2025 THEMATIC OUTLOOK

• MODEST RATE CUTS COULD SUPPORT SENSITIVE ASSETS: Recent U.S. Federal Reserve rate cuts could start to take pressure off interest rate sensitive companies and non-cash-flowing¹ assets. This presents potential tailwinds for biotech stocks, bitcoin, and gold. 
• REBUILDING THE U.S. PHYSICAL ECONOMY: Themes centered around rebuilding the physical economy, like infrastructure, manufacturing, and homebuilding may be better poised to benefit in the post-U.S. election environment, as they sit at the intersection of policy tailwinds and structural changes.
• AI’S BUILD PHASE ACCELERATES: Massive investment in AI infrastructure as well as ever more powerful chips and models, are laying the groundwork for increased adoption.

From March 2022 to September 2024, the U.S. markets entered a period of quickly rising and elevated interest rates, bringing the federal funds rate to its highest levels since 2001². This environment punished rate-sensitive investments on two fronts:

1. Companies with long paths to profitability saw valuations contract given higher discount rates, and;
2. Firms dependent on floating rate debt or that had to roll over maturing debt were hurt by higher financing costs

Additionally, non-cash-flowing assets like bitcoin and gold faced pressure from rising opportunity costs compared to holding interest-paying assets like bonds. Now these headwinds could abate; The U.S. Federal Reserve (Fed) has cut rates by 75 basis points³ as of November 2024, and while rates may not return to pre-pandemic levels, a path of additional modest rate cuts is anticipated by the market for 2025.⁴

Rebuilding the physical economy in the U.S.- including improving and repairing infrastructure, expanding manufacturing capacity, and accelerating homebuilding - has become a topic of increasing consensus across both the public and private sectors. We believe spending and policy changes will continue to accelerate this theme.

It has been just two years since the release of ChatGPT in November 2022, which ignited the generative AI revolution. Surging AI optimism, since then, including estimations of up to $15.4 trillion⁵ for the total annual value of AI and analytics across industries, has catalyzed massive investment in AI infrastructure in an arms race among hyperscalers. It is our belief that AI’s continued infrastructure buildout, along with hardware and model upgrades, will drive ever more powerful AI tools in the years ahead. Secondary impacts of AI’s rise, including AI-politics and cybersecurity, may become increasingly relevant.

Thematic narratives drove markets in 2024 and could continue to do so in 2025 - though the landscape has shifted meaningfully. With falling rates, public policy tailwinds, and AI’s infrastructure buildout, there are select thematic opportunities for investors to potentially capture as they look to position their portfolios. In the new year, investors should consider what exposure they have to these themes and how they may position their portfolios for these structural trends.