Global Perspectives: The best sector opportunities in 2025

Lara Castleton: Hello and thank you for joining this episode of Global Perspectives, a podcast created to share insights from our investment professionals and the implications they have for investors. I’m your host for the day, Lara Castleton.

At Janus Henderson, we have a long history of deep, fundamental equity research. For over 90 years, our research analysts and portfolio managers have leveraged this bottom-up stock picking to find the best opportunities as markets continually change. Today, mega-cap concentration continues to dominate the market, and many investors are wondering if there are any opportunities outside of the top seven names.

That is why I’m so excited to be sitting here with Josh Cummings and John Jordan. They’re both Research Analysts and Portfolio Managers on our U.S. and Global Research Strategies at the firm. Today, we’re going to talk about some of the deep fundamental ideas through their research that they’re uncovering today. Gentlemen, thank you for both being here.

John Jordan: Thanks for having us.

Castleton: Josh, I want to go to you first, maybe level-set with the macro environment. So, obviously the S&P [500 Index] has been on a two-year bull run and is continuing to look strong as we are recording this, one week post the U.S. election. As you think about the valuations of where they are today versus the rest of the world, how are you thinking about the S&P valuations and opportunities going forward?

Joshua Cummings: Thank you for having me. I think, you know, we don’t spend a ton of time thinking about valuation from a top down or market perspective, but it is fair. It’s empirically true that forward P/E [price-to-earnings] multiples are historically high. I would also, though, say in a long-term context, interest rates are still historically on the low side. And, you know, fingers crossed, will keep falling.

I think what the market’s done real short term is obviously try to—it’s a discounting mechanism, right? So, it’s trying to price in a friendlier business environment. Maybe a friendlier corporate tax environment, whatever it may be, into the market post-election. And so, I think on a static basis, you know, that might be inflating what the actual P/E ratio is going to be, let’s say, if the market is right, indeed, about the prospects for maybe slightly more robust earnings growth in a [Donald] Trump administration. I don’t know, I don’t have a view. But I can appreciate why the market’s doing what it’s doing.

Castleton: Okay, and those earnings revisions are coming…they’re strong, earnings growth for 2025 looks good for right now?

Cummings: So far, so good. Typically, what happens is consensus starts the year at the high point and fades through the year. But we are looking for earnings growth again year over year. So, who knows what happens with consensus through the year. But we’re in a reasonably comfortable place relative to where we normally would be at this time of year, where analysts like us and market strategists, what have you, are estimating, I think, low double-digit earnings growth next year.

Castleton: Which is pretty strong. John, are you pretty confident in that as well going forward in 2025, the earnings growth backdrop?

Jordan: I think as Josh said it’s hard for us to comment on the overall market level. But our analysts are organized by seven global sector teams. Those sector teams work together, and we’re definitely finding good ideas across all of those sector teams where we think the outlook for earnings growth in 2025 and over the medium term is quite good. And so, yes, we’re still finding attractive opportunities.

Castleton: Both of you—your team is 35 research analysts—and you do take a global approach to investing. So, we’ve talked thus far about S&P, the strength behind the S&P. As you look forward to 2025, are there any patterns emerging with one region over the other in terms of opportunities?

Cummings: We’re still seeing a better earnings backdrop in the U.S. relative to Europe and Asia Pacific, for sure; still a better earnings backdrop for large caps versus small caps as well, which is another area that folks are hoping may normalize or reverse a little bit.

One country that we’ve certainly seen a bit of a change in over the past year-plus is Japan, where we’re seeing a little bit of what I would, I guess, I’d call corporate governance reform, a little bit more shareholder friendly behavior around balance sheets and so forth; returning capital. So, that’s one theme I would mention.

The obvious one is China. I wouldn’t espouse any particular insight there. Our team’s approach to investing in China—I’m speaking of consumer and communications—is really to do so through Western companies and Western brands that are exposed to China consumerism, if you will, over the long term. Again, around largely corporate governance concerns.

