Today we’ll talk about Morgan Stanley’s picks for biggest market debates for 2025, which include “diabesity” and Canadian rail stocks. Meanwhile, Wells Fargo covers the “what could go wrong for markets?” without turning bearish.
Apple has brought its suite of artificial intelligence-based tools to Canada. Customers shop at the Apple Store on 5th Ave. in New York on Friday, September 20, 2024.Ted Shaffrey/The Associated Press
Equities
The important debates to have in 2025
Thirty analysts and strategists at Morgan Stanley published a list of the biggest, most important debates for investors looking to outperform in 2025. Some, like “diabesity” and “AI tech diffusion”, offer significant opportunities for Canadian investors. Others, like growth in U.S. alternative asset managers, are largely none of our business.
Morgan Stanley analysts believe that Edge AI – independent AI software running independently on devices ranging from smartphones to refrigerators - will be the next lucrative theme in technology. Apple Inc. will release Apple Intelligence on devices globally before the launch of iPhone 17 in September and an enhanced version of Siri in the first quarter of 2025. Stocks benefitting from Edge AI are Alphabet Inc., Apple Inc., Dell Technologies Inc., Samsung Electronics, Atlassian Corp. PLC and Xiaomi.
Diabesity is a made-up word covering the family of drug treatments like Ozempic that were developed for diabetes but found success as weight loss drugs. Analyst Terence Flynn believes diabesity is “set to become among the largest pharma categories in history.” The big debate surrounds the efficacy of new drugs like Eli Lilly’s Orforglipron that are taken orally, not injected.
Mr. Flynn believes oral drugs will be necessary to address current shortages of injectable treatments. Stocks involved with this overall theme include Eli Lilly and Co., Pfizer Inc., Structure Therapeutics Inc. and Viking Therapeutics Inc.
One of the major themes in the report is “The Evolving Consumer”. I don’t even want to cover this – my experience is that consumer behaviour is too fickle to predict or sustainably dependable when visible. For those that disagree with me, the debate surrounded Alaska Air Group Inc., Delta Airlines Inc., Starbucks Corp., Home Depot Inc. and DraftKings Inc.
Another debate for 2025 is the extent to which the new president murders the alternative energy industry. Analyst Andrew Percoco believes a repeal of president Joe Biden’s IRA bill, which includes incentives for clean energy, is unlikely.
The end of 2017’s Tax Cut and Jobs Act is more likely, which threatens electric vehicle and offshore wind subsidies. Mr. Percoco adds, however, that tax credits for nuclear and solar power development enjoy bipartisan support. Potential opportunities here include First Solar Inc., Fluence Energy Inc., Enphase Energy Inc. and GE Vernova.
The report included a few options for market rotation in case market leadership expands further out of technology. These include oncology (BeiGene Ltd.), freight transportation (both major Canadian railways are included as favoured here), health facilities (Ardent Health Partners, Humana Inc., Elevance Health Inc.) and media and entertainment (AMC Networks Inc., Netflix Inc., Warner Brothers Discovery Inc.).
So what interests me most? If AI penetration starts to move software stocks like Atlassian and UiPath that would get my attention because the total addressable market is gigantic. (Any position I buy might be a rent rather than a buy). Successful trials for oral obesity treatments would be big for similar reasons. An accelerating U.S. economy would make any inexpensive freight stock interesting.
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Outlook 2025
Mind these risks
Wells Fargo head of equity strategy Christopher Harvey is bullish on U.S. markets for 2025, forecasting a 7007 target for the S&P 500 that is roughly 15 per cent higher than current levels. Nonetheless, he recently completed the useful exercise of identifying the biggest risks to the rally next year.
The first risk is sticky inflation pressure and higher-than-expected bond yields. U.S. CPI less food and energy has already fallen from 6.6 per cent in 2022 to 3.3 per cent but the final move to the Fed target of 2.0 per cent could prove difficult. Higher longer-term bond yields could stifle a risk-on market backdrop.
Risk two is the obvious one – high valuations. The index has rarely started a year with a forward PE ratio above 22 and ended with a higher one. The last time was 1999 and the following year was unpleasant.
Mr. Harvey is also concerned that management guidance will disappoint optimistic analyst and investor expectations, causing volatility and that’s risk number three. Geopolitics, including potential Chinese aggression in Taiwan, is risk number four.
Risk number five is government litigation focused on megacap technology stocks. Meta Platforms, for example, is set to slug it out with the Federal Trade Commission over a ruling demanding the spinoff of Instagram.
Being aware of the risks is different from being bearish. It allows investors to more quickly identify the reasons for market volatility.
Diversions
Holiday viewing
Two of my favourite podcasts – The Watch and Prestige TV – combined to provide a holiday TV binge guide. The hosts pick the best shows for all ages and to a great extent it amounts to a best tv of 2024 guide.
The essentials
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Globe Investor highlights
Optimists often say don’t worry about bubbles. But if you’re close to retirement, that’s not great advice, says Ian McGugan
With the Bank of Canada cutting rates further, Rob Carrick points out that the case for cash in your investing account is quickly unraveling. Meanwhile, Rob also suggests this one TFSA maintenance task to clean up before year’s end
Bank of Nova Scotia insiders have been snapping up shares after its latest earnings report, reports Ted Dixon
David Rosenberg’s latest missive clarifies that he’s still the stock market bear that he’s well known for - it’s just that the timing of a correction is a big unknown. He’s also back to being a bond bull.
Norman Rothery updates three versions of his Stable Dividend portfolio
What’s up next
CPI highlights the domestic calendar this week. The November month-over-month reading on Tuesday is expected to be flat, which translates into 1.9 per cent year over year. Retail sales for October, another important data point for its ability to measure domestic household financial strength, is out on the 20th and economists expect a 0.7 per cent increase month over month.
The Americans will report advance retail sales for November on Tuesday where a 0.4 per cent month-over-month gain ex-autos is predicted. Month-over-month industrial production for November is out the same day and 0.2 per cent is expected.
The big event is the FOMC meeting on interest rates on the 18th. Economists expect a 25 basis point cut to 4.50 per cent at the upper bound. Personal spending for November will be reported on the 20th – a month-over-month gain of 0.5 per cent for November is forecasted.
For U.S. earnings, FedEx Corp. might provide insight into the speed of economic growth on Thursday and Nike Inc. reports the same day. Carnival PLC reports Friday.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)