2025: The Market Rundown
Walking Through Different Markets, Sectors & Commodities For 2025
Over the last couple weeks I wrote about several big picture topics that are worth keeping an eye on this year. 2025 is already off to a chaotic start, in financial markets and otherwise. Today, I’m going to bounce around different spots of the financial markets that I will be watching this year. There are going to be a lot of moving pieces with Trump being inaugurated next week, and the moving pieces won’t stop after Trump is in office. Overall, there are a lot of questions that I have that should get answered in 2025.
How broad are tariffs going to be? Are we going to target China? Europe? What happens if Trump pulls the US out of NATO? The WHO? The UN? Is the US going to buy Greenland? Or annex a piece of Canada? Is artificial intelligence the holy grail, the next evolution of the internet? Or is it artificial, and not all that intelligent? Is inflation dead, and the CPI on its way to two percent, or was last year the calm before the storm? Is the secular bear market in bonds set to resume? Is the Permian Basin about to roll over? Or will Scott Bessent’s 3-3-3 plan be able to increase US oil production? Is the commodities cycle on hold, or is never going to come?
Those are all questions that have been floating around my brain for the last month, but I think we are going to get some fireworks this year in financial markets. There will be trends moving forward, but I think it’s wise to avoid extrapolating trends indefinitely into the future. I said last week that we live in interesting times, and we certainly have interesting financial markets to go with it. I have started to change my thinking on how markets work over the last year, but it comes back to one main question:
Where is money going to flow?
This part is up for debate, but if I invert and work backwards, I think there are several places to avoid. At the top of the list is long bonds. I don’t have any issue owning short term debt (1-2 years), but I still think we are in a secular bear market for bonds. I just see owning long bonds right now as trying to pick up pennies in front of a steamroller. It might work out as a short term trade if we see more rate cuts in 2025, but it hasn’t worked so far. We have had 100 basis points of rate cuts since September, and TLT 0.00%↑ is down roughly 15% since then. We could be due for a short-term bounce from what I have seen on sentiment, but I think the move in bonds since the start of rate cuts should at least be a warning.
A couple sharp people I have talked to have pointed out that we are a couple rate cuts away from an upward sloping yield curve if long bonds stay put, but my bias is that long-term interest rates are headed higher over the next several years. Consensus is that we have at least a couple more rate cuts coming this year, but it will be interesting to see how that plays out as 2025 develops. I think inflation might rear its ugly head in 2025, and with the current debt levels and the deficit, I have a hard time getting excited about bonds right now. I will say that I would much rather own US debt than anything in Europe, but I will spend some more time on Europe later.
Stocks
I said last year that the valuations were unattractive, but the passive money flows overpowered that in 2024. While the valuations have me skeptical that the gravy train will continue in 2025, it’s hard to be bearish for two main reasons. The first is the passive investing cycle, which keeps money flowing into the S&P 500 SPY 0.00%↑ and Nasdaq 100 QQQ 0.00%↑, even if it is extremely concentrated in large cap tech names. The second reason is that I think capital from overseas will continue to flow into the US, which is one of the reasons that I’m bearish on Europe.
I do think we could get a chunky selloff in indices, but as long as passive money keeps flowing and more international capital keeps coming into the US, we will see if markets rebound. I have a hard time getting bullish due to valuations, but I’m pretty much neutral on broader stocks at this point. I do want to zero in on a couple sectors and geographic themes because I think we will start to see a narrative shift on several fronts in 2025.
AI Capital Cycle, Quantum Computing & Bitcoin
I think we are going to start to see some cracks in the Artificial Intelligence narrative in 2025. The tech giants are spending money as fast as possible to develop data centers and AI, investors are busy hunting AI beneficiaries, and I keep hearing about a potential productivity miracle. This is one place where I see people taking trends and extrapolating them out into the distant future, which is usually a good reason to have at least a little bit of skepticism. I do wonder what the long term impact on a company like Google GOOG 0.00%↑ is. They have had the search engine cash cow for well over a decade, and language learning models could spell trouble for their golden goose over the next several years. That’s not a 2025 prediction, but something worth watching as things develop.
