Top 10 Market Themes for 2025: A Four-Month Review

Posted by Bedrock on 1st May 2025

At the start of 2025, we published our Top 10 Market Themes, offering our top themes that we believed would influence the markets in the coming year and identified the assets best positioned to capitalise on these opportunities.

Now, four months into the year, the global landscape has shifted dramatically—driven by political unpredictability, economic divergence, and renewed market volatility.

In this update, we revisit each of the ten themes, assess what’s played out so far, and evaluate whether our convictions still hold amid changing tides.

1. US growth exceptionalism to continue – and dollar strength to persist

We expected the US economy to outpace global peers in 2025, supported by strong corporate earnings and fiscal momentum, with persistent rate differentials keeping the dollar strong.

What has played out so far

While the US economy continues to show resilience – and likely outperformance over developed market peers – Donald Trump’s tariff manoeuvres and economic policy more broadly have created uncertainty, which is beginning to show up in macroeconomic data. As long as the recession scenario is avoided, strong fundamentals could still see the US economy outperform.

However, our dollar strength call has not materialised during the first months of the year. In fact, we have seen significant dollar weakness with the US Dollar Index (DXY) down 8% since the beginning of the year as a sign of lower business and investor confidence in US economic policy and increased economic uncertainty. We still expect dollar strength to resume in the medium term horizon, driven by interest rate differentials and stronger US growth versus the rest of the world, in particular the European economies.   

Conviction status: Partially intact
> US growth outperformance remains plausible, but dollar strength has not materialised so far, making this a theme we are watching closely but still believe in medium term.

2. Heightened volatility is expected after two strong years for equities

Following two exceptional years for equities, we anticipated that stretched valuations and macro uncertainty would trigger increased market volatility in 2025.

What has played out so far

The year has indeed brought heightened volatility, especially in the wake of Donald Trump’s ‘Liberation Day’ tariff announcement. The VIX Index (or CBOE Volatility Index – a measure of equity market volatility) in April crossed above 50 for the first time since the onset of the coronavirus pandemic in 2020. The sharp market moves were magnified by forced selling due to margin calls and forced buying to cover short positions. (Indeed, the volatility has extended beyond equities, with powerful moves in currency and bond markets; the MOVE Index of US Treasury market volatility also hit a two-year high.)

This period of volatility has again demonstrated the importance of maintaining diversified portfolios – including exposures across equity factors (notably Growth, Quality and Value), sectors (including defensives, not just US large-cap tech) and geographies. Portfolio hedges such as quality fixed income, gold, long puts on equities and certain types of structured products which perform well during market downturns have proved to be good diversifiers. We also used the heightened volatility and market pullback to trade structured products with attractive payout terms.

Conviction status: Unchanged
> Volatility has returned as expected, validating our call and reinforcing the need for diversification and risk-managed positioning.

3. Look beyond US large-caps

What we expected

We believed that under Trump, US SMID-caps would benefit from pro-business policies, while Japanese and European equities offered diversification and attractive valuations.

What has played out so far

Both US small-caps and Japanese equities were negatively affected by the tariff announcement. Given the expected impact of tariffs on the domestic US economy (where smaller companies are focused), the Russell 2000 US small cap index underperformed (down -13% year-to-date). Reflecting their strong export orientation, Japanese stocks also fell – but have started to recover on the news on the trade deal progress between Japan and the USA. European equities proved to be a better diversifier, although they were not spared the tariff impact, with April declines mostly erasing gains earlier in the year to leave the Stoxx 50 and other European indices largely flat year-to-date (a better outcome than, e.g., the S&P 500’s negative returns on the year so far).

Conviction status: Adjusted but broadly intact
> While US SMID-caps have underperformed due to tariffs, Japanese equities show signs of recovery and European equities continue to offer diversification, supporting the broader theme with a shift in emphasis.

4. AI trend to advance, supporting the linked robotics theme  

We foresaw continued momentum in AI and robotics as transformative long-term themes, with revenue growth and innovation justifying elevated valuations.

What has played out so far

We believe that AI is a long-term trend, although since the beginning of the year we have seen some change of investor sentiment caused by news of Chinese firm DeepSeek’s breakthroughs, valuation adjustments in Magnificent 7 stocks, and the recent introduction of further semiconductor export restrictions for US firms, in particular to China. NVIDIA has declined -18% and the PHLX Semiconductor Index of US chip stocks down -15% year-to-date. None of these developments shift our conviction in AI as a long term trend, which will continue playing an important role across markets and industries.