Castleton: What about you, John? Any other regions in focus?

Jordan: Yeah, I’d highlight one area that we found attractive opportunities [in] is European banks. That’s not necessarily a call on the European economy. It’s much more a call on those businesses having improved. Many of the banks in Europe have been on a 15-year restructuring, business-simplification, business-focus process. And they’ve emerged with solid and focused businesses; improving returns; significant excess capital, which they built over a long period of time. And they’re also benefiting from our world of non-zero interest rates. They can gather deposits from their customers at low cost. And so, even a world of just a couple percent interest rates makes a big difference for those. So, that’s one area where, you know, our bottom-up fundamental research is finding ideas.

Castleton: And that’s both two great examples of why maybe it is nice to have that global approach to be able to look at the entire world’s opportunity set. If we think about your process as well, you’re generally agnostic to sectors because you do manage to the indices; you don’t make sector bets. But I’d love to go into some of these specific sectors to find, again, where the best opportunities are within those. I think that’s a really unique part of your process.

So, Josh, let me go to you first. And AI [artificial intelligence], it’s just the biggest theme, I’m probably going to be talking about it forever…

Cummings: …can’t get away from it.

Castleton: So, where do you think we are in the technology’s evolution? How is it shaping up in terms of tangible investment opportunities in that sector?

Cummings: Well, number one, it’s early. It’s still early. This is going to be…AI is going to be a theme probably for the rest of your career in investments. I think we’re certainly in the build-out phase, right? Where, that’s why we’re seeing such strong demand for high-performance chips to sort of power the large language models that are being built and are in the process of learning and getting better.

What investors are still waiting for, I suppose, or have some concern about is how will the companies that are spending all this money for this compute power monetize that spend? They’ll have to do so through products, services, tools, apps, what have you. Many things we haven’t thought of yet. What I would say there is, again, I don’t have any special insight. Although, I would bet on these companies—the Metas, the Googles, the Microsofts of the world—to have no issue finding lots of applications for AI. That’s my bet. I think that’s been the right bet for a long time. We like innovative companies, and I don’t think any of that’s changed.

One thing I would say about AI, in terms of an analog to history, let’s say, if you look at the late ‘90s, which was sort of internet 1.0, the analog might be, you know, Nvidia chips versus fiber optic cable in 1998 or ’99, right? We were plumbing the world for the internet. This is sort of the next huge wave probably in computing. And if I think back to like ‘99/2000 and the companies that were getting all the headlines then, many of them proved to not be the companies that you wanted to invest in for the next 10 or 20 years, right? They were, you know, flash in the pans, if you will. I’m not necessarily saying that’s going to be the case today, but I’m certain that the companies that will benefit the most from AI, we’ve identified a few of them, I’m sure. There are many others that we’ve yet to identify, right? And we just don’t know.

What I’m also confident in is that AI overall is going to be bigger and more pervasive than anyone can conceive of today. And that’s a lot like the internet was in ‘98, ‘99. The internet turned out to be dramatically more impactful to the global economy and to everyone’s life than anyone could have imagined then, but it wasn’t necessarily the ticker symbols of the day that turned out to be the greatest investments. So, I think it’s going to play out in a similar manner, and that’s how we’re kind of framing our work.

Castleton: I think what you highlighted there, and it’s important to remember, is those top seven names, many of them are there for a reason for that AI trend.

Cummings: Absolutely, and a few of them were there in ’99, too.

Castleton: Quickly comment—is there anything else that gets you excited within technology outside of maybe specifically AI? Or is that kind of the biggest focus right now within that sector?

Cummings: I think our tech team is certainly very excited on the software side to see what comes of this from an application perspective. And really, we’re not quite there yet. But what I will say is, you know, there’s been a couple of, I guess, anecdotal data points in the last quarter or two from some of these companies. I would say even companies like Meta are speaking, you know, relatively favorably about how AI and machine learning overall is impacting their business—helping their business, helping profitability, productivity. Not quite the same as coming out with the next Instagram, if you will, you know, the next killer app. But I think it’s already having a positive impact. The companies are saying as much.