In all seriousness, I still haven’t heard a compelling argument on what is going to be the end result of the massive spending going into AI / data center buildout. Yes, it can process data quickly, but what is the end result if the data fed into LLMs has biases or if the data is garbage? I would have loved to have AI write essays on some of the boring books in my high school English classes (Great Expectations and Pride and Prejudice are at the top of that list), but I’m in the wait and see camp on the actual impact of AI and LLMs.
Part of my skepticism on AI is on the philosophical side. I’m not sure that anyone is going to be able to put a divine spark (or whatever term you want to use) into a machine, and we end up with artificial general intelligence that is similar to the way a human brain functions. I’m also skeptical because I wonder how much is already priced into the market when it comes to AI. The other question I have is this: are we just going to have an infinite boom in computers, AI, processing? There will definitely be winners and losers from AI / Language Learning Models, but are we going to shovel money into the computational economy indefinitely? What does it actually produce? Is it profitable for the companies involved, or just the picks and shovels plays like Nvidia NVDA 0.00%↑?
Microsoft announced their CAPEX budget for 2025 is going to be 80B. That’s up from roughly 45B in 2024 and it’s going to be predominantly geared towards AI, data center buildout…. That’s the combined CAPEX next year for Chevron, Shell, Exxon and Total.
Bearish On Europe
I said in my post last week that I think the EU is probably going to collapse by 2030. An argument can be made that we are already seeing cracks, but I have also seen people talking about how cheap European stocks are. At this stage, I have a hard time getting bullish on European stocks or bonds. It turns out that importing the third world, de-industrializing, over regulation, and climate change insanity is not a recipe for a strong currency or a strong economy. Add in the potential for tariffs from the US this year (Europe could be the biggest loser from from US tariffs in my opinion), and I just don’t see a good reason to own assets in Europe.
A strong dollar and higher oil prices could spell serious trouble for Europe, but I have heard several people make compelling cases that the dollar (DXY) will end 2025 at a lower level than it is today. I can also see the dollar going higher with all of the uncertainty in the world. Bond yields have been headed higher across the West (while Chinese bond yields have been headed lower), but I think money will continue to flow out of Europe and into the US over the next couple years. I’m still long-term bearish on the Euro and the Pound, which make up roughly 2/3 of the DXY, but there are going to be so many moving pieces with the Trump administration, tariffs, and a variety of other factors that make it hard to get a read on that front over the next several months.
The most interesting geopolitical puzzle piece to watch in my opinion will be Europe’s access to cheap energy. After the recent regime change in Syria, there have been rumblings of a pipeline from Qatar to Turkey, but Europe’s reliance on LNG after the sabotage of the Nord Stream pipeline has been an issue, especially for the manufacturing sector in Germany. The pipeline from the Middle East is just speculation for now, but the other potential solution is a resolution in Ukraine that allows gas to start flowing from Russia into Europe again.
Bullish On South America
On the other hand, I think there are a bunch of opportunities in South America right now. I will be writing about one in particular next week that is basically trading near the same price it was during the COVID panic with a double digit yield, but countries like Argentina, Brazil, and Colombia have several interesting opportunities. I’m still kicking myself for passing on YPF 0.00%↑ around $9-10 when I was looking at it along with companies like Petrobras PBR 0.00%↑ and Ecopetrol EC 0.00%↑ a couple years ago.
One of the reasons that I think South America will be an interesting pond to fish in is the potential for political changes. Milei has been in power in Argentina for just over a year, and I think we could see Lula in Brazil and Petro in Colombia get replaced in the next couple years with more business friendly administrations. Some of these opportunities might be in companies focused oil, steel, iron, or even financials, but I think we could see things line up for a move in several commodities as well
The Brazilian real for example is at 25 year lows, and I know a couple sharp guys that are starting to get bullish on Brazil. If you get a weaker dollar and some help from the underlying commodity, I wouldn’t be surprised to see huge returns in some of the South American stocks. A lot of the valuations are extremely cheap, and it wouldn’t take much as far as financial flows to get things moving. Investments in South America do come with some political risk, but I think it’s an interesting pond to fish in for 2025.
