Equities Outlook 2025: "The Bigger the Boom, the Bigger the Bust"

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As we approach 2025, global equity markets are poised at a critical juncture.

Analysts from Bank of America (BofA) highlight a unique confluence of opportunities and risks, with the Nasdaq-100 (NDX) taking centre stage amidst the continued Artificial Intelligence (AI) boom.

Nasdaq-100 and the AI Bubble

The Nasdaq-100 has experienced a meteoric rise fueled by advances in AI technology. Since the launch of ChatGPT in late 2022, the index has nearly doubled, and AI-related stocks, particularly the "Magnificent 7," have surged by over 200%.

According to BofA’s Global Equity Strategy team, the AI boom is strikingly similar to the 1990s internet bubble. Back then, the US Tech 100 saw an 11x increase in value over five years.

"We believe the current AI-driven rally is reminiscent of the mid-90s internet boom," said a BofA strategist. "While the upside potential remains, investors must prepare for inevitable volatility as valuations stretch."

Yet, while history may not repeat itself verbatim, it offers cautionary lessons. The report notes, "The bigger the boom, the bigger the bust," pointing to stretched valuations and rising volatility as potential precursors to a downturn. Current data suggest the market resembles 1996/1997 more than the crash-prone period of 1999/2000, indicating that there may still be room for growth - but also heightened risk.

Macro Risks and Fragility

The global equity market faces significant macroeconomic uncertainties, with U.S. debt-to-GDP ratios nearing historic highs at 120%. Such fiscal conditions, coupled with potential shifts in public policy under the Trump administration, could amplify market volatility. Analysts warn of 'bond vigilantes' reacting to excessive spending, which might disrupt the fragile equilibrium between stocks and bonds.

"Bond markets have been remarkably patient, but we’re nearing a tipping point," noted a senior economist at BofA. "Any sudden spike in yields could cascade into equity markets, given the current levels of fragility."

Furthermore, market fragility remains a pressing concern. August 2024’s volatility index (VIX) spike was a stark reminder of the structural vulnerabilities in the current trading environment. A broader market fragility event could be overdue, with equity correlations suggesting a rising potential for sharp corrections.

Opportunities and Strategies

Despite the looming risks, 2025 presents significant upside potential for investors who adopt a balanced approach. BofA suggests strategies to "ride the boom without timing the bust." For instance, leveraging option-based trades like the 'SkeU' strategy offers a defensive overlay against market selloffs while maintaining exposure to rallies.

"Our SkeU strategy has shown resilience in volatile markets, enabling investors to stay invested during rallies while cushioning against sudden downturns."

Internationally, Europe remains undervalued, and analysts recommend exposure to cyclical and defensive plays. In Asia, sectors related to nuclear energy and AI-driven technologies offer asymmetric risk-reward profiles.

"Europe is often overlooked, but the region’s valuation gap provides an attractive entry point," added another strategist. "We see opportunities in sectors with limited downside risk and strong upside potential."

What Lies Ahead?

BofA’s outlook for 2025 underscores a dual-path scenario: either the AI boom transitions into a full-scale bubble, or markets undergo a sobering correction. In either case, elevated volatility appears inevitable. Investors are urged to prepare for both outcomes, leveraging hedging strategies and seeking opportunities in less crowded trades.

"Timing market tops is a near-impossible task," the report cautioned.

"Instead, focus on building portfolios that can weather both booms and busts." While the Nasdaq-100 is expected to remain the epicentre of this financial storm, the broader implications for global equity markets will depend on how policymakers, corporations and investors navigate the complex interplay of innovation, regulation, and economic fragility.