We just had a conversation about Google earlier today, and our analyst who covers Google made the point that something like 25% of the internal code that’s being written in any given day or week at Google is now being written by AI—25%. That was a meaningful number; that was higher than I would have guessed.

Castleton: Very important implications there, thank you for that.

Let me turn to a very different sector, financials. John, you already mentioned a little bit within European banks, liking that. But rates are starting to come down. At least here, domestically, we still have a strong economy. So, is this a good backdrop for financials, and where are you seeing the best opportunities there?

Jordan: I do think it is a good backdrop for a number of different financial businesses. And we’re finding a variety of opportunities, and we found those before the election. But I can talk about some of the implications of that, as well.

You know, one of the areas that we found opportunities is in the payments industry, where we’ve been able to find businesses that not only process electronic payments but can also add significant value around a transaction, whether that’s helping prevent fraud or adding information about, you know, who the buyer is and data and the like. So, that’s one area that we still see a long growth runway.

A second area that we found a lot of opportunity in is insurance. We’re going through a positive pricing cycle in property casualty insurance in the United States and parts of the rest of the world. And that’s a tailwind for those businesses, but we’ve also been able to find market share gainers within insurance, many of whom have technological and/or brand competitive advantages that they’re using to take share in what’s still a pretty fragmented market.

In terms of banks and lenders, we are finding opportunities…as you mentioned, interest rates are coming down some. Certainly, the Federal Funds rate has recently come down some, but we’re still at interest rates that are a positive for many banks, which still allows them to earn returns on their low-cost deposits.

Castleton: Not 0% anymore.

Jordan: That’s right. But I do think there’s the potential for an improving regulatory environment, which would help some banks and lenders. And I think even before the election, there was a sense that parts of the capital markets environment could be improving. Potentially the IPO [initial public offering] market; beginning to see more signs of M&A [merger and acquisition] activity; and commercial real estate began to see more transaction activity. And so, some of that’s already been starting over the last quarter or two. But there are potential signs that the election and some of the animal spirits from that—deregulation, etc.—might lead to more of that. And so, that could be quite a, quite a positive cycle just given some of those markets have been relatively depressed over the last couple of years.

Castleton: Great, thank you for that.

Josh, coming to you, I just want to ask you about energy, too. That’s one that’s in the headlines quite a bit. What’s your thought on oil, the global outlook for oil? Just what are you seeing in terms of the broad energy sector, the outlook for that sector going forward?

Cummings: I used to cover energy for a number of years. So, the whole predicting oil prices gives me gives me the willies. But that’s really what it’s about, for better or worse. If you get oil prices right, you tend to get the group right. And we have a fantastic energy analyst who who’s done just that. But, yeah, I would say, look, part of this is going to relate to Trump as well, right? You saw in the immediate aftermath of the election, you saw a lot of alternative energy, solar, clean energy, if you will, those stocks got rocked. They went a lot lower. Traditional energy went higher. Whether or not that’s ultimately the right interpretation, I don’t know.

But one thing is clear: Donald Trump is certainly a fan of domestic energy. And the fact remains that we’ve become energy independent in the last 20 years, which nobody would have thought was possible, particularly on the oil side. And here we sit, right? We’re essentially the largest oil producer in the world. If we put capital into it, we could become bigger than Saudi Arabia if we want it to be. The question is just, how much incentive is the Trump administration going to give to our domestic energy industry? Is it going to favor domestic energy over other sources? Because we should source globally if we’re putting on our pure economics hat, right? You don’t necessarily always want to just source domestically. So, we’ll see if there’s going to be a big change to the energy policy.