Commodities
I still think the commodities cycle is coming, and I still think it’s going to sneak up on a lot of investors. I think inflation will also sneak up on people, but oil prices will play a part on that front. I have started to revise my thinking in some ways, but I think for the most part, commodities are going higher in dollar terms between now and the end of the decade. Instead of a bull cycle driven by broad demand for all commodities, I’m starting to think that we could see price moves driven by supply shortages in specific commodities. I’m not married to this view, but I am watching several different commodities and sectors for 2025.
Oil: Is 2025 The Year?
Am I bullish on oil, so I think shale production in the Permian Basin is going to roll over? Or do I think shale production the Permian Basin is rolling over, so I’m bullish on oil?
This is the question I have been asking myself for the better part of the last three months. Sentiment on oil was completely bombed out in the fall, financial market positioning was more short than it was during COVID lows, and the gold to oil ratio (admittedly not a timing tool) was at all time lows outside of oil going negative in 2020. I even saw recently that Asset Managers were short and Dealers were long when it came to energy.
Oil is up roughly $10 a barrel in less than a month so it’s probably time to cool off a bit, but I have a bunch of questions. What is the impact of sanctions on Russian oil companies along with tankers and the so-called dark fleet? Is Trump going to tariff oil imported from Canada? How much spare capacity does OPEC actually have? Is the Permian rolling over? The answer to the last question is far more important than any of the other ones in my opinion, but I think we will start to find out this year.
Today, 60-70% of all shale production comes from wells less than three years old, making production trends highly sensitive to changes in new well productivity. Yet the remaining undrilled locations are, on average, 35% less productive than wells drilled in 2023, primarily due to inferior geology. This degradation is not easily remedied.
Should higher prices or deregulation spur drilling activity, the likely outcome would be plummeting productivity, much as occurred in the 1970s. Despite increased drilling, total production would struggle to grow, constrained by the quality of remaining inventory and the relentless pace of depletion.
Some think it’s a geological issue for the Permian Basin, others think that it’s not an issue at all. That’s part of why I’m so excited about several upcoming podcast guests, but I think that 2025 will be the year oil starts to play catch up with gold. People have also started to talk about earthquakes and water issues in the Permian, but there are so many moving pieces with oil right now. I think if the Permian is starting to rollover and demand continues to hold up, it will put the supply glut narrative to bed pretty quickly.
Scott Bessent has a 3-3-3 plan that was to increase US production by 3M barrels a day, but that was quickly (and quietly) changed to 3M barrels of oil equivalent. I am skeptical that the US has another 3M barrels without opening up California or another new basin, but we will find out if existing fields can ramp production in 2025. Before I move on from oil, I wanted to highlight the Canadian Oil Sands as another sector to watch for oil bulls.
Canadian Oil Sands: To Tariff Or Not To Tariff?
I haven’t made it any secret that I’m very bullish on Sable Offshore SOC 0.00%↑ in California, and I think that stock starts flying as soon as they get to first production. I’m also a bull on several names in offshore oil services. They would obviously benefit from booming oil prices, but I think Canada also has several opportunities for investors that are expecting some political changes up north. They’re also interesting if you want to prioritize long-lived assets. The wildcard is what happens with the proposed 25% tariff on all imports coming from Canada.
I find it unlikely that the heavy oil we need to feed US refineries gets a 25% tariff, but it’s not a 0% probability. I think it is probably prudent to wait a little bit to see what happens, especially when you have the Premier of Alberta, Danielle Smith, warning that tariffs are coming with no exceptions for oil. The joke for people that know the ins and outs of Canadian oil sands is to just buy Canadian Natural Resources CNQ 0.00%↑ and forget about it. I also know some people that are bullish on Suncor Energy SU 0.00%↑, as well as some of the smaller oil sands names. I’ll be waiting for now, but I think we might see some very attractive opportunities in Canada pop up this year for investors.
