Is it just me or has the late Thanksgiving given this holiday season a frenzied feel? I’m trying to figure out how to attend all the year-end meetings, retirement parties, and Mingles & Jingles while not missing my kids performing Rockin’ Around the Christmas Tree on their violins and cellos. Meanwhile, my email inbox is overflowing with 2025 investment outlooks.
Naturally, Morningstar’s 2025 Outlook was first on my reading list. It’s not that I think my colleagues possess an especially high-powered crystal ball. But I do think their long-term, valuation-driven approach is sensible. And I like how they combine security-level work with top-down expected return estimates.
Here are three contrarian investment ideas I took from the Morningstar’s 2025 Outlook:
Go Global
US investors can be forgiven for rolling their eyes at the mention of foreign stocks. The Morningstar US Market Index, a broad gauge of equities, is up nearly 30% in 2024, trouncing the Morningstar Global Markets ex-US Index’s return in dollar terms. Over the past 15 years, US stocks have averaged an annual gain of 14%, while their overseas counterparts have returned just 6% from the perspective of an unhedged American investor. At many points over that span, observers have noted better value abroad. Yet, US equities have continued to win. Artificial intelligence, postelection clarity, and economic strength are the latest drivers. But US stocks have disproportionately reaped the rewards of innovation for years now.
“The US market appears expensive,” says the Morningstar’s 2025 Outlook. To put a number on it, Morningstar equity research sees US stocks as roughly 7% overvalued as of mid-December when the stock level price to fair value estimates are aggregated to the market level. Unlike some other valuation signals, this one does not perpetually flash red. Since 2010, the US market has traded at a premium of 5% or more less than 10% of the time. I remember the team’s prescient call going into 2022 that stocks were overvalued.
So, where in the world are my colleagues seeing more upside? “Europe, especially the UK, is the most attractive of all the developed markets,” according to the outlook. Within emerging markets, “China faces structural challenges but offers good value,” and opportunities within Latin American equities are also identified. Whether targeted through an international equities fund or a basket of international stocks, there are great companies across the globe, many of which derive significant revenues from the US. Currency diversification is another important benefit. The dollar has been on a long run of strength that could lose steam.