3 issues investors must be aware of in 2025

Investors must keep their eyes on three issues as they look ahead to the new year, according to a panel of Morningstar experts. Those issues are: finding returns in a falling interest rate environment, looking at the pros and cons of investing in private assets, and the impact of artificial intelligence on investing.

Morningstar analysts took a deep dive into these issues during a recent webinar.

The Federal Reserve will continue to lower interest rates in 2025, which theoretically, should push all local rates downward, said Dominic Pappalardo, Morningstar chief multiasset strategist. He predicted the Fed will drop rates to near 3% in 2025 and closer to 2% in 2026.

“It’s a pretty strong downward trend,” he said.

However, he warned of a potential rebound of inflation or unforeseen increase in inflation.

“The fed has proven their No. 1 priority is controlling inflation,” he said. “And if for some reason, consumer price index data starts to move up, that could change this outlook dramatically. Long-term rates could move higher. However, in either scenario, the yield curve is likely to steepen. If inflation does rebound, we would expect longer-term rates to go higher.”

Investors are holding on to record amounts of cash, Pappalardo said, with between $6.5 billion and $7 billion sitting on the sidelines.

“It certainly made sense to hoard this cash when the yield curve was inverted, which allowed investors to earn a higher yield on cash as opposed to longer term fixed income investments,” he said. “But that’s not necessarily the case today and we certainly don’t expect that to persist into 2025. The benefits of holding that outsized cash position fade quickly when interest rates are falling.”

A new wave of consolidation

The convergence of public and private markets kicked off a new wave of industry consolidation, said Brian Moriarty, Morningstar U.S. fixed income strategist.

The impact of this consolidation, he said, is that “asset managers are going to compete on offering better products, which gives regular investors access to strategies and assets that they historically haven’t had access to and with the right financial advice that could benefit them. As competition heats up, these solutions’ fees will start to come down. That’s a story we’ve seen play out many times over the years.”

The coming year will mark the time when AI moves from hardware providers to the people who use it to generate additional revenue, said Dave Sekera, Morningstar chief U.S. strategist.

“I think we’re now at the point where those hardware suppliers are building enough new capacity to be able to address the amount of forecasted demand,” he said. “After spending as much money as they have on AI hardware, investors are now looking at corporations that have spent that money, the corporations that have dedicated resources to how they will be able to use all that capital they spent over the past two years in order to generate value.”

Sekera said that in 2025, he expects to see the number of use cases for AI expand rapidly and to see more companies look at how they can expand their operating margins using AI.

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