Natural Gas & LNG: Bullish With Questions
This is another place where I think investors are extrapolating current trends indefinitely into the future. I’m leaning bullish on natural gas, but I have questions about the AI & Data Center power demand that is expected to boom over the next several years. I do think some of the equities are interesting, but I haven’t found anything that really caught my eye. On the LNG front, I think investors will have decent returns from the sector, but I have a couple questions that make me hesitant to actually buy any of the LNG infrastructure names.
This report on LNG will be food for thought for investors interested in LNG, but I wonder what the returns will be on the investment boom going on now in the sector. I just don’t know if LNG will be able to compete with pipeline gas over a long time period. Is any economy going to be able to compete using more expensive LNG, which needs to be shipped all over the world, and loses volume in transit, between facilities that cost billions to build? The other hypothetical question I have is related to the geopolitical state of the world.
If Ukraine doesn’t start to wind down, and things go the other way and actually escalate with Russia for example, wouldn’t the LNG terminals be a high value target? If NATO gets involved directly, and Russia wants to hit Europe’s economy, wouldn’t LNG terminals be near the top of the target list? It’s just a hypothetical and it’s highly unlikely, but something I have thought about when it comes to LNG.
Precious Metals: A Repeat For 2025?
Gold and silver both had very good years in 2024, and I wouldn’t be surprised if 2025 is another solid year. I still think gold is headed much higher over the next couple years, and I wouldn’t be surprised if we see $3,000 and then some this year. Like gold, I think silver is on its way to all time highs in the next couple years, but probably not this year. $40 isn’t out of the question, but we will have to wait and see how that plays out. I do think some of the miners are interesting, but I have avoided them for a couple reasons.
The miners are usually crappy businesses, and they are basically a long gold or silver, short oil position in a stock, and they only seem to work for six months at a time. I do think the miners should have a solid 2025, but I’m watching from the cheap seats. The precious metal that I’m most bullish on is platinum, but that might take longer to play out than 2025. Eventually platinum prices are going way higher in my opinion, and if I were buying physical metals today, platinum would be at the top of the list. I own relatively small amounts of all three precious metals, but that’s my only position in the precious metals for now.
Other Commodities On The Watchlist
Coal is another commodity that I’m generally bullish on for the next several years, but I think it makes sense to be picky in that sector. I will be looking to add to one name in particular at some point in 2025, but I think coal stocks will be somewhat similar to tobacco stocks from two decades ago. Copper is one that I’m more neutral on because I have questions on how much electrification demand will impact things. I understand the long-term supply deficits, but I haven’t found any equities that stood out to me. Uranium is another one where I’m neutral for now. Like copper, I understand the long-term story, but I would have a hard time owning anything but the Sprott Physical Uranium Trust if I was a buyer.
There are several other spots that I’m watching, especially depending on what happens with tariffs. At the top of that list are steel companies based in the US, or with a significant chunk of their operations in the US. The US Steel X 0.00%↑ merger has been an interesting story to follow, but there are other names that look cheap. I’m not sure if a steel cycle is imminent, but I think there is a margin of safety in several steel companies. I’m also curious to see what happens with lumber, agriculture, and fertilizers, but to be perfectly honest, that’s outside my wheelhouse, at least for now.
Conclusion
I’ll be back next week with a writeup on one of the stocks at the top of my watchlist, but I wanted to write up a summary on what I’m seeing in the market and where I think money might flow this year. If you made it this far, the TLDR summary is that I think it would be wise to avoid long-term bonds and Europe, and focus on digging into opportunities in South America. If a California oil company like Sable is too much hair, the Canadian oil sands producers are interesting, but I would wait for some clarity on tariffs. There are several other companies and commodities on the watchlist, but I think 2025 is set up to be an interesting year in the world and in financial markets. Trump coming in could create some volatility in markets and commodities, and I think there will be buying opportunities for investors paying attention.
Ben any reason why Borr is tanking this am ??
Great writeup on 2025.