Conviction status: Unchanged
> Despite short-term headwinds and regulatory uncertainty, we remain firmly committed to AI and robotics as a long-term structural trend.

5. Electrification will be at the centre of real economy investment

We projected accelerating investment in electrification infrastructure, driven by outdated grids, AI-powered data centres, and global energy transition efforts.

What has played out so far

Upgrading electricity generating infrastructure will remain a longer-term theme. Further restrictions on the export of US semiconductors could result in increased data centre power demand as a higher percentage of US chips may be used within the country. This would require investments in additional electric transmission infrastructure to meet the forecasted increase in electricity consumption.

Conviction status: Unchanged
> The theme remains intact as power demand continues to grow and infrastructure needs mount, even if material benefits are expected over a longer horizon.

6. Defence investment is rising

We anticipated structurally higher defence spending globally, especially in Europe and Asia, spurred by rising geopolitical risks and Trump’s pressure on allies.

What has played out so far

This theme continues to play out, reflected in rising shares of GDP being committed to defence spending, in particular in European countries. The STOXX Europe Aerospace and Defence Index has risen +29% year-to-date. For more details on this theme please see our deep dive on European defence equities in the March newsletter here. 

Conviction status: Unchanged
> Developments have reinforced this theme, with increased defence budgets and strong performance from defence equities confirming our call.

7. M&A dealmaking to pick up

We expected M&A activity to rebound under a deregulation-focused Trump administration, creating tailwinds for event-driven strategies and financials.

What has played out so far

Significant increase in mergers and acquisitions has not happened yet, as many strategic and financial buyers are putting deals on hold amid the uncertainty on US economic policies and tariffs. Once the tariff uncertainty is resolved, and provided the US and global economies avoid recession, we may still see a rebound in the M&A deal making – though the Trump Administration’s attitude to mergers and competition still remains unclear.

Conviction status: Weakened, but conditional optimism remains
> Uncertainty has delayed dealmaking so far, but we maintain cautious optimism that activity could rebound if macro clarity improves.

8. A slow rate cutting cycle – especially in the US – sustains fixed income’s appeal

We predicted a gradual rate-cutting cycle with persistently attractive yields, favouring income-generating fixed income strategies and selective credit exposure.

This theme is still in place, especially in the US, where the Federal Reserve (Fed) has held rates unchanged since its cut in December 2024. In April 2025 the Fed did not signal any intention to cut rates at the next FOMC meeting in May. In contrast, the European Central Bank (ECB) has cut rates three times since the beginning of the year. The Bloomberg Global Aggregate Index is up 2.2% year-to-date, demonstrating investment grade bonds’ value to diversified portfolios during the recent market turbulence. As ever, we emphasise the importance of selectivity when investing in corporate credit.

Conviction status: Unchanged
> Our expectations for a gradual rate-cutting cycle and continued fixed income appeal remain well-supported, especially in the US.

9. Gold’s appeal has not dulled – while cryptocurrencies will be an alternative for some

We believed that central bank demand and geopolitical risks would sustain gold’s strength, while a more crypto-friendly political climate could buoy digital assets.

What has played out so far

This theme has played out, with gold up +21% since the beginning of the year and briefly reaching the psychologically important level of $3500/oz. On top of a flight-to-safety move amid recent volatility, the main drivers of the recent sharp move in gold were strong demand from central banks and increased ETF inflows caused by rising recession concerns. We still see upside to gold, however, some pullback after the steep run over recent weeks is plausible.

Conviction status: Unchanged
> Gold has performed strongly as predicted, and the broader appeal of alternative assets remains valid in the current macro climate.

10. Global economies are diverging

We anticipated that global economic divergence – across growth, inflation, and policy – would accelerate in 2025, creating opportunities for macro trading strategies.

What has played out so far

Since the beginning of the year we have seen diverging macro policies across the major global economies, with the European Central Bank (ECB) and Bank of England (BOE) cutting interest rates, the Federal Reserve (Fed) holding and the Bank of Japan (BOJ) even raising rates in January. The broad basket of Emerging Market economies present a further range of diverging outcomes. We believe global economic divergence may continue further as US trade policy evolves and the tariff steady-state potentially emerges from the ongoing negotiations between the US and its trading partners.

Conviction status: Unchanged
> The divergence in policy and macro trends across economies has played out as expected and continues to offer opportunities for macro strategies.

If you have any questions about the themes discussed in this article, please do not hesitate to get in contact with us: info@bedrockgroup.ch

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