1. Gold’s Historic Rally: What’s Driving Prices Higher?
Gold has surged 12% year-to-date, approaching the $3,000 per troy ounce mark. This follows an impressive 25.3% increase in 2024, outpacing the S&P 500’s total return. Despite modest growth in overall demand over the last five years, central banks have emerged as the dominant buyers, increasing their gold purchases by 11.5% annually since 2019. The accumulation trend accelerated after Russia’s foreign assets were frozen in 2022, as central banks sought to diversify reserves and hedge against geopolitical risks. Unlike private investors, central banks are price-insensitive buyers, continuing to acquire gold at record highs.
For private investors, the calculus is different. Gold offers no yield, making its opportunity cost higher in today's elevated rate environment. While it serves as a crisis hedge, it has not been a long-term source of alpha, delivering roughly half the returns of a traditional 60/40 portfolio with 50% more volatility since 1988. Investors seeking diversification now have superior alternatives, such as infrastructure and transportation assets, which offer both risk reduction and yield—something gold inherently lacks.
Key Takeaway: Gold's rally is primarily driven by central bank purchases rather than private investor demand. While it remains a geopolitical hedge, its high volatility and lack of yield make it a less attractive long-term asset.
2. Mega-Cap Tech Stocks Are Losing Momentum in 2025
After leading market gains in 2024, mega-cap technology stocks have had a mixed performance this year. Only two of the seven “Magnificent 7” stocks (AAPL, AMZN, GOOGL, META, MSFT, NVDA, TSLA) have outperformed the S&P 500 in 2025, with the group underperforming most other asset classes. While valuations are not as extreme as the 1999 Tech Bubble, concerns remain about stretched prices and exposure to trade uncertainties, particularly in semiconductors and hardware.
Earnings growth in 2025 is expected to be more balanced across sectors, with financials, energy, and healthcare outperforming technology and consumer discretionary stocks. With 10 of the 11 S&P 500 sectors in positive territory this year, the broadening of market leadership suggests a shift in investor sentiment.
Key Takeaway: Mega-cap tech stocks are facing valuation pressures and trade risks. Investors should consider diversifying across sectors as market leadership expands beyond tech.
3. Treasury Yields Stabilize After Sharp Rise
The U.S. 10-year Treasury yield jumped from 3.6% to 4.8% between September 2024 and early January 2025, driven by strong economic data and inflation uncertainty. However, yields have since stabilized at around 4.5%, as inflation expectations moderate and concerns over economic growth resurface.
Upcoming personal consumption expenditures (PCE) inflation data is expected to show a slight decline from 2.6% to 2.5%, reinforcing the view that inflation is gradually cooling. Additionally, potential spending cuts by the new administration and weaker-than-expected retail sales have contributed to more stable yields. If economic growth slows further, the Federal Reserve may consider rate cuts later this year.
Key Takeaway: Treasury yields have stabilized as inflation moderates and economic concerns emerge. If growth slows, the Fed may revisit rate cuts, benefiting both stocks and bonds.
4. European Stocks Outperform U.S. Markets
European equities have outpaced global markets in early 2025, with the EuroStoxx 50 up 13%, compared to the S&P 500’s 4% gain. This marks a reversal from last year’s underperformance and has been fueled by a weaker U.S. dollar, positive economic surprises in the Eurozone, and discussions of a potential resolution to the Russia-Ukraine war.
While these factors have driven short-term gains, sustainability remains uncertain. With upcoming elections in Germany and expectations for increased fiscal spending, European markets could see further support. However, given the region's historical growth challenges, long-term outperformance remains questionable.
Key Takeaway: European equities have started the year strong due to currency shifts and economic optimism, but sustaining this outperformance will depend on broader structural improvements.
5. Portfolio Diversification Remains Critical
So far in 2025, three key market trends have emerged: (1) a broadening of stock market leadership beyond mega-cap tech, (2) stabilization in government bond yields, and (3) strong early performance from European equities. These developments highlight the importance of diversification. Investors should maintain balanced exposure across asset classes, sectors, and regions to navigate an evolving market landscape.
After two strong years of low volatility, markets may experience increased fluctuations. While we do not foresee an imminent downturn or Federal Reserve rate hikes, corrections could present opportunities for investors to rebalance and strengthen their portfolios.
Key Takeaway: A diversified approach remains essential as markets adjust to shifting leadership, interest rate trends, and global equity dynamics.
Looking ahead: Market focus will turn to the upcoming PCE inflation report and Fed commentary, which may shape expectations for rate policy in the coming months.
