Top 3 Investment Themes to Watch for in 2025

Key Points

• These are the main themes taking over the markets in 2025, ones that investors should consider when aligning their portfolios.
• From value and energy stocks to Chinese stocks, one common theme drives this shift.
• Wall Street analysts are on the same page when it comes to this thesis.

Now that 2024 is coming to an end, it is easy for investors to sit back and look over the past 12 months and the gains they have made. However, getting too comfortable in the stock market typically leads to losing track of the game just when investors need to be the most focused. Starting 2025 on the right foot is essential, as having a profitable first quarter can give investors the confidence they need to take on more of their ideas.

For this reason, investors need to become aware of the main themes that could dominate the entire market during 2025 to align their portfolios in the right direction. These themes comprise fundamental and technical trends, all leading investors to three market areas that might deliver outsized returns.

Starting with value stocks, this is where the relationship between the iShares S&P 500 Value ETF NYSEARCA: IVE and the iShares S&P 500 Growth ETF NYSEARCA: IVW comes into play, which might call for a rally in value stocks soon. Then, as the economy heats back on interest rate cuts, the energy sector will be one to keep an eye on through the Energy Select Sector SPDR Fund NYSEARCA: XLE. Lastly, when all of these themes play out, overseas Chinese stocks like Alibaba Group NYSE: BABA and the iShares MSCI China ETF NASDAQ: MCHI.

Value Stocks Will Take Over in 2025

When investors look at the spreads between value and growth stocks over the past five years, it becomes evident that value stocks are at a cyclical low compared to growth stocks, and that typically has to do with the business cycle. As the cycle resets itself, consider how the Federal Reserve (the Fed) has begun its interest rate-cutting cycle again.

However, interest rate cuts usually come into play when the economy is not doing well, and the Fed's admittance creates a level of uncertainty that could lead to market volatility. This volatility will drive capital to safer stocks, like the biggest brands in their respective industries.

This article includes a list of value stocks, including discounted value plays like PepsiCo Inc. NASDAQ: PEP, Nike Inc. NYSE: NKE, and even ASML Holdings NASDAQ: ASML. Aligning portfolios with this view might make it worth their while in the coming months of 2025.

If investing in individual stocks seems daunting for some, then tracking the broader value ETF might be a better way to find alpha in the stock market for the coming quarters.

A Buffett View Is Always a Good View

There’s a reason why Warren Buffett decided to buy up to 29% of Occidental Petroleum Co. NYSE: OXY throughout the year: He knows that the sector's risk-to-reward ratios are the best. As the economy picks back up on these new interest rate cuts, several industries will create more oil demand to help these stocks take off again.

The relationships described between growth and value stocks have always been mirror images of oil prices. As value underperforms growth, low oil prices accommodate easier and more flexible business environments.

The opposite is true: as value starts to outperform, it is typically due to high oil prices that make large-cap stocks with economies of scale more attractive, as they can more easily diversify away costs through international operations and exposure. This is why Wall Street analysts see so much upside in stocks like Transocean Ltd. NYSE: RIG, being at the top of the oil value chain commands a consensus $6.25 price target, or 77% upside from today’s stock price.

In case investors haven’t realized it yet, there is a common theme in the way that energy stocks and value stocks could outperform in 2025, and that’s a lower dollar index. A lower dollar will also help a completely different set of stocks in 2025, across the world this time.

It’s Time for Chinese Stocks

A lower dollar will raise the price of any stock or commodity quoted in dollars, which is why the bullish themes behind value and oil stocks will directly favor Chinese stocks. A lower dollar has historically been the catalyst for stocks like Alibaba and the broader China ETF.

This time around, though, other major players in the Chinese economy could also take off, such as Nio Inc. NYSE: NIO and PDD Holdings Inc. NASDAQ: PDD, which could fall into the value category for China’s stock market.

Knowing this, it shouldn’t come as a surprise to see analysts from Barclays reiterated an overweight rating for Alibaba stock as of November 2024, placing a $130 a share price target to call for up to 52% upside from where the stock trades today.