will Surprise to the Upside

Due to unexpected rises in inflation, copper and raw materials are viewed positively amid excessive fiscal spending, economic isolationism, and advancements in artificial intelligence. Such conditions are anticipated to outweigh any deflationary pressures heading into 2025. Hartnett argues that allowing a second wave of inflation would represent a political failure, but economic prosperity typically means higher inflation rather than lower, especially as the U.S. nears full employment in 2025.

The Bank of America investment clock suggests that the bullish stage of the stock market recovery—defined by falling rates and rising earnings—may transition to a bullish phase for commodities in 2025, driven by rising earnings even as interest rates climb. A bear steepening of the yield curve in early 2025 will signify this shift, with bonds starting to reflect "inflationary prosperity" rather than just a focus on interest rate reductions.

Given expectations of higher-than-anticipated inflation, Hartnett predicts that gold—particularly when bought below $2,500 an ounce—cryptocurrencies, and undervalued commodity categories will thrive in 2025. Once "policy panic" emerges in Asia and Europe, investing in copper, raw materials, Latin America, and commodities may be wise.

4. Buy U.S. Government Bonds Yielding 5%

If U.S. government bond yields reach 5% in 2025, it could signal a massive opportunity for investors. If yields overshoot and hit that 5% benchmark, it would likely lead to volatility and losses in risk assets, peak the “inflationary boom,” and encourage creative solutions to reduce U.S. budget deficits. Rising bond yields represent the greatest threat to stock markets; however, Hartnett anticipates that by the end of 2025, yields will likely fall below 4% rather than surpassing 5%. This dynamic shift may set the stage for global equity markets to transition from volatility in the first half to gains of 5-10% by the year's end.

5. Long Cryptocurrencies and Chinese Stocks to Hedge Against AI/Tech Stock Bubble Risks

Investors must remain vigilant against unexpected "tail risks," such as the potential end of Hong Kong's currency peg, the implications of a "America First" policy that could lead to the disintegration of the euro or a pivot in EU relations towards Asia, trade tariffs instigating a steep contraction in the U.S. economy, a second wave of inflation forcing the Federal Reserve to hike rates, and the possibility of a new pro-inflation Fed chair in 2026 resulting in dollar depreciation. The tech sector, particularly AI, presents the clearest bubble risk in this scenario.

Hartnett warns that the risk of a collapse among the tech giants is comparable to the anticipation surrounding $7 trillion of money market funds being funneled into U.S. equities if tighter financial conditions in the first quarter fail to dampen investors’ spirits. Within this investment lexicon, he suggests that an allocation to cryptocurrencies and undervalued Chinese equities—especially those linked to technology—is the most prudent course of action.