3 Contrarian Investments for 2025

Is it just me or has the late Thanksgiving given this holiday season a frenzied feel? I’m trying to figure out how to attend all the year-end meetings, retirement parties, and Mingles & Jingles while not missing my kids performing Rockin’ Around the Christmas Tree on their violins and cellos. Meanwhile, my email inbox is overflowing with 2025 investment outlooks.

Naturally, Morningstar’s 2025 Outlook was first on my reading list. It’s not that I think my colleagues possess an especially high-powered crystal ball. But I do think their long-term, valuation-driven approach is sensible. And I like how they combine security-level work with top-down expected return estimates.

Here are three contrarian investment ideas I took from the Morningstar’s 2025 Outlook:

Go Global

US investors can be forgiven for rolling their eyes at the mention of foreign stocks. The Morningstar US Market Index, a broad gauge of equities, is up nearly 30% in 2024, trouncing the Morningstar Global Markets ex-US Index’s return in dollar terms. Over the past 15 years, US stocks have averaged an annual gain of 14%, while their overseas counterparts have returned just 6% from the perspective of an unhedged American investor. At many points over that span, observers have noted better value abroad. Yet, US equities have continued to win. Artificial intelligence, postelection clarity, and economic strength are the latest drivers. But US stocks have disproportionately reaped the rewards of innovation for years now.

“The US market appears expensive,” says the Morningstar’s 2025 Outlook. To put a number on it, Morningstar equity research sees US stocks as roughly 7% overvalued as of mid-December when the stock level price to fair value estimates are aggregated to the market level. Unlike some other valuation signals, this one does not perpetually flash red. Since 2010, the US market has traded at a premium of 5% or more less than 10% of the time. I remember the team’s prescient call going into 2022 that stocks were overvalued.

So, where in the world are my colleagues seeing more upside? “Europe, especially the UK, is the most attractive of all the developed markets,” according to the outlook. Within emerging markets, “China faces structural challenges but offers good value,” and opportunities within Latin American equities are also identified. Whether targeted through an international equities fund or a basket of international stocks, there are great companies across the globe, many of which derive significant revenues from the US. