China-based startup DeepSeek took the markets by storm recently, igniting a broad sell-off in US technology stocks with the launch of DeepSeek-R1, the most recent iteration of its generative artificial-intelligence (AI) model. The R1 model has quickly risen in popularity, propelling to the top of the US Apple App Store’s free applications, where it surpassed competitors like OpenAI’s ChatGPT.

DeepSeek has attracted significant attention for its cost-effective and innovative AI approach. This has prompted swirling concerns that the Chinese AI company was able to achieve its efficiencies and high-performance results using less advanced hardware, potentially circumventing US export controls on high-end AI chips.

DeepSeek’s success challenges the prevailing notion that larger models and more computational resources are essential for AI advancement. Ultimately, if DeepSeek’s claims are true and large language models (LLMs) can be trained with fewer AI chips at a fraction of the cost of competitors’ models, there are a myriad of investment implications to consider. Investors fear this could reduce demand for advanced AI chips, as well as for large-scale data centres and extensive power production to support models. While we believe that lower development costs could pose challenges for hardware and semiconductor companies in the medium term, we see greater development and growth opportunities for hyperscalers, software companies and AI consumers beyond the technology sector. 

The geopolitical race for innovation

DeepSeek’s AI chatbot was released as an open-source model, meaning its source code is publicly available, so users can customise and distribute it as they see fit, subject to the open-source license. The Chinese startup claims to have trained the chatbot for under $6 million, substantially less than US tech giants have spent on similar models. DeepSeek also claims that it used far fewer and lower-grade chips than its American competitors, thereby building a product that rivals counterparts despite US efforts to restrict exports of semiconductor manufacturing equipment to China.

The DeepSeek story highlights the massive geopolitical race at play for AI dominance and the intensifying competition between the West and China. Should global markets be worried about China’s next big move? China has seemingly demonstrated that when companies release groundbreaking LLMs, it can produce cheaper, albeit slightly less performant, versions. If powerful AI models can be built without the most advanced hardware, high-end chip producers could take a hit.

In our view, we should be prepared for disruption on both the supply side and demand side, and not just from China. For instance, OpenAI has since unveiled new innovations that demonstrate fresh capabilities in driving leading-edge research efforts. Based on past technology cycles, recent news coverage highlights how the theme should continue to evolve at a rapid rate. Investors should anticipate that these advancements may usher in lower prices that could spark the elasticity required to drive new applications and the next wave of growth. 

In our view, we should be prepared for disruption on both the supply side and demand side, and not just from China.

Intense competition for model development

While DeepSeek’s ultimate cost structure remains in question, we expect the competitive environment for models to remain intense. We believe this competition should foster lower pricing and drive elasticity, creating new markets that support further long-term growth in the theme.   

Despite the prospects for lower cost models and rapid price declines, earnings results continue to highlight rising capital expenditures (capex) from hyperscalers in 2025. We continue to see rapid innovation and expect more companies to move workloads into the cloud to leverage these advancements. 

But what does this ultimately mean for data-centre capex, and especially for the energy complex? Based on a comprehensive data-centre tracker built by our research associates, we believe capital spending intentions in the near time are robust, if not improving; several hyperscalers boosted capex in their recent earnings announcements. Some of that rise in capital spending is reportedly for investments in long-lived assets, including land and buildings in new regions, and therefore not indicative of an overbuild in compute capacity. Also, as AI matures, more countries are developing sovereign AI strategies that require new data centres in regions where considerable up-front infrastructure investment boosts capital spending on an interim basis.

A myriad of investment implications

Hyperscalers and software

Based on comments made by two influential US tech companies, we believe it is safe to assume that DeepSeek realised at least some cost advantage in building its model. If this is accurate and the cost of building models drops substantially, we believe that hyperscalers and software companies are likely to benefit.

Lower capital intensity equates to higher returns, and we generally think this dynamic bodes well for hyperscalers. Hence, our view on hyperscalers continues to be positive, though we favour those that are less focused on being vertically integrated. Hyperscalers are driven by compounding growth in data and applications, and we believe lower capital costs support that growth algorithm. Additionally, US hyperscalers could become security gatekeepers, which may reinforce the moat of these large companies as geopolitical forces potentially further ration AI technology between the West and the East.

We also believe these developments may boost certain software companies. We have a positive outlook on infrastructure software providers that deliver tools and applications used in developing AI products. Our view is also favourable on application software and internet companies that may embed AI into their products and services. Edge computing companies may also benefit as lower cost and faster inferencing at the edge becomes more compelling. 

Late last year, prior to DeepSeek’s recent announcement, our research analysts had expressed their bullish take on consumption software, owing to improved comparables and a desire to bet on more AI application development in 2025. Additionally, during research visits in December, our analysts gathered evidence that more companies believed that their AI products were ready to ship. Assuming that DeepSeek’s claims are true, the Jevon’s paradox argument—which suggests that increased efficiency can lead to increased demand—crystalises our positive view of software in 2025; if hardware costs are coming down to train LLMs and to ship them and for the increased adoption of AI products, there should be more AI products shipping in 2025 and 2026.

Hardware and semiconductors

On hardware and semiconductors, we are a bit more guarded as we believe the risk to both sectors has increased over the medium term. 

On the hardware front, we have uncertainty around whether a significant reduction in compute costs would lead to a proportional increase in demand on a shorter-term basis. Lower capital intensity may yield excess compute capacity for a period of time before demand elasticity kicks in.

Beyond technology

AI is a foundational technology capable of reshaping various industries and the economy over time. AI technology has expansive potential beyond traditional chatbots. Tech giants and others are exploring broader AI applications, including autonomous vehicles, robotics and digital twins. We believe that many of the biggest winners from the AI theme are likely to be the companies that apply it in non-technology industries, e.g., in manufacturing, health care and financials. These companies are likely to use declining costs of AI innovation to pull those applications in to propel revenue growth.

Longer term, AI-driven labour automation and the cost advantage for companies adopting AI pose risks to jobs in certain industries, including sales, marketing and administrative functions. In our view, companies that have higher costs in those areas relative to their peers may disproportionately benefit from the adoption of AI, unfortunately at the expense of workers.

We harness our multidimensional research capabilities to help us identify potential winners within and beyond the tech ecosystem, while understanding broader investment implications.

Regulatory and geopolitical policy changes

We are monitoring the regulatory and geopolitical environment for potential policy moves that may shift competitive advantages and prompt changes to fundamentals.

For instance, the construction of data centres in the European Union is driven by stringent regulations aimed at protecting European consumer data. Despite potential shifts in AI models, the core need for secure data storage remains unchanged. This regulatory environment necessitates a proactive approach to monitor and adapt to new policies, ensuring that businesses can navigate these changes effectively.

In US regulatory developments, President Trump issued an executive order in January aiming to reduce regulations and accelerate progress in AI. Trump’s order rescinded former President Biden’s 2023 executive order that sought to tighten regulations on advanced computer chips, potentially restricting shipments of AI chips to certain countries beyond US allies. While we expect the political and regulatory environment to remain dynamic, we expect AI companies to remain under increased scrutiny regarding their compliance with export restrictions and operational transparency.

Cyber risks are also a key consideration, as downloading AI applications can introduce new avenues for cyber attacks. Social risks, including trust and misinformation, are also heightened in this context. As regulatory developments continue to unfold, it is crucial for investors to stay informed and prepared for the evolving challenges and opportunities.

The ever-evolving AI industry

At Newton, we utilise our global multidimensional research capabilities to stay abreast of the latest technology innovations, in China and elsewhere. In the case of DeepSeek, our fundamental research analysts have been assessing the credibility of headlines and the potential impact of news on hardware, software, power generation and power infrastructure investments. Our quantitative team has identified 21 past instances since 1990 when top constituents of the S&P 500 were down 15% or more in one day; they have been examining those instances to assess what the past might reveal about future market performance. Members of our specialist team have consulted with a former director for China economics on the White House National Security Council; they have reviewed media interviews by the hedge fund sponsoring DeepSeek to evaluate the credibility of the claims and assess the geopolitical implications.

DeepSeek’s latest innovation highlights the dynamic and rapidly evolving nature of AI technology. The competitive landscape is intensifying, and as companies continue to innovate and adapt, the potential for lower costs and increased efficiency could drive new applications and growth opportunities across various industries. Investors should remain vigilant and prepared for the ongoing changes likely to shape the future of AI and its impact on the global market.

China-based startup DeepSeek took the markets by storm recently, igniting a broad sell-off in US technology stocks with the launch of DeepSeek-R1, the most recent iteration of its generative artificial-intelligence (AI) model. The R1 model has quickly risen in popularity, propelling to the top of the US Apple App Store’s free applications, where it surpassed competitors like OpenAI’s ChatGPT.

DeepSeek has attracted significant attention for its cost-effective and innovative AI approach. This has prompted swirling concerns that the Chinese AI company was able to achieve its efficiencies and high-performance results using less advanced hardware, potentially circumventing US export controls on high-end AI chips.

DeepSeek’s success challenges the prevailing notion that larger models and more computational resources are essential for AI advancement. Ultimately, if DeepSeek’s claims are true and large language models (LLMs) can be trained with fewer AI chips at a fraction of the cost of competitors’ models, there are a myriad of investment implications to consider. Investors fear this could reduce demand for advanced AI chips, as well as for large-scale data centers and extensive power production to support models. While we believe that lower development costs could pose challenges for hardware and semiconductor companies in the medium term, we see greater development and growth opportunities for hyperscalers, software companies and AI consumers beyond the technology sector. 

The Geopolitical Race for Innovation

DeepSeek’s AI chatbot was released as an open-source model, meaning its source code is publicly available, so users can customize and distribute it as they see fit, subject to the open-source license. The Chinese startup claims to have trained the chatbot for under $6 million, substantially less than US tech giants have spent on similar models. DeepSeek also claims that it used far fewer and lower-grade chips than its American competitors, thereby building a product that rivals counterparts despite US efforts to restrict exports of semiconductor manufacturing equipment to China.

The DeepSeek story highlights the massive geopolitical race at play for AI dominance and the intensifying competition between the West and China. Should global markets be worried about China’s next big move? China has seemingly demonstrated that when companies release groundbreaking LLMs, it can produce cheaper, albeit slightly less performant, versions. If powerful AI models can be built without the most advanced hardware, high-end chip producers could take a hit.

In our view, we should be prepared for disruption on both the supply side and demand side, and not just from China. For instance, OpenAI has since unveiled new innovations that demonstrate fresh capabilities in driving leading-edge research efforts. Based on past technology cycles, recent news coverage highlights how the theme should continue to evolve at a rapid rate. Investors should anticipate that these advancements may usher in lower prices that could spark the elasticity required to drive new applications and the next wave of growth. 

In our view, we should be prepared for disruption on both the supply side and demand side, and not just from China. 

Intense Competition for Model Development

While DeepSeek’s ultimate cost structure remains in question, we expect the competitive environment for models to remain intense. We believe this competition should foster lower pricing and drive elasticity, creating new markets that support further long-term growth in the theme.   

Despite the prospects for lower cost models and rapid price declines, earnings results continue to highlight rising capital expenditures (capex) from hyperscalers in 2025. We continue to see rapid innovation and expect more companies to move workloads into the cloud to leverage these advancements. 

But what does this ultimately mean for data-center capex, and especially for the energy complex? Based on a comprehensive data-center tracker built by our research associates, we believe capital spending intentions in the near time are robust, if not improving; several hyperscalers boosted capex in their recent earnings announcements. Some of that rise in capital spending is reportedly for investments in long-lived assets, including land and buildings in new regions, and therefore not indicative of an overbuild in compute capacity. Also, as AI matures, more countries are developing sovereign AI strategies that require new data centers in regions where considerable up-front infrastructure investment boosts capital spending on an interim basis.

A Myriad of Investment Implications

Hyperscalers and Software

Based on comments made by two influential US tech companies, we believe it is safe to assume that DeepSeek realized at least some cost advantage in building its model. If this is accurate and the cost of building models drops substantially, we believe that hyperscalers and software companies are likely to benefit.

Lower capital intensity equates to higher returns, and we generally think this dynamic bodes well for hyperscalers. Hence, our view on hyperscalers continues to be positive, though we favor those that are less focused on being vertically integrated. Hyperscalers are driven by compounding growth in data and applications, and we believe lower capital costs support that growth algorithm. Additionally, US hyperscalers could become security gatekeepers, which may reinforce the moat of these large companies as geopolitical forces potentially further ration AI technology between the West and the East.

We also believe these developments may boost certain software companies. We have a positive outlook on infrastructure software providers that deliver tools and applications used in developing AI products. Our view is also favorable on application software and internet companies that may embed AI into their products and services. Edge computing companies may also benefit as lower cost and faster inferencing at the edge becomes more compelling. 

Late last year, prior to DeepSeek’s recent announcement, our research analysts had expressed their bullish take on consumption software, owing to improved comparables and a desire to bet on more AI application development in 2025. Additionally, during research visits in December, our analysts gathered evidence that more companies believed that their AI products were ready to ship. Assuming that DeepSeek’s claims are true, the Jevon’s paradox argument—which suggests that increased efficiency can lead to increased demand—crystalizes our positive view of software in 2025; if hardware costs are coming down to train LLMs and to ship them and for the increased adoption of AI products, there should be more AI products shipping in 2025 and 2026.

Hardware and Semiconductors

On hardware and semiconductors, we are a bit more guarded as we believe the risk to both sectors has increased over the medium term. 

On the hardware front, we have uncertainty around whether a significant reduction in compute costs would lead to a proportional increase in demand on a shorter-term basis. Lower capital intensity may yield excess compute capacity for a period of time before demand elasticity kicks in.

Beyond Technology

AI is a foundational technology capable of reshaping various industries and the economy over time. AI technology has expansive potential beyond traditional chatbots. Tech giants and others are exploring broader AI applications, including autonomous vehicles, robotics and digital twins. We believe that many of the biggest winners from the AI theme are likely to be the companies that apply it in non-technology industries, e.g., in manufacturing, health care and financials. These companies are likely to use declining costs of AI innovation to pull those applications in to propel revenue growth.

Longer term, AI-driven labor automation and the cost advantage for companies adopting AI pose risks to jobs in certain industries, including sales, marketing and administrative functions. In our view, companies that have higher costs in those areas relative to their peers may disproportionately benefit from the adoption of AI, unfortunately at the expense of workers.

We harness our multidimensional research capabilities to help us identify potential winners within and beyond the tech ecosystem, while understanding broader investment implications.

Regulatory and Geopolitical Policy Changes

We are monitoring the regulatory and geopolitical environment for potential policy moves that may shift competitive advantages and prompt changes to fundamentals.

For instance, the construction of data centers in the European Union is driven by stringent regulations aimed at protecting European consumer data. Despite potential shifts in AI models, the core need for secure data storage remains unchanged. This regulatory environment necessitates a proactive approach to monitor and adapt to new policies, ensuring that businesses can navigate these changes effectively.

In US regulatory developments, President Trump issued an executive order in January aiming to reduce regulations and accelerate progress in AI. Trump’s order rescinded former President Biden’s 2023 executive order that sought to tighten regulations on advanced computer chips, potentially restricting shipments of AI chips to certain countries beyond US allies. While we expect the political and regulatory environment to remain dynamic, we expect AI companies to remain under increased scrutiny regarding their compliance with export restrictions and operational transparency.

Cyber risks are also a key consideration, as downloading AI applications can introduce new avenues for cyber attacks. Social risks, including trust and misinformation, are also heightened in this context. As regulatory developments continue to unfold, it is crucial for investors to stay informed and prepared for the evolving challenges and opportunities.

The Ever-Evolving AI Industry

At Newton, we utilize our global multidimensional research capabilities to stay abreast of the latest technology innovations, in China and elsewhere. In the case of DeepSeek, our fundamental research analysts have been assessing the credibility of headlines and the potential impact of news on hardware, software, power generation and power infrastructure investments. Our quantitative team has identified 21 past instances since 1990 when top constituents of the S&P 500 were down 15% or more in one day; they have been examining those instances to assess what the past might reveal about future market performance. Members of our specialist team have consulted with a former director for China economics on the White House National Security Council; they have reviewed media interviews by the hedge fund sponsoring DeepSeek to evaluate the credibility of the claims and assess the geopolitical implications.

DeepSeek’s latest innovation highlights the dynamic and rapidly evolving nature of AI technology. The competitive landscape is intensifying, and as companies continue to innovate and adapt, the potential for lower costs and increased efficiency could drive new applications and growth opportunities across various industries. Investors should remain vigilant and prepared for the ongoing changes likely to shape the future of AI and its impact on the global market.

What is in store for investors in 2025? A group of Newton’s research analysts and portfolio managers met to debate and discuss their top ten predictions for 2025 on key positions that oppose prevailing market trends. Could the ‘magnificent seven’ lose their lustre and become the ‘meagre seven’, ushering in a period where small caps rally and outpace large caps? Could the new US administration break inflation, prompting a Federal Reserve (Fed) rate-cutting cycle that moves interest rates to levels last seen during President-elect Trump’s first term?

These ten debates illustrate Newton’s core ability to unlock opportunity by leveraging our multidimensional research capabilities, where all investors and analysts have a seat at the table to engage in spirited debate on their most out-of-consensus viewpoints.

1. The Trump trade head fake: Will interest rates, inflation and the US dollar all lower in 2025?

Point: Growth and inflation are expected to rise in 2025, which should lead to higher rates, a stronger dollar and an increase in equities. The Fed is more cautious regarding inflation risks and global growth is weaker. While these conditions may persist through the first quarter of 2025, it could be a potential contrarian opportunity to buy bonds, sell dollars and favour global ex-US equities. The fiscal impulse may remain flat next year, and tariffs could eventually lower both growth and inflation, thereby posing downside risks to both. Moreover, the US appears very attractive—whether in bonds, equities or currencies—relative to the rest of the world. Additionally, there is an expressed interest among some incoming administration members for a weaker dollar in the future. Efficiencies in reducing the budget deficit through the proposed US Department of Government Efficiency (DOGE) could lower the term premium in bonds. Naturally, there are risks, primarily from the fiscal side, which could impose constraints via bond-market discipline.

Counterpoint: US economic activity remains strong. Consumer spending has recently risen, and corporate activity could also increase as we head into 2025. The recent election of a new pro-business, lighter regulation administration could further heighten inflation. Higher and more enduring inflation may result in structurally higher interest rates relative to recent history but not as restrictive as today.

2. AI winter is coming: Could overcapacity cause an unwind of the consensus AI trade?

Point: Investment in artificial intelligence (AI) is expected to continue growing, and concerns about oversupply may be overstated. The AI theme is still developing and early in its application. Companies are learning about this technology and experimenting with how it can optimise business functions, which could lead to higher future demand as enterprises further leverage AI. Additionally, agents (software applications capable of running tasks independently) and on-device AI might expand the investment opportunities in this space. AI has the potential to affect personal devices, work devices, cars, and homes, leading to a significant hardware upgrade cycle as AI chips are installed on devices for data analysis and decision-making. It is also important to note that AI influences investment beyond the technology sector, affecting areas such as infrastructure, utilities, industrials and nuclear power.

Counterpoint: Generative AI emerged in the technology industry two years ago, leading to a considerable rise in capital expenditure to construct data centres. Given that building data centres takes approximately three to four years, it is anticipated that significant capacity will become available in 2026-2027. However, there is a question as to whether there will be sufficient demand to utilise this capacity. While consumers are currently adopting AI technology, enterprises remain in the testing phase. An excess supply could affect tier 2 and tier 3 cloud companies and GPU-as-a-service (high-performance computing) providers that have smaller customer bases and/or are more exposed to AI training relative to inferencing. Companies with robust customer bases, complete AI computing stacks and greater capacity to generate inference revenue may be better positioned for success. 

3. America second: Will Europe outperform the US in the coming year?

Point: The United States appears to have surpassed its peak. US equity valuations are exceptionally high, with the disparity between US and UK/Europe valuations reaching unprecedented levels. This gap is primarily driven by a select group of high-performing and influential companies in the US stock market, commonly referred to as the ‘magnificent seven’. It is crucial to consider that any decline in AI demand would adversely affect these companies and consequently affect US valuations overall. In our assessment, European political conditions are anticipated to improve by 2025, which should positively influence European valuations. Furthermore, there is an acceleration in mergers and acquisitions in the UK, contributing to a more optimistic economic outlook. Finally, the US economy may be more vulnerable than generally perceived, with potential inflation on the horizon, thus positioning Europe to potentially outperform the US in the forthcoming years.

Counterpoint: Europe has underperformed for over a decade. While some anticipate a cyclical rebound, this slower growth could be secular. In the US, GDP grew by 2.5% in 2023 and is expected to grow by 2.6% in 2024.^1,2 The US also benefits from significant innovation, potentially boosting further GDP growth. Conversely, Europe saw 0.5% GDP growth in 2023 with an expected 1% growth in 2024.^3,4 It is also important to recognise that Europe consists of diverse countries, each facing unique challenges. Input costs across Europe are higher than in the US with more expensive electricity costs and a more fixed labour market. Additionally, valuation should be considered, and on a price-to-earnings/return-on-equity basis, the US is far cheaper than Europe.

4. US housing bulls become homeless: Could US housing sink further still?

Point: Existing home sales are at nearly 30-year lows, and there is a strong possibility that they could fall further in 2025.⁵ Housing affordability remains a real issue and mortgage rates are not declining, which presents a huge roadblock for improving existing home sales in the US.

Counterpoint: While interest rates remain a headwind, the economy and job outlook could become a more important driver for home sales. There is a lot of pent-up demand for housing, and with current rates being similar to rates in the mid-1990s, pent-up demand may be ready to be released. Existing home sales are unsustainably low, and companies participating in fragmented markets exposed to housing may be market winners.

5. The revenge of environmental, social and governance (ESG): Will companies pick up the banner as regulations come under pressure?

Point: Companies should be motivated to enhance value. At the same time, many consumers are concerned with addressing the needs of future generations, necessitating that companies and politicians consider these interests. With this in mind, ESG will remain relevant, but we may observe a balance in language emphasising value creation through ESG practices. For instance, many initiatives aimed at reducing emissions and environmental footprints are financially driven; the expansion of renewable energy has bolstered job creation and decreased foreign dependencies. Furthermore, the rise of AI and proliferation of data centres will require both supplemental power sources such as renewables, and more efficient power sources.On the social front, multiple studies indicate that diversity correlates with higher corporate returns, fosters innovation, enhances employee satisfaction and can reduce corporate costs. ESG is not merely a box-checking exercise; it is fundamentally about generating monetary value.

Counterpoint: ESG, as an acronym, has been politically charged for some time. The US has retreated from the concept while it has remained relevant in many parts of the world. This divergence highlights the varied standards for ESG across the globe. Additionally, regulators may heavily scrutinise any labelled claims of ESG and diversity, equity, and inclusion, which could lead to potential issues such as ‘greenhushing’ (when a company intentionally downplays information about its environmental efforts). The appointment of the next US Securities and Exchange Commission (SEC) chair will be critical, but it is anticipated that the new administration will be less supportive of shareholder proposals and resolutions compared to the current administration. There is also the possibility that the US may withdraw from United Nations climate initiatives, raising questions about whether China might take its place, and what that could mean geopolitically. Lastly, there is a belief that ESG could become a lesser priority as countries turn their focus to other pressing priorities such as security, reliability and affordability.

6. Executive in peace: Could the Trump administration usher in a period of global peace not seen since the Clinton era?

Point: Global peace is a very low probability outcome. Maybe somewhat counterintuitively, countries pursuing more isolationist policies should be a boon for defence spending globally. European countries in NATO have recognised the need to invest in their own defence owing to heightened aggression from Russia. As Trump has made clear, these countries cannot solely depend on the US for blanket defence against Russia, prompting many nations to begin the multi-year process of significantly increasing defence budgets. Additionally, China’s rise has led to heightened defence spending in Asia, which is expected to continue. The Ukraine/Russia conflict has also increased the use of battlefield drones, and there may be significant growth in this market.

Counterpoint: The past sets a precedent, and global peace might prevail once more. We saw how Trump governed from 2017-2020, and he ran his campaign on a very similar strategy this election season. During his first presidential term, the US refrained from entering any new or expanded conflicts. President Trump maintained diplomatic relationships with both North Korean President Kim Jong Un and Russian President Vladimir Putin, and he was committed to the US withdrawal from Afghanistan. Market trends suggest confidence in Trump’s potential to bring about a period of peace, as evidenced by the underperformance of defence stocks following the election. Additionally, Trump has expressed his dedication to mediating an end to the ongoing conflicts in Ukraine and Gaza.

7. David versus Goliath: Will small caps finally find their footing and start a long-term run of beating the ‘magnificent seven’?

Point: Over the last 100 years,US small-cap versus large-cap relative performance is consistently cyclical. We are now in the midst of cycle year 14 of large caps outperforming small caps. Earnings expectations for the Russell 2000 are poised to rise in 2025, and cash flows are improving. It should not take much capital to buoy the index given the low amount of market capitalisation in this arena. Additionally, private equity has been staying private for longer, creating a backlog of companies about to go public and join their small-cap brethren. Current large-cap dominators may be past their prime as these once traditionally capital-light businesses are now capital-intensive, translating to lower multiples.

Counterpoint: The bigger the better. Large-cap companies have outperformed because they have experienced better growth, and small-cap companies will need serious earnings improvement if they are to surpass these giant companies. When looking at the investable universe with an innovation lens, small-cap companies are cheap for a reason. Much of the true market innovation around AI and obesity drugs has been driven by large-cap companies despite the fact that small-cap companies are traditionally the most innovative. Historically, small caps have benefitted from the complacency of large caps, but this is no longer the case. Finally, companies are staying private for longer now, creating an IPO vacuum and minimising the universe of small-cap companies.

8. Make America healthy again: Will health care be the worst sector in 2025?

Point: Between Trump’s nominations for high-level positions, tariffs, further pricing pressure in the sector and subsidy cuts that many believe could come through, it appears every part of health care may be negatively affected. Overwhelming focus has been on the nominations for Trump’s administration, especially the choice of Robert F. Kennedy Jr (RFK) as US health secretary. Given RFK’s past statements, there is a worry that his personal agenda will override evidence-based policy, detracting from health-care and funding priorities. Beyond RFK, it does seem like the upcoming administration is comfortable ratcheting up pricing pressure on drugs, pressuring pharmaceutical companies and all the vendors that support them. Tariffs could also have an impact, to varying degrees, on the medical technology space. Some companies may shift manufacturing or pass this pressure on to consumers. Finally, Republican wins at the federal and state level could influence exchange subsidies and Medicaid rosters as well.

Counterpoint: While there is fear that RFK could upend the health-care system, the health-care sector is at its lowest percentage of the S&P 500® in 20 years while innovation is at an all-time high owing to obesity, immunology, genetic and oncology drug advancements. Kennedy’s rhetoric may be stronger than his eventual policies and, if confirmed, he may have a narrow focus on ingredients in the food supply chain, and the risk/rewards of vaccines. Other appointees for heads of the Food and Drug Administration (FDA), Centers for Disease Control and Prevention (CDC), and the National Institutes of Health (NIH), are all dedicated scientists with no polarising agendas. Overall, there could be some changes ahead surrounding food and some vaccines, but pricing worries and FDA/NIH disruption fears are likely overblown.

9. China in a bull shop: Could China come roaring back and benefit from the Trump administration?

Point: China has significantly reduced its dependency on exporting to the US with its Belt and Road initiative. Exports to the global south now represent roughly half of Chinese exports, while exports to the G7 have nearly halved. There is a misconception that China cannot catch up with Western peers; there are 3.6 million graduates in China each year in STEM subjects (science, technology, engineering and mathematics) versus less than one million in the US.⁶ These are the skills required for the industries of the future. Additionally, China is increasingly catching up in the semiconductor and AI space, opening many new technology companies. Innovation is especially important, with China filing a significant number of patents compared to the US.

Counterpoint: There are two gravitational forces that may pose concerns for China: a large growth problem and a lack of equity returns. China has trillions of dollars of unsold housing and sells only a fraction of that housing annually. Property still accounts for a high percentage of GDP and home ownership is nearly 100%. This indicates the need for a monumental rebalancing, and a transition from investment-driven growth without affecting other potential growth drivers presents difficulties. Remember, this occurs amid demographic headwinds and high total system leverage. The Chinese Communist Party faces both ideological and practical barriers to aggressive stimulus measures. It appears unlikely to replicate 2008 stimulus levels, and while pension or ‘hukou’ (household registration) reform is possible, it may only stabilise short-term growth. Chinese equities tend to be idiosyncratic and do not provide compound returns owing to significant equity dilution.

10. Tariffs, no biggie: Will a new wave of Trump tariffs be disastrous for the US consumer?

Point: In Trump’s previous presidency, tariffs had little impact on consumers. Tariffs may not always be passed on to the consumer. It is important to consider the competitive dynamics on the industry to which tariffs are being applied. While tariffs could fall heavily on consumers in instances where producers have pricing power, tariffs on undifferentiated products with competitive dynamics could fall heavily on the producer by way of lower margins. It is unlikely that the new administration will implement tariffs in industries where the producers hold pricing power. If aggregate nominal demand grows strongly, corporations could more easily pass on the cost of tariffs to consumers; however, this is not currently the case, and the current economic cycle is mature. Corporations may struggle to pass on tariffs to consumers, with profit pools through the value chain likely taking the bulk of the hit.

Counterpoint: The president-elect has said he believes the current trade system does not benefit American businesses and consumers, so tariffs are a credible threat to both US companies and consumers. Other countries could retaliate, potentially creating a full-blown trade war. Most importantly, tariffs are a headwind for the consumer, the global economy and equities, as they reduce real purchasing power and profit margins. A resulting stronger dollar is also an issue for US profits, and the inflationary effect of higher import prices could lead to a more hawkish Fed given rising inflation expectations. It is expected that these tariffs would be enacted at a time when equity valuations are rich, and do not offer much margin of safety. The transmission mechanism of these costs to the consumer could be through higher borrowing costs, lower asset prices, higher unemployment and higher inflation, lower real wages and a reduction in purchasing power.

Sources:

¹ Statista, Annual growth of the real gross domestic product of the United States from 1990 to 2023, January 2024, https://www.statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/#:~:text=In%202023%20the%20real%20gross,and%20high%20growth%20in%202021

² Federal Reserve Bank Philadelphia, Third Quarter 2024 Survey of Professional Forecasters, August 9, 2024, https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q3-2024#:~:text=Overall%2C%20the%20forecasters%20revised%20upward,compared%20with%20the%20previous%20survey

³ Statista, Gross domestic product (GDP) growth in Central and Eastern European countries compared to the European Union region from 1991 to 2023, November 2024, https://www.statista.com/statistics/1187041/cee-gdp-change/

⁴ European Commission, Autumn 2024 Economic Forecast: A gradual rebound in an adverse environment, November 2024, https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/economic-forecasts/autumn-2024-economic-forecast-gradual-rebound-adverse-environment_en#:~:text=This%20Autumn%20Forecast%20projects%20real,unchanged%20for%20the%20euro%20area

⁵ Fannie Mae, Recent Rate Run-Up Expected to Keep Existing Home Sales Near Historic Lows Through 2025, November 2024, https://www.fanniemae.com/newsroom/fannie-mae-news/recent-rate-run-expected-keep-existing-home-sales-near-historic-lows-through-2025#:~:text=WASHINGTON%2C%20DC%20%E2%80%93%20Existing%20home%20sales,Strategic%20Research%20(ESR)%20Group

⁶ CSET, The Global Distribution of STEM Graduates: Which Countries Lead the Way?, November 2023, https://cset.georgetown.edu/article/the-global-distribution-of-stem-graduates-which-countries-lead-the-way/#:~:text=The%20WEF%20report%20identified%20China,of%20graduates%20in%20STEM%20fields

What is in store for investors in 2025? A group of Newton’s research analysts and portfolio managers met to debate and discuss their top ten predictions for 2025 on key positions that oppose prevailing market trends. Could the ‘magnificent seven’ lose their luster and become the ‘meager seven,’ ushering in a period where small caps rally and outpace large caps? Could the new US administration break inflation, prompting a Federal Reserve (Fed) rate-cutting cycle that moves interest rates to levels last seen during President-elect Trump’s first term?

These ten debates illustrate Newton’s core ability to unlock opportunity by leveraging our multidimensional research capabilities, where all investors and analysts have a seat at the table to engage in spirited debate on their most out-of-consensus viewpoints.

1. The Trump Trade Head Fake: Will interest rates, inflation and the dollar all lower in 2025?

Point: Growth and inflation are expected to rise in 2025, which should lead to higher rates, a stronger dollar and an increase in equities. The Fed is more cautious regarding inflation risks and global growth is weaker. While these conditions may persist through the first quarter of 2025, it could be a potential contrarian opportunity to buy bonds, sell dollars and favor global ex-US equities. The fiscal impulse may remain flat next year, and tariffs could eventually lower both growth and inflation, thereby posing downside risks to both. Moreover, the US appears very attractive—whether in bonds, equities or currencies—relative to the rest of the world. Additionally, there is an expressed interest among some incoming administration members for a weaker dollar in the future. Efficiencies in reducing the budget deficit through the proposed Department of Government Efficiency (DOGE) could lower the term premium in bonds. Naturally, there are risks, primarily from the fiscal side, which could impose constraints via bond-market discipline.

Counterpoint: US economic activity remains strong. Consumer spending has recently risen, and corporate activity could also increase as we head into 2025. The recent election of a new pro-business, lighter regulation administration could further heighten inflation. Higher and more enduring inflation may result in structurally higher interest rates relative to recent history but not as restrictive as today.

2. AI Winter is Coming: Could overcapacity cause an unwind of the consensus AI trade?

Point: Investment in artificial intelligence (AI) is expected to continue growing, and concerns about oversupply may be overstated. The AI theme is still developing and early in its application. Companies are learning about this technology and experimenting with how it can optimize business functions, which could lead to higher future demand as enterprises further leverage AI. Additionally, agents (software applications capable of running tasks independently) and on-device AI might expand the investment opportunities in this space. AI has the potential to affect personal devices, work devices, cars, and homes, leading to a significant hardware upgrade cycle as AI chips are installed on devices for data analysis and decision-making. It is also important to note that AI influences investment beyond the technology sector, affecting areas such as infrastructure, utilities, industrials and nuclear power.

Counterpoint: Generative AI emerged in the technology industry two years ago, leading to a considerable rise in capital expenditure to construct data centers. Given that building data centers takes approximately three to four years, it is anticipated that significant capacity will become available in 2026-2027. However, there is a question as to whether there will be sufficient demand to utilize this capacity. While consumers are currently adopting AI technology, enterprises remain in the testing phase. An excess supply could affect tier 2 and tier 3 cloud companies and GPU-as-a-service (high-performance computing) providers that have smaller customer bases and/or are more exposed to AI training relative to inferencing. Companies with robust customer bases, complete AI computing stacks and greater capacity to generate inference revenue may be better positioned for success. 

Given that building data centers takes approximately three to four years, it is anticipated that significant capacity will become available in 2026-2027. However, there is a question as to whether there will be sufficient demand to utilize this capacity.

3. America Second: Will Europe outperform the US in the coming year?

Point: The United States appears to have surpassed its peak. US equity valuations are exceptionally high, with the disparity between US and UK/Europe valuations reaching unprecedented levels. This gap is primarily driven by a select group of high-performing and influential companies in the US stock market, commonly referred to as the ‘magnificent seven.’ It is crucial to consider that any decline in AI demand would adversely affect these companies and consequently affect US valuations overall. In our assessment, European political conditions are anticipated to improve by 2025, which should positively influence European valuations. Furthermore, there is an acceleration in mergers and acquisitions in the UK, contributing to a more optimistic economic outlook. Finally, the US economy may be more vulnerable than generally perceived, with potential inflation on the horizon, thus positioning Europe to potentially outperform the US in the forthcoming years.

Counterpoint: Europe has underperformed for over a decade. While some anticipate a cyclical rebound, this slower growth could be secular. In the US, GDP grew by 2.5% in 2023 and is expected to grow by 2.6% in 2024.^1,2 The US also benefits from significant innovation, potentially boosting further GDP growth. Conversely, Europe saw 0.5% GDP growth in 2023 with an expected 1% growth in 2024.^3,4 It is also important to recognize that Europe consists of diverse countries, each facing unique challenges. Input costs across Europe are higher than in the US with more expensive electricity costs and a more fixed labor market. Additionally, valuation should be considered, and on a price-to-earnings/return-on-equity basis, the US is far cheaper than Europe.

4. US Housing Bulls Become Homeless: Could US housing sink further still?

Point: Existing home sales are at nearly 30-year lows, and there is a strong possibility that they could fall further in 2025.⁵ Housing affordability remains a real issue and mortgage rates are not declining, which presents a huge roadblock for improving existing home sales in the US.

Counterpoint: While interest rates remain a headwind, the economy and job outlook could become a more important driver for home sales. There is a lot of pent-up demand for housing, and with current rates being similar to rates in the mid-1990s, pent-up demand may be ready to be released. Existing home sales are unsustainably low, and companies participating in fragmented markets exposed to housing may be market winners.

5. The Revenge of Environmental, Social and Governance (ESG): Will companies pick up the banner as regulations come under pressure?

Point: Companies should be motivated to enhance value. At the same time, many consumers are concerned with addressing the needs of future generations, necessitating that companies and politicians consider these interests. With this in mind, ESG will remain relevant, but we may observe a balance in language emphasizing value creation through ESG practices. For instance, many initiatives aimed at reducing emissions and environmental footprints are financially driven; the expansion of renewable energy has bolstered job creation and decreased foreign dependencies. Furthermore, the rise of AI and proliferation of data centers will require both supplemental power sources such as renewables, and more efficient power sources. On the social front, multiple studies indicate that diversity correlates with higher corporate returns, fosters innovation, enhances employee satisfaction and can reduce corporate costs. ESG is not merely a box-checking exercise; it is fundamentally about generating monetary value.

Counterpoint: ESG, as an acronym, has been politically charged for some time. The US has retreated from the concept while it has remained relevant in many parts of the world. This divergence highlights the varied standards for ESG across the globe. Additionally, regulators may heavily scrutinize any labelled claims of ESG and diversity, equity, and inclusion, which could lead to potential issues such as ‘greenhushing’ (when a company intentionally downplays information about its environmental efforts). The appointment of the next US Securities and Exchange Commission (SEC) chair will be critical, but it is anticipated that the new administration will be less supportive of shareholder proposals and resolutions compared to the current administration. There is also the possibility that the US may withdraw from United Nations climate initiatives, raising questions about whether China might take its place, and what that could mean geopolitically. Lastly, there is a belief that ESG could become a lesser priority as countries turn their focus to other pressing priorities such as security, reliability and affordability.

6. Executive in Peace: Could the Trump Administration usher in a period of global peace not seen since the Clinton era?

Point: Global peace is a very low probability outcome. Maybe somewhat counterintuitively, countries pursuing more isolationist policies should be a boon for defense spending globally. European countries in NATO have recognized the need to invest in their own defense owing to heightened aggression from Russia. As Trump has made clear, these countries cannot solely depend on the US for blanket defense against Russia, prompting many nations to begin the multi-year process of significantly increasing defense budgets. Additionally, China’s rise has led to heightened defense spending in Asia, which is expected to continue. The Ukraine/Russia conflict has also increased the use of battlefield drones, and there may be significant growth in this market.

Counterpoint: The past sets a precedent, and global peace might prevail once more. We saw how Trump governed from 2017-2020, and he ran his campaign on a very similar strategy this election season. During his first presidential term, the US refrained from entering any new or expanded conflicts. President Trump maintained diplomatic relationships with both North Korean President Kim Jong Un and Russian President Vladimir Putin, and he was committed to the US withdrawal from Afghanistan. Market trends suggest confidence in Trump’s potential to bring about a period of peace, as evidenced by the underperformance of defense stocks following the election. Additionally, Trump has expressed his dedication to mediating an end to the ongoing conflicts in Ukraine and Gaza.

The past sets a precedent, and global peace might prevail once more. We saw how Trump governed from 2017-2020, and he ran his campaign on a very similar strategy this election season.

7. David versus Goliath: Will small caps finally find their footing and start a long-term run of beating the ‘magnificent seven’?

Point: Over the last 100 years, US small-cap versus large-cap relative performance is consistently cyclical. We are now in the midst of cycle year 14 of large caps outperforming small caps. Earnings expectations for the Russell 2000 are poised to rise in 2025, and cash flows are improving. It should not take much capital to buoy the index given the low amount of market capitalization in this arena. Additionally, private equity has been staying private for longer, creating a backlog of companies about to go public and join their small-cap brethren. Current large-cap dominators may be past their prime as these once traditionally capital-light businesses are now capital-intensive, translating to lower multiples.

Counterpoint: The bigger the better. Large-cap companies have outperformed because they have experienced better growth, and small-cap companies will need serious earnings improvement if they are to surpass these giant companies. When looking at the investable universe with an innovation lens, small-cap companies are cheap for a reason. Much of the true market innovation around AI and obesity drugs has been driven by large-cap companies despite the fact that small-cap companies are traditionally the most innovative. Historically, small caps have benefitted from the complacency of large caps, but this is no longer the case. Finally, companies are staying private for longer now, creating an IPO vacuum and minimizing the universe of small-cap companies.

8. Make America Healthy Again: Will health care be the worst sector in 2025?

Point: Between Trump’s nominations for high-level positions, tariffs, further pricing pressure in the sector and subsidy cuts that many believe could come through, it appears every part of health care may be negatively affected. Overwhelming focus has been on the nominations for Trump’s administration, especially the choice of Robert F. Kennedy Jr (RFK) as health secretary. Given RFK’s past statements, there is a worry that his personal agenda will override evidence-based policy, detracting from health-care and funding priorities. Beyond RFK, it does seem like the upcoming administration is comfortable ratcheting up pricing pressure on drugs, pressuring pharmaceutical companies and all the vendors that support them. Tariffs could also have an impact, to varying degrees, on the medical technology space. Some companies may shift manufacturing or pass this pressure on to consumers. Finally, Republican wins at the federal and state level could influence exchange subsidies and Medicaid rosters as well.

Counterpoint: While there is fear that RFK could upend the health-care system, the health-care sector is at its lowest percentage of the S&P 500® in 20 years while innovation is at an all-time high owing to obesity, immunology, genetic and oncology drug advancements. Kennedy’s rhetoric may be stronger than his eventual policies and, if confirmed, he may have a narrow focus on ingredients in the food supply chain, and the risk/rewards of vaccines. Other appointees for heads of the Food and Drug Administration (FDA), Centers for Disease Control and Prevention (CDC), and the National Institutes of Health (NIH), are all dedicated scientists with no polarizing agendas. Overall, there could be some changes ahead surrounding food and some vaccines, but pricing worries and FDA/NIH disruption fears are likely overblown.

9. China in a Bull Shop: Could China come roaring back and benefit from the Trump administration?

Point: China has significantly reduced its dependency on exporting to the US with the Belt and Road initiative. Exports to the global south now represent roughly half of Chinese exports, while exports to the G7 have nearly halved. There is a misconception that China cannot catch up with Western peers; there are 3.6 million graduates in China each year in STEM subjects (Science, Technology, Engineering and Mathematics) versus less than one million in the US.⁶ These are the skills required for the industries of the future. Additionally, China is increasingly catching up in the semiconductor and AI space, opening many new technology companies. Innovation is especially important, with China filing a significant number of patents compared to the US.

Counterpoint: There are two gravitational forces that may pose concerns for China: a large growth problem and a lack of equity returns. China has trillions of dollars of unsold housing and sells only a fraction of that housing annually. Property still accounts for a high percentage of GDP and home ownership is nearly 100%. This indicates the need for a monumental rebalancing, and a transition from investment-driven growth without affecting other potential growth drivers presents difficulties. Remember, this occurs amid demographic headwinds and high total system leverage. The Chinese Communist Party faces both ideological and practical barriers to aggressive stimulus measures. It appears unlikely to replicate 2008 stimulus levels, and while pension or ‘hukou’ (household registration) reform is possible, it may only stabilize short-term growth. Chinese equities tend to be idiosyncratic and do not provide compound returns owing to significant equity dilution.

There are two gravitational forces that may pose concerns for China: a large growth problem and a lack of equity returns.

10. Tariffs, No Biggie: Will a new wave of Trump tariffs be disastrous for the US consumer?

Point: In Trump’s previous presidency, tariffs had little impact on consumers. Tariffs may not always be passed on to the consumer. It is important to consider the competitive dynamics on the industry to which tariffs are being applied. While tariffs could fall heavily on consumers in instances where producers have pricing power, tariffs on undifferentiated products with competitive dynamics could fall heavily on the producer by way of lower margins. It is unlikely that the new administration will implement tariffs in industries where the producers hold pricing power. If aggregate nominal demand grows strongly, corporations could more easily pass on the cost of tariffs to consumers; however, this is not currently the case, and the current economic cycle is mature. Corporations may struggle to pass on tariffs to consumers, with profit pools through the value chain likely taking the bulk of the hit.

Counterpoint: The president elect has said he believes the current trade system does not benefit American businesses and consumers, so tariffs are a credible threat to both US companies and consumers. Other countries could retaliate, potentially creating a full-blown trade war. Most importantly, tariffs are a headwind for the consumer, the global economy and equities, as they reduce real purchasing power and profit margins. A resulting stronger dollar is also an issue for US profits, and the inflationary effect of higher import prices could lead to a more hawkish Fed given rising inflation expectations. It is expected that these tariffs would be enacted at a time when equity valuations are rich, and do not offer much margin of safety. The transmission mechanism of these costs to the consumer could be through higher borrowing costs, lower asset prices, higher unemployment and higher inflation, lower real wages and a reduction in purchasing power.

Sources:

¹ Statista, Annual growth of the real gross domestic product of the United States from 1990 to 2023, January 2024, https://www.statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/#:~:text=In%202023%20the%20real%20gross,and%20high%20growth%20in%202021

² Federal Reserve Bank Philadelphia, Third Quarter 2024 Survey of Professional Forecasters, August 9, 2024, https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q3-2024#:~:text=Overall%2C%20the%20forecasters%20revised%20upward,compared%20with%20the%20previous%20survey

³ Statista, Gross domestic product (GDP) growth in Central and Eastern European countries compared to the European Union region from 1991 to 2023, November 2024, https://www.statista.com/statistics/1187041/cee-gdp-change/

⁴ European Commission, Autumn 2024 Economic Forecast: A gradual rebound in an adverse environment, November 2024, https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/economic-forecasts/autumn-2024-economic-forecast-gradual-rebound-adverse-environment_en#:~:text=This%20Autumn%20Forecast%20projects%20real,unchanged%20for%20the%20euro%20area

⁵ Fannie Mae, Recent Rate Run-Up Expected to Keep Existing Home Sales Near Historic Lows Through 2025, November 2024, https://www.fanniemae.com/newsroom/fannie-mae-news/recent-rate-run-expected-keep-existing-home-sales-near-historic-lows-through-2025#:~:text=WASHINGTON%2C%20DC%20%E2%80%93%20Existing%20home%20sales,Strategic%20Research%20(ESR)%20Group

⁶ CSET, The Global Distribution of STEM Graduates: Which Countries Lead the Way?, November 2023, https://cset.georgetown.edu/article/the-global-distribution-of-stem-graduates-which-countries-lead-the-way/#:~:text=The%20WEF%20report%20identified%20China,of%20graduates%20in%20STEM%20fields

Donald Trump’s US presidential win, together with a Republican sweep of the US Congress, puts Trump in a strong position to implement his economic agenda. As his campaign proposals were very broad-brush, it is too early to assess how his policies will play out. However, he has made clear that trade tariffs, immigration controls, regulatory easing and tax cuts are priorities.

Despite the uncertainty about which policies Trump may implement, a consensus outlook has developed based on first-term governance, his rhetoric over the past four years and pledges he made during this year’s campaign. Broadly, that consensus suggests reflation, a strong US dollar, higher interest rates, reshoring and oil-supply growth, to name a few, with the potential for material downstream effects on broad asset classes and equity sectors.

Our multidimensional approach allows investment team members to exploit an unusually wide and innovative range of inputs in their idea generation, and it shapes the creation and management of our strategies. In order to assess the consensus view’s validity, we gathered our multidimensional research and portfolio management teams to debate market assumptions and offer contrarian investment outcomes.

The ‘incoming’ overview

Our discussion began with a brief overview from Rafe Lewis, head of specialist research, who keeps a close watch on the US political landscape. Rafe stated that Republicans not only have the executive branch but now have control of both the Senate and House of Representatives, as well as a conservative-leaning Supreme Court.

Rafe also noted that personnel are important, and despite Trump getting off to a fast start nominating a number of individuals for key administration posts, it is too early to assess the full makeup of his administration and how his policies will be implemented.

The macro take

President-elect Donald Trump has vowed to impose additional tariffs on China, Mexico and Canada, that together account for about 43% of all goods imports to the US. Taken at face value, these tariffs are forecast to increase inflation. However, there were differing views among the team about tariffs and their potential effects.

Ella Hoxha, head of fixed income, suggested that tariffs are likely coming but that their impact on rates and inflation are currently difficult to assess. Immigration curbs and tariffs may slow growth and raise inflation, while deregulation and tax cuts could enhance growth. US interest-rate expectations have adjusted based on growth and the election results. Other regions see declining rates due to weaker growth. The US Federal Reserve is expected to act cautiously in 2025, balancing inflation and growth uncertainties.

Ella also suggested there is a wrinkle in the US dollar outlook. The recent dollar strength may face challenges as the new administration aims to boost US manufacturing competitiveness, which would require a shift in policy on the dollar. If the US dollar is part of the policy toolkit for the incoming administration, we should pay attention to how it approaches policies to weaken the dollar, as they could create volatility in markets. If successful, we could see a reversal in dollar strength in the second quarter of 2025 and later into the year.

As a final thought on the macro outlook, while it appears that Trump may be releasing the ‘animal spirits’ that led to a strong economy during his first term, Brendan Mulhern, global strategist, pointed out that the current setup is very different to that in 2016. The first Trump administration benefited from a very favourable global macro environment. 2017 was the first period of synchronised global growth since the global financial crisis; the US economy benefited from the broad improvement in global growth. Today, the economic cycles in the US and Europe are mature and growth in China remains subdued. From a market-cycle perspective, bearishness pervaded in 2016, and that was evident in positioning. Today it is the opposite—investors are bullish and have substantial exposure to equities. It is likely that it was never about Trump in 2016, and it is unlikely to be all about Trump on this occasion.

Sector rotation?

The Trump scenario suggests there may be a rotation in equity-sector leadership. Globally, the US benefits from the prospect of lower tax rates. The intersection of Trump’s policies may have greater implications for specific sectors. Deregulation and taxation could benefit banks and small/mid-cap stocks, while oil and gas companies may gain from the short-term positive sentiment of the president-elect’s focus on energy independence. If Trump decides to roll back support for renewables and electric vehicles under the Inflation Reduction Act, stocks in those sectors could see a pullback. Among industrials, stocks with more exposure to global supply chains, China’s economy and immigrant workers may suffer the most, while those in the automation business could benefit.

Consumer discretionary

Deputy head of global equity research Maria Toneva discussed the impact of tariffs on the retail sector. She believes that although tariffs could be significant, they are more likely to be moderate. If the US were to impose a 60% tariff on China, major retailers would need to pass these costs on to consumers, potentially causing a new rise in inflation. Toneva thinks Trump and his team are calculating this scenario but predicts the tariffs could likely be similar to the more manageable 2018 levels.

For brands with stronger pricing power, she expects the tariff impact to be more manageable. For luxury goods, a strong dollar could benefit European retailers that pay in euros but sell in dollars, counterbalancing any tariffs. In the US, tax cuts, rising markets and increased focus on cryptocurrency might boost luxury spending.

Health care

President-elect Donald Trump aims to reform the US health-care system, raising concerns for health-care investors. Research analyst Matt Jenkin is monitoring potential regulatory changes that could impact the sector. Jenkin focuses on the US Food and Drug Administration’s balance of safety and efficacy, fearing disruptions from new policies under Trump. Trump’s pick for Health and Human Services, Robert F. Kennedy Jr., emphasises safety, particularly for traditional drugs and vaccines, which may increase regulatory scrutiny. Trump’s cost-cutting efforts, including a proposed international reference pricing system for prescription drugs and using the Inflation Reduction Act to negotiate Medicare drug prices, could significantly affect health-care spending.

Higher interest rates pose challenges for biotechnology funding, yet merger and acquisition activity may surge under Trump, benefiting the industry. Additionally, tariffs and border taxes could affect companies manufacturing in Mexico, Ireland and Costa Rica.

Energy

According to research analyst and portfolio manager Dave Intoppa, the energy cycle and capital allocations targets have far more important implications for the energy sector than the election results. Intoppa argued that the election results should not significantly affect shale drilling in the US, while acknowledging that regulatory changes could marginally influence production. In his view, the potential reduction in oil volumes from sources like Iran is a greater concern. Intoppa remains cautious about market predictions and has not changed positioning, while emphasising his positive outlook on natural gas.

Information technology

Portfolio manager Rob Zeuthen indicated that he is paying close attention to the direction of the US dollar. As Zeuthen explained, most of the technology sector, and particularly semiconductors and hardware, is priced in US dollars. According to Zeuthen, if the US dollar continues to strengthen, that could dampen sector performance, and adding tariffs to the mix could further suppress demand. Despite these concerns, Zeuthen stated, “There are too many positive thematic drivers within tech to be too bearish.” While he is selective in the semiconductors and hardware segments, he is bullish on software and internet stocks.

With the potential for M&A activity to increasingly come into play next year, he thinks that certain small-to-mid-cap software companies may be motivated to sell due to concerns about where their futures might lie given the rise of artificial intelligence ‘smart agents’. “A lot of these companies are sold, not bought,” he noted, proactively seeking buyers and leveraging market competition to maximise the sales price. For this reason, he also believes that software companies may benefit from lower taxes, another positive consideration to appreciate.

Mobility

Frank Goguen, equity portfolio manager, raised the contrarian view that China could establish manufacturing operations on US soil. He explained that Trump, who has pledged to build the US workforce, has commented that he is open to the possibility. Goguen believes that the probability is low but not off the table, particularly as a Chinese battery manufacturer and technology company recently expressed interest in building a battery factory in the US if permitted. The other side to this is whether China’s government would allow any technology transfer to enter the US via the local production.

Charging ahead

While the 2024 election outcome has already driven significant market movements, the future remains uncertain, with multiple variables at play. Our multidimensional research and portfolio management teams carefully weigh these factors, considering both the macro and micro outlook and the associated risks of the changing landscape. As always, maintaining flexibility and staying informed will be key to navigating evolving market conditions and unlocking opportunity.

At Newton, we harness our multidimensional research capabilities to investigate key long-term trends that we believe will be instrumental in shaping the investment landscape over the coming years. Since 2022, the topic of artificial intelligence (AI) has never been far from the headlines, generating both huge excitement and deep concern.

AI is set to expand to new areas and enable significant advancements by creating user-friendly connections between people and advanced tech, with productivity and value creation set to skyrocket across industries. AI has the potential to change everything consumers touch, as technology and functionality continue to converge. AI application has broadened considerably in 2024; we expect this to continue into 2025 and beyond. AI looks set to transform essentially everything we touch, from our personal devices, work devices, cars and homes. The technology will continue to evolve as AI agents (software applications capable of running tasks on their own) extend their capabilities from assistance to action.

The modern software and data ‘stack’ is poised to change. Winning technology companies are likely to be vertically integrated, which will tend to favour large caps over small caps. Scale in computing by leveraging the cloud will also be compounded by companies that have the resources to deliver processing close to customers. Moving more resources to the edge, or even into the hands of users through local devices, can shape new winners in the next phase of the AI theme.

AI is also spreading beyond the technology sector as the second-order impacts are beginning to be felt in areas such as infrastructure, utilities, industrials, and nuclear power. 

Not to be outdone by the private sector, government engagement in AI is poised to create a second wave of AI progress. Nations are starting to see both the benefits and risks of AI, understanding its impact on economic growth and national security. Consequently, more countries are developing their own AI infrastructure and capabilities to boost competitiveness and ensure future security.

Evolving AI use cases: agents, real-time language translation, education

AI is breaking out of its limited scope of assistance to engage more and more of the world through action.

Large language models (LLMs) have opened up a new frontier for AI to assist with productivity, including potentially replacing manual jobs that have a high propensity for errors. Large action models (LAMs) will take the baton from LLMs and keep the momentum going for AI into 2025. LAMs combine the language of LLMs with the ability to make decisions autonomously. They are also used in creating agents. LAMs can understand human intentions and can be trained for specific tasks using specific applications.

Over the next decade, we may see the rise of entire agent ecosystems—vast networks of interconnected AI that will push enterprises to think about their intelligence and automation strategy in a fundamentally different way.

An AI agent interacts with its environment, gathers data, and uses it to carry out self-chosen tasks to reach set objectives. Humans set the goals, but the AI agent independently selects the best actions to achieve them.

Agents are possible owing to the many innovations and advancements across technology, including a significant increase in data to analyse, driven in part by an increasing number of connected devices from the internet of things, exponential data growth from generative AI, and progress in algorithms. Together with increased processing capacity on smaller chips that reduces latency for real-time AI, this all leads to improved response times and reliability.

Agent applications

Education is an area of significant opportunity for AI agents to break down barriers and democratise education globally, helping to customise education to the student based on their needs and progress. Using a machine-learning foundation, agents can analyse visual, auditory, reading/writing and kinaesthetic learning patterns. They can decipher strengths and weaknesses and create customised curricula.

Another major advancement in AI is real-time language translation. Language is a significant barrier to learning and social interaction. Among the first applications of AI on mobile devices will be to break down linguistic barriers through real-time LLMs. Devices have the potential to become more intelligent, learning our patterns, routines, interactions and reactions to interactions, and will become platforms to enhance all aspects of our lives. Essentially, we could all have a supercomputer in our hand, in our ears, on our wrist, or as our eyes.

Broader agent themes

With more agents on our devices, we may also see an evolution from a graphical user interface (GUI) to a conversational user interface (CUI), which uses voice prompts to engage with LLMs and LAMs. Agents driven by LAMs embedded in our devices can act in real time by communicating with other LAMs and engaging with external systems (such as apps), making AI more functional for the general population.

In some form, agents will also be on our work computers, changing the way we interact with our computer by performing a myriad of tasks. The current limitations are around what we tell them to do. Over time, the capabilities will evolve and expand through machine and deep-learning techniques, and agents will interact with each other to make higher-level decisions and take more intuitive actions.

Having AI on devices, coupled with the rollout of 5G mobile networks and a proliferation of sensors, should drive growth in the ‘internet of things’ (connected devices), and enable more real-time data analysis and decision-making to take place at the ‘edge’ (i.e., in real time even at remote locations). We expect significant improvement in, for example, autonomous driving capabilities, and these developments also open the door for progress within health care, with better monitoring, treatment and detection. The advancements in safety and privacy alone should be noticeable.

We can envision a future in which everyday devices are transformed. We will also see many failures, and some will come to market before the ideal infrastructure and technology are ready. The possibility exists for one device with built-in internet access, driven by LLMs, LAMs and agents, which sees everything you see, hears everything you hear, and becomes your personal assistant and life coach. It could include biosensors to sense your mood, biometrics to measure your health, and facial recognition to tell you who people are (for those of us who are not good at remembering names).

Impact on power/electricity

The power sector has hit an inflection point, which has been driven by electrification, deglobalisation, and now the demand for and growth of AI. Throughout 2024, we have seen continued strength in the technology sector, but utilities have led the market. AI is providing an additional tailwind to the power market beyond the themes that were already in place.

The International Energy Agency’s (IEA) recently released Electricity 2024 report¹ highlights:

• Global electricity demand is set to grow at a 3.4% compound annual growth rate (CAGR) from 2024-2026 compared to 2.2% and 2.4% in the prior two years.
• Electricity consumption from data centres, AI and cryptocurrency sectors could double from 460 terawatt hours (TWh) in 2022 to potentially 1,050 TWh in 2026.
• Global nuclear generation is set to grow 3% per year on average through 2026, surpassing the previous generation record last set in 2021.

Data centres, AI and cryptocurrency already represent almost 2% of total global electricity demand, according to the report. This number could double to 4% in 2026 as data centres increase electricity devoted to computing and cooling. The US consumes the most energy, with its 33% of global data centres representing 4% of all US electricity demand, growing to 6% in 2026, while China and the European Union (EU) are forecast to grow their data-centre electricity consumption by 50% by 2026. Ireland’s data centres represent a whopping 17% of total electricity consumed in the country, which is forecast to increase to 32% over this time frame. 

Estimated data centre electricity consumption and its share in total electricity demand in selected regions in 2022 and 2026

Source: International Energy Agency, Electricity 2024.

Given the global race for computing power, we expect this trend to continue well beyond 2025, creating second-order impacts in the AI ecosystem across areas such as energy, infrastructure, utilities and nuclear power. China recently communicated its desire to almost double its computing power by 2025, believing that, historically, every one yuan invested in computing power has driven three to four yuan of economic output.

The US CHIPS Act of 2022 provides $52 billion in manufacturing grants and subsidies along with a 25% investment tax credit to incentivise semiconductor manufacturing in the US, with the aim of increasing market share through revitalising US semiconductor manufacturing, strengthening the supply chain, and advancing national security. The EU passed its own European Chips Act in 2023 aimed at doubling Europe’s share of the global microchips market, with more than €43 billion of policy-driven investment to support the legislation until 2030, which is intended to be broadly matched by long-term private investment.

This global chip war and considerable government support should provide long-term tailwinds for the second-order effects of AI growth mentioned above. Nuclear power is one area of significant opportunity. The IEA’s updated Net Zero Roadmap estimates nuclear energy could more than double by 2050. Nuclear momentum really started to build at the COP28 climate change conference in December 2023, with over 22 countries aiming to triple nuclear capacity by 2050. 

Sovereign AI

As the pivotal role of AI in our future becomes increasingly evident, states are preparing themselves against disruption by building their own AI algorithms and industries. Governments around the globe are ramping up their investment to enable the wide array of use cases, including the bolstering of critical areas of health care, energy and defence. Combined with the prospect of new forms of cyber risk from AI, increased regulatory scrutiny (e.g., the EU’s General Data Protection Regulation) is also a driving force in data-centre construction across the globe. The EU, for example, wants data centres close at hand to tighten compliance and security. We should expect regulatory scrutiny to continue and cannot rule out the prospect of additional fines or frameworks to control risk, though such measures could have the unintended risk of stifling innovation and further entrenching today’s incumbents. In Asia, Chinese companies may be expanding data-centre computing resources beyond the Chinese mainland owing to rising export restrictions by the West. These activities are likely to expand and diversify the growth of AI beyond today’s private-sector hyperscalers.

Conclusion

We are at a point of reinvention. Businesses will soon have powerful technologies that will boost human potential, productivity and creativity. Early adopters are leading the way into a new era where technology, ironically, is becoming more human.

Generative AI and transformer models have revolutionised technology, from chatbots like ChatGPT to more accessible, intelligent systems. While AI initially focused on automation, it is now enhancing our work, democratising technology, and making specialised knowledge more widely available. This shift is transforming organisations and markets, bridging gaps between humans and technology, and unlocking greater human potential.

AI may deliver financial impact through productivity, cost reduction and new sources of revenue. We expect the first two of those levers, productivity and cost savings, to drive margins higher as AI expands. AI may also be a source of deflation. Revenues may follow once enterprises see tangible internal successes and launch new products and services with integrated AI capabilities.

¹Electricity 2024: Analysis and forecast to 2026, International Energy Agency.

At Newton, we harness our multidimensional research capabilities to investigate key long-term trends that we believe will be instrumental in shaping the investment landscape over the coming years. Since 2022, the topic of artificial intelligence (AI) has never been far from the headlines, generating both huge excitement and deep concern.

AI is set to expand to new areas and enable significant advancements by creating user-friendly connections between people and advanced tech, with productivity and value creation set to skyrocket across industries. AI has the potential to change everything consumers touch, as technology and functionality continue to converge. AI application has broadened considerably in 2024; we expect this to continue into 2025 and beyond. AI looks set to transform essentially everything we touch, from our personal devices, work devices, cars and homes. The technology will continue to evolve as AI agents (software applications capable of running tasks on their own) extend their capabilities from assistance to action.

The modern software and data ‘stack’ is poised to change. Winning technology companies are likely to be vertically integrated, which will tend to favor large caps over small caps. Scale in computing by leveraging the cloud will also be compounded by companies that have the resources to deliver processing close to customers. Moving more resources to the edge, or even into the hands of users through local devices, can shape new winners in the next phase of the AI theme.

AI is also spreading beyond the technology sector as the second-order impacts are beginning to be felt in areas such as infrastructure, utilities, industrials, and nuclear power. 

Not to be outdone by the private sector, government engagement in AI is poised to create a second wave of AI progress. Nations are starting to see both the benefits and risks of AI, understanding its impact on economic growth and national security. Consequently, more countries are developing their own AI infrastructure and capabilities to boost competitiveness and ensure future security.

Evolving AI Use Cases: Agents, Real-Time Language Translation, Education

AI is breaking out of its limited scope of assistance to engage more and more of the world through action.

Large language models (LLMs) have opened up a new frontier for AI to assist with productivity, including potentially replacing manual jobs that have a high propensity for errors. Large action models (LAMs) will take the baton from LLMs and keep the momentum going for AI into 2025. LAMs combine the language of LLMs with the ability to make decisions autonomously. They are also used in creating agents. LAMs can understand human intentions and can be trained for specific tasks using specific applications.

Over the next decade, we may see the rise of entire agent ecosystems—large networks of interconnected AI that will push enterprises to think about their intelligence and automation strategy in a fundamentally different way.

An AI agent interacts with its environment, gathers data, and uses it to carry out self-chosen tasks to reach set objectives. Humans set the goals, but the AI agent independently selects the best actions to achieve them.

Agents are possible owing to the many innovations and advancements across technology, including a significant increase in data to analyze, driven in part by an increasing number of connected devices from the internet of things, exponential data growth from generative AI, and progress in algorithms. Together with increased processing capacity on smaller chips that reduces latency for real-time AI, this all leads to improved response times and reliability.

Agent Applications

Education is an area of significant opportunity for AI agents to break down barriers and democratize education globally, helping to customize education to the student based on their needs and progress. Using a machine-learning foundation, agents can analyze visual, auditory, reading/writing and kinesthetic learning patterns. They can decipher strengths and weaknesses and create customized curricula.

Another major advancement in AI is real-time language translation. Language is a significant barrier to learning and social interaction. Among the first applications of AI on mobile devices will be to break down linguistic barriers through real-time LLMs. Devices have the potential to become more intelligent, learning our patterns, routines, interactions and reactions to interactions, and will become platforms to enhance all aspects of our lives. Essentially, we could all have a supercomputer in our hand, in our ears, on our wrist, or as our eyes.

Broader Agent Themes

With more agents on our devices, we may also see an evolution from a graphical user interface (GUI) to a conversational user interface (CUI), which uses voice prompts to engage with LLMs and LAMs. Agents driven by LAMs embedded in our devices can act in real time by communicating with other LAMs and engaging with external systems (such as apps), making AI more functional for the general population.

In some form, agents will also be on our work computers, changing the way we interact with our computer by performing a myriad of tasks. The current limitations are around what we tell them to do. Over time, the capabilities will evolve and expand through machine and deep-learning techniques, and agents will interact with each other to make higher-level decisions and take more intuitive actions.

Having AI on devices, coupled with the rollout of 5G mobile networks and a proliferation of sensors, should drive growth in the ‘internet of things’ (connected devices), and enable more real-time data analysis and decision-making to take place at the ‘edge’ (i.e. in real time even at remote locations). We expect significant improvement in, for example, autonomous driving capabilities, and these developments also open the door for progress within health care, with better monitoring, treatment and detection. The advancements in safety and privacy alone should be noticeable.

We can envision a future in which everyday devices are transformed. We will also see many failures, and some will come to market before the ideal infrastructure and technology are ready. The possibility exists for one device with built-in internet access, driven by LLMs, LAMs and agents, which sees everything you see, hears everything you hear, and becomes your personal assistant and life coach. It could include biosensors to sense your mood, biometrics to measure your health, and facial recognition to tell you who people are (for those of us who are not good at remembering names).

Impact on Power/Electricity

The power sector has hit an inflection point, which has been driven by electrification, deglobalization, and now the demand for and growth of AI. Throughout 2024, we have seen continued strength in the technology sector, but utilities have led the market. AI is providing an additional tailwind to the power market beyond the themes that were already in place.

The International Energy Agency’s (IEA) recently released Electricity 2024 report¹ highlights:

• Global electricity demand is set to grow at a 3.4% compound annual growth rate (CAGR) from 2024-2026 compared to 2.2% and 2.4% in the prior two years.
• Electricity consumption from data centers, AI and cryptocurrency sectors could double from 460 terawatt hours (TWh) in 2022 to potentially 1,050 TWh in 2026.
• Global nuclear generation is set to grow 3% per year on average through 2026, surpassing the previous generation record last set in 2021.

Data centers, AI and cryptocurrency already represent almost 2% of total global electricity demand, according to the report. This number could double to 4% in 2026 as data centers increase electricity devoted to computing and cooling. The US consumes the most energy, with its 33% of global data centers representing 4% of all US electricity demand, growing to 6% in 2026, while China and the European Union (EU) are forecast to grow their data-center electricity consumption by 50% by 2026. Ireland’s data centers represent a whopping 17% of total electricity consumed in the country, which is forecast to increase to 32% over this time frame. 

Estimated Data Center Electricity Consumption and its Share in Total Electricity Demand in Selected Regions in 2022 and 2026

Source: International Energy Agency, Electricity 2024.

Given the global race for computing power, we expect this trend to continue well beyond 2025, creating second-order impacts in the AI ecosystem across areas such as energy, infrastructure, utilities and nuclear power. China recently communicated its desire to almost double its computing power by 2025, believing that, historically, every one yuan invested in computing power has driven three to four yuan of economic output.

The US CHIPS Act of 2022 provides $52 billion in manufacturing grants and subsidies along with a 25% investment tax credit to incentivize semiconductor manufacturing in the US, with the aim of increasing market share through revitalizing US semiconductor manufacturing, strengthening the supply chain, and advancing national security. The EU passed its own European Chips Act in 2023 aimed at doubling Europe’s share of the global microchips market, with more than €43 billion ($46 billion) of policy-driven investment to support the legislation until 2030, which is intended to be broadly matched by long-term private investment.

This global chip war and considerable government support should provide long-term tailwinds for the second-order effects of AI growth mentioned above. Nuclear power is one area of significant opportunity. The IEA’s updated Net Zero Roadmap estimates nuclear energy could more than double by 2050. Nuclear momentum really started to build at the COP28 climate change conference in December 2023, with over 22 countries aiming to triple nuclear capacity by 2050. 

Sovereign AI

As the pivotal role of AI in our future becomes increasingly evident, states are preparing themselves against disruption by building their own AI algorithms and industries. Governments around the globe are ramping up their investment to enable the wide array of use cases, including the bolstering of critical areas of health care, energy and defense. Combined with the prospect of new forms of cyber risk from AI, increased regulatory scrutiny (e.g., the EU’s General Data Protection Regulation) is also a driving force in data-center construction across the globe. The EU, for example, wants data centers close at hand to tighten compliance and security. We should expect regulatory scrutiny to continue and cannot rule out the prospect of additional fines or frameworks to control risk, though such measures could have the unintended risk of stifling innovation and further entrenching today’s incumbents. In Asia, Chinese companies may be expanding data-center computing resources beyond the Chinese mainland owing to rising export restrictions by the West. These activities are likely to expand and diversify the growth of AI beyond today’s private-sector hyperscalers.

Conclusion

We are at a point of reinvention. Businesses will soon have powerful technologies that will boost human potential, productivity and creativity. Early adopters are leading the way into a new era where technology, ironically, is becoming more human.

Generative AI and transformer models have revolutionized technology, from chatbots like ChatGPT to more accessible, intelligent systems. While AI initially focused on automation, it is now enhancing our work, democratizing technology, and making specialized knowledge more widely available. This shift is transforming organizations and markets, bridging gaps between humans and technology, and unlocking greater human potential.

AI may deliver financial impact through productivity, cost reduction and new sources of revenue. We expect the first two of those levers, productivity and cost savings, to drive margins higher as AI expands. AI may also be a source of deflation. Revenues may follow once enterprises see tangible internal successes and launch new products and services with integrated AI capabilities.

¹Electricity 2024: Analysis and forecast to 2026, International Energy Agency.