But I would say current energy…oil prices rather, excuse me… [are] low $70s somewhere for WTI [West Texas Intermediate]. That’s a very economic price. Certainly, for the E&P [exploration and production] companies, they can generate a lot of free cash flow at that price and reinvest it. And increasingly, what we’re finding is, the upstream energy companies—who historically, when oil prices rose, they would make more money [and] they would plow it right back into the ground—recently, in recent years, similar to the comment about Japan earlier, these companies are getting a little bit more religion, I suppose, around capital return. And so, the outlook in the energy space is pretty productive, I would say, at mid $70s-type oil prices. I think we’re going to see free cash flow and we’re going to see these companies buy back their stocks. So, we generally like the sector. We don’t try to predict oil prices. But what I would say is, as long as global GDP [gross domestic product] is comfortably positive, something in the $70s feels fundamentally supportable in oil.

Castleton: Great, I could probably spend forever talking about all the sectors and the outlooks. You have a unique strategy in that you only focus on seven versus the traditional 11 [GICS, or Global Industry Classification Standard, sectors]. You combine a couple.

But maybe we’ll just end, John, what’s one sector you choose that would be maybe a good representation of your fundamental research and expertise that you’d want to highlight.

Jordan: So, maybe I could highlight an example from our healthcare team. So, obviously incretins, GLP-1s, have been in the news a lot this year. But our research effort there goes back many years, including in early 2021. You know, one of our analysts identifying that as potentially a big, or the biggest, opportunity in healthcare. So, first of all, spotting the trend early, years before it’s on the front page of newspapers.

Secondly, is deep fundamental research. So, once we identified that potential trend, the healthcare team came at it from a number of different perspectives. They utilized their science expertise. We have three PhDs on that team who can help understand the science and how it might work and what the outcomes could be. We also leveraged…our team leveraged proprietary surveys. So, they talked to doctors about what was in the market, what could be in the market, what might they use? We leveraged the unique experience from one of our analysts who had worked in industry [and] understood the process to invest behind drugs like this to the extent they’re successful—how hard it may be to build capacity, how that may take years. So, really a broad perspective on the opportunity. And ultimately, that led to us investing meaningfully behind that idea, both directly, but, I think, importantly—and maybe this the last thing I’ll talk about—just the broad communication we have, not only across the healthcare team but across all our research analysts and investors. And so, part of that was thinking through, will this have an impact on health outcomes, usage of other procedures, usage of other tools? So, looking ahead early on for the healthcare team and thinking about that, demand for that. And then helping other teams think about, you know, will this impact parts of the consumer sector, will it impact food or beverage consumption, and the like.

Cummings: It was a really good example of cross-sector collaboration, I think. You know, our consumer staples analyst who covers a lot of companies that make food that’s bad for you—sweets, snacks, salty and sweet—you know, immediately started partnering with our healthcare team, getting our arms around the numbers, running different sensitivities around adoption rates. And, you know, what we still don’t know, really is, is sort of when do people drop off these and then what’s the recidivism rate? We’re still pretty early in that, you know, understanding what that population curve and the usage is going to look like structurally over time. But our team jumped into action and did a lot of work early, and it allowed us actually on the consumer team to take advantage of some share price weakness driven by the GLP-1s.

Castleton: I love that, that’s such a great example in one to two sectors. But that’s how you work and operate in all of the sectors that you’re investing in, and while it has been very easy for investors to passively allocate to U.S. or global equity indices because rates have been low, at 0% for a very long time, it is a different backdrop today. It is clear there will be winners and losers within each sector. And that exact process that you just highlighted is what they can look for when they’re trying to understand where to go outside of just these top seven names that are dominating all of these indices. So, thank you for highlighting both of those.

I want to end with just maybe two more questions on how to just think about the broad landscape going forward. Josh, if I go to you, you’ve mentioned—both of you—multiple times throughout your answers now, the impact that a Trump presidency might have on the sectors that you’ve highlighted today. What other impact do you see in all of the sectors going forward from a Trump presidency?

That’s a loaded question, obviously.

Cummings: Sure is. I guess I’ll go to M&A because I do think mergers and acquisitions have been a…it’s been a really tough space in the last administration. I think some mergers and acquisitions have been blocked for reasonable reasons. I think some have not. It’ll be very interesting to see if there are changes at DOJ [Department of Justice] and FTC [Federal Trade Commission] either relatively soon or coming on the heels of an executive change over the next couple of years. I think there’s reason to be optimistic that the M&A environment should be a little bit easier going forward. And I think it needs to happen, frankly, in a handful of sectors. I think about consumer where, you know, the digitization of that sector is leading to much more market concentration than in the physical world. So, e-commerce, for example, is much more concentrated from a market share perspective than physical retailing. And it would be nice if our regulators, could understand that dynamic and that it’s not quite the same dynamic as it was in the ‘70s and ‘80s.

Castleton: Great, great example to that. John, any other risks that your team is broadly focusing on as we enter into the new year for 2025?

Jordan: I’d probably start by highlighting just policy uncertainty, geopolitical uncertainty. And we’re certainly aware of some of the wars that are unfortunately going on around the world. But we’ve also had quite a number of elections; certainly, we’re aware of the one in the U.S, but we’ve seen those happen in other parts of the world. And that along with other factors is driving policy uncertainty. You know, we haven’t talked very much about the potential for tariffs and how that might impact global trade, but that would be one example. There are parts of Europe where we have new governments where there might be a less business-friendly environment or higher taxes. And then obviously there’s uncertainty about China and how much they may or may not stimulate the economy there and other decisions that they may make.

So, we can’t control those. We can’t really predict those, but we try to be aware of those when we do our research and try to think about how different scenarios could impact the companies that we own.

Cummings: Your point about uncertainty is a good one. Although the election, in theory, I suppose, removes some uncertainty, right? Who’s going to be president, A or B, right? There’s still quite a bit of uncertainty around what the new administration’s policies are going to look like. Some of the rhetoric in the campaign around tariffs is, frankly, a little concerning to economists and investors. And I’m also not entirely sure how that would even work, some of his proposals.

So, we’re not sure. Maybe that’s just language, right. Maybe it’s positioning. I personally happen to think that a lot of this is about putting pressure on U.S. companies to build capacity in the United States. So, no better way than threatening blanket tariffs. Because remember, it’s the importers that pay the tariff, right? It’s not China. It’s our companies and therefore their customers, right?

So, we’ll see where it all goes. There is a tremendous amount of uncertainty. I think if you were to imagine you’re a global company like Procter & Gamble or Nike and you’re trying to make 10- or 20-year decisions about where to put distribution centers or factories, I don’t know that the Trump administration necessarily clears the air for you there. What’s the outlook in China going to be? Is Trump going to change that in a material way? I don’t know.

Castleton: Clearly, a lot of questions still to be sorted out.

Cummings: If you’re allocating long-term capital, it’s foggy.

Castleton: Yeah, and so a lot of things you guys will be focusing on for the next year but then for many years to come. So, that’s a great way to end in terms of if you are invested in equities, passively, maybe now is the time to be able to rely on some fundamental expertise. Because regardless of what does happen in the global backdrop, you’re clearly doing your work and finding the best bottom-up stocks that can weather whatever storms are heading our way. And you’ll continually be monitoring that going forward. So, I love that. It’s a great note to end on. Thank you both for being here.

And thank you, listeners, for tuning in. We hope you found the conversation valuable. For more insights from Janus Henderson, you can download other episodes of Global Perspectives wherever you get your podcasts or visit janushenderson.com.

I’ve been your host for the day, Lara Castleton. Thanks, see you next time.

S&P 500^® Index reflects U.S. large-cap equity performance and represents broad U.S. equity market performance.

Price-to-Earnings (P/E) Ratio measures share price compared to earnings per share for a stock or stocks in a portfolio.

Free cash flow (FCF) yield is a financial ratio that measures how much cash flow a company has in case of its liquidation or other obligations by comparing the free cash flow per share with the market price per share and indicates the level of cash flow the company will earn against its share market value.