Client Update: Market Cycles, Mega Trends, and Investment Opportunities in 2025

Understanding where we are in the market cycle is key to making sound investment decisions. At Sound Financial Strategies Group, we take a cycle-based approach to investing because, as Clint Sorensen, our Chief Investment Strategist, often says, "Cycles are undefeated." This means that no matter how unpredictable markets may seem, history shows that economic cycles follow patterns. Recognizing these patterns allows us to identify opportunities while avoiding potential pitfalls.

Now that we are well into 2025, we are witnessing significant shifts in the economy. Political changes, economic policies, and global events are shaping the financial landscape in ways that require careful analysis. Some of these shifts were expected, while others have introduced new challenges. What matters now is how investors position themselves to take advantage of these trends.

The Three Mega Trends Shaping the Future

One of the most significant transformations underway is deglobalization. For decades, businesses leveraged globalization to manufacture products in the most efficient locations and ship them worldwide. However, this model is changing. Governments and corporations are pulling production closer to home, investing in domestic infrastructure, and prioritizing economic independence. This shift means manufacturing in the U.S. is on the rise, creating investment opportunities in industrial real estate and infrastructure development. At the same time, increased government focus on domestic production is leading to higher defense spending, greater investment in supply chain security, and stronger economic nationalism. The U.S. is uniquely positioned to benefit from these changes, thanks to its energy independence, agricultural strength, and control over the global financial system through the U.S. dollar.

Another transformative force is technological disruption. We are experiencing one of the greatest technological leaps in history, driven by artificial intelligence, automation, and data-driven advancements. These innovations are increasing productivity and reshaping industries. Businesses that leverage AI and automation are becoming more efficient and scalable, creating opportunities for investors to benefit from the rapid evolution of technology. AI is also shifting economic power toward individuals, making it easier for entrepreneurs and small businesses to compete with large corporations. Investing in companies that lead in cloud computing, AI development, and technological infrastructure will be crucial in the coming years.

The third major trend is the continued growth of debt. Government spending has reached historic levels, with the U.S. deficit increasing by 64% year over year in the first two months of the fiscal year. The Congressional Budget Office projects that debt-to-GDP will reach 172% by 2054—and that estimate does not account for potential recessions, wars, or new spending initiatives. Given this environment, the question is not whether the government will continue spending but rather where the money will go. Much of it is expected to flow into infrastructure projects, defense, and social programs. These sectors will likely see significant investment, creating opportunities for those who align their portfolios accordingly.

Short-Term Market Outlook: What to Expect in 2025

One of the most pressing issues this year is interest rates and Federal Reserve policy. Many expect the Fed to cut interest rates more than initially anticipated. Several factors support this outlook. Banks are facing increasing pressure due to rising commercial real estate defaults, and cutting rates would provide much-needed relief. Employment data, while appearing strong on the surface, shows underlying weakness that could prompt the Fed to adjust policy. Additionally, the strength of the U.S. dollar typically correlates with an increased likelihood of rate cuts. Lower interest rates would benefit real estate, infrastructure, and other interest-sensitive investments, making them areas to watch closely.

The real estate market, particularly commercial real estate, has experienced a downturn over the past few years. However, there are strong indications that the sector is at an inflection point, with new investment opportunities emerging. Industrial real estate is expected to see increased demand due to the onshoring of manufacturing. Companies are moving production closer to home, increasing the need for warehouses, logistics hubs, and manufacturing facilities. Historically, investing in real estate after a downturn has resulted in strong long-term returns, and current conditions suggest this pattern may hold true once again.

The stock market, meanwhile, remains highly concentrated in a handful of mega-cap companies. This level of concentration has rarely been seen before, with approximately 75% of the S&P 500’s weight concentrated in just ten companies. Historically, such conditions have led to shifts in market leadership, creating opportunities in areas that have been overlooked. Small-cap stocks, for example, are trading at a significant discount relative to large-cap stocks, positioning them for potential outperformance as market conditions evolve. Similarly, value stocks, which have struggled in recent years, may be poised for a resurgence. International markets also present compelling opportunities, as valuations outside the U.S. remain relatively attractive compared to domestic equities.

Where Should Investors Focus?

Given the market trends, real assets are likely to be a strong area for investment. Infrastructure projects will receive significant government backing, creating demand for materials, construction, and development. Industrial real estate, particularly properties tied to manufacturing and logistics, will benefit from shifting supply chain dynamics. Scarce resources such as energy and industrial metals are also expected to see strong demand, making commodities a sector worth considering.

Another key strategy is to follow the flow of money. With government spending driving economic activity, investors can benefit by aligning with sectors positioned to receive federal funding. U.S.-based companies that benefit from deglobalization and onshoring are well-positioned for long-term success. We believe technology and AI infrastructure will continue to play a critical role in shaping future productivity growth, making these areas attractive for investment.

When it comes to equities, we consider selectivity to be essential. Given the extreme concentration of market leadership, equal-weighted stock portfolios may offer a way to reduce risk and enhance diversification. Small-cap stocks and international equities are trading at more attractive valuations than many large-cap U.S. technology stocks, making them potential areas of opportunity. Value investing, which has been overshadowed by growth stocks in recent years, may also see a resurgence as market dynamics shift.

Final Thoughts: Patience & Strategy Win the Race

The investment landscape in 2025 presents both challenges and significant opportunities. While market conditions are evolving, it is our opinion that the key to success is staying patient, disciplined, and focused on long-term trends. Investors who position themselves strategically can take advantage of emerging opportunities in real estate, infrastructure, technology, and undervalued segments of the stock market.

At Sound Financial Strategies Group, we remain committed to helping our clients navigate these changes with confidence. Our goal is to ensure that your investments align with your long-term financial objectives, allowing you to benefit from market opportunities while managing risks effectively.

If you have any questions or want to discuss how these insights apply to your personal portfolio, we encourage you to reach out. We’re here to help you make informed financial decisions and position yourself for long-term success. Thank you for trusting us with your financial future.