Allspring Global Investments forecast an evolving investment landscape filled with economic shifts and changes in the equity market’s leadership during its global market outlook for 2025. It also predicted a fixed income market witnessing significant change as investors shift toward diversification amid rising market volatility and the unknown direction for interest rates.
Allspring Enters ETF Market
Unlike most market outlook press conferences, Allspring actually had hard news to tell last Tuesday. The firm announced it entered the ETF market with the launch of three new fixed income ETFs—Allspring Broad Market Core Bond ETF, Allspring Core Plus ETF, and Allspring Income Plus ETF. The new funds provide retail investors the opportunity to profit from the expertise in Allspring’s fixed income business. Allspring manages $590 billion in assets under advisement, of which $440 billion is in fixed income. Over the past five years, the business, which focuses on taxable, municipal, and investment-grade bonds, has seen 97% of its fixed income assets outperform their benchmarks, according to Allspring.
Fixed Income Outlook
With the decline in inflation slowing down, and new policies from the new administration, interest rates remain in flux into the new year, Allspring predicts that shifts in monetary policies across central banks—particularly the Federal Reserve (Fed) and European Central Bank (ECB)—will continue to create volatility in the fixed income market. Investors are advised to focus on high-yield areas, short-duration opportunities, and strategic duration tilting to better capture relative value during these market changes.
Allspring offered key strategies for investors in the fixed income market:
- Diversify exposure through active ETFs, especially those aligned with market cycles.
- Incorporate sectors like securitized credit, mortgage-backed securities, and financials as they show relative value opportunities.
- Navigating volatility through strategic adjustments in duration and yield-curve positioning.
The opportunity lies in combining risk-focused strategies with tactical exposure adjustments to maintain flexibility and optimize returns, said the Charlotte, N.C.-based asset manager.
The overall trend supports growth in the U.S., but globally, there are more challenges, said Janet Rilling, head of Allspring’s plus fixed income team.
“Europe certainly has been under pressure,” said Rilling, “but the ECB is more on a path for rate cuts” and will continue to be steady on the rate cuts. The Fed, on the other hand, looks to be slowing rates cuts next year.
The firm said global bond markets remain attractive with yields near their highest levels in 15 years, while compensation for bearing credit risk in U.S. investment grade and high-yield bonds is near its lowest. It says security selection is key and that means active portfolio management. It’s not surprising that all three ETFs are actively managed.
The Allspring Broad Market Core Bond ETF (AFIX) uses fundamental factors to find diverse high-quality sources of yield. It has a monthly dividend and an expense ratio of 0.19%.
The Allspring Core Plus ETF (APLU) holds the manager’s best global ideas. It also has a monthly dividend and an expense ratio of 0.3%.
And the Allspring Income Plus ETF (AINP) seeks a total return consisting of a high level of current income and capital appreciation. It also pays monthly dividends and charges 0.35%.
Equity Outlook: Shifting Landscape
Going into the new year, U.S. equities are at a critical inflection point driven by a shift in market dominance.
Ann Miletti, Allspring’s head of equity laid out 4 themes for 2025.
1. The breadth of the U.S. equity market should widen beyond the handful of mega-cap growth stocks.
2. Investments in small- and mid-cap equities will likely increase given their attractive valuations relative to large-caps.
3. The dark horse with valuations at historic lows could be emerging markets which has been ignored by investors.
4. Given high valuations and high expectations, it would not be surprising if the market hit bumps. Still of all the asset classes, equities are set up to potentially deliver great growth for long-term investors.
The “Magnificent 7” companies—Meta, Apple, Google, Amazon, Microsoft, NVIDIA, and Tesla—have driven market performance the past two years, with artificial intelligence and tech innovation fueling their market leadership. However, the landscape is shifting. Growth among these companies is expetcted to decelerate, leading investors to question whether these giants will maintain their positions in 2025 and beyond.
Stock valuations among the Mag7 concern Bryant VanCronkhite, senior portfolio manager for the Special Global Equity Team. The price-to-sales ratio for the Mag7 is now seven times. “This happens to be the peak level they were at in 2022 when the markets collapsed,” he said. In addition, the spread between the Mag7 valuations and the “modest 493 that make up the rest of the S&P 500 is very wide.”
Investors are beginning to look for opportunities in small- and mid-cap sectors.
Historically, cycles of small-cap outperformance follow periods of large-cap dominance. Analysts anticipate that small-cap companies could outperform their large-cap counterparts as earnings growth and long-term performance for these smaller firms is expected to accelerate by 2025. Active managers are focusing on profitable small-cap companies with valuation opportunities within the Russell 2000 Index.
“If you look at cycles of small-cap outperformance, they tend to last long periods of time,” said Miletti.
Emerging Markets Could Surprise
“With the new administration it’s easy to point fingers and say negative things about the emerging markets, said Miletti. “Tariffs are a real thing. Growth rates have accelerated in China, and that’s a big factor in the emerging markets space. Geopolitical risks are also real there.”
She said that the valuation of the MSCI Emerging Markets Index is at trough levels relative to the S&P 500 Index. She added in 2016, when President-elect Trump first won the White House, emerging markets were hit pretty hard with the same fears, including tariffs. But the next year, 2017, emerging markets were the best performing market.
“Expectations are low,” said Miletti, “but sometimes that’s an area that really does surprise.”