Deutsche Bank Research Highlights Shifting Market Risks for 2025
Investors’ views on the most significant threats to market stability have evolved as 2025 approaches, with concerns over a potential global trade war now topping the list, according to Deutsche Bank Research. This marks a departure from last year when fears of a U.S. economic “hard landing” dominated investor concerns.
“The biggest global risks are seen as a global trade war, a U.S. tech sector plunge, and inflationary pressures alongside bond market volatility,” said Jim Reid, Deutsche Bank’s global head of macro and thematic research, in a note released Monday. The accompanying chart illustrates how investor priorities have shifted compared to a year ago.
Evolving Concerns About Inflation and Central Bank Policy
Despite a resilient U.S. economy in 2024, earlier fears of a recession triggered by aggressive Federal Reserve rate hikes have given way to worries about a trade agenda that could re-ignite inflation. While the Fed began easing its monetary policy in September after inflation receded significantly from its 2022 peak, investors remain wary of potential surprises, including a sudden interest rate hike to combat inflationary pressures.
The bond market has mirrored this uncertainty, with volatile movements in Treasury yields. The 10-year Treasury note yield, a key benchmark for stock valuations, climbed to 4.397% on Monday, raising concerns that further spikes could destabilize equity markets.
Tech Stocks and AI Enthusiasm at Risk
Another major risk cited by investors is the potential for a sharp decline in tech stock valuations, particularly if enthusiasm around artificial intelligence (AI) wanes. Big Tech has been a major driver of market gains in 2024, with the S&P 500 rising 27.3% and the Nasdaq surging 34.4% year-to-date. AI chipmaker Nvidia, for instance, has seen its stock skyrocket more than 166%, while the Roundhill Magnificent Seven ETF, comprising leading tech giants, is up an impressive 73.2%, according to FactSet.
However, investors fear that declining AI-driven momentum could lead to a pullback in these over-weighted sectors, potentially rattling broader markets.
Survey Highlights Mixed Optimism for 2025
Deutsche Bank’s survey revealed tempered optimism for 2025. Investors project a 5.2% gain for the S&P 500 and a 6.8% rise for the Magnificent Seven stocks. However, these expectations are tempered by broader concerns about geopolitical risks, inflation, and unexpected central bank policy shifts.
As the Federal Reserve prepares for its upcoming policy meeting, with a decision on interest rates expected Wednesday, markets remain cautious. The backdrop of strong equity performance in 2024 juxtaposes rising risks heading into the new year.
Investors will closely monitor the Fed’s actions and the evolving trade policy landscape, both of which could have far-reaching implications for global market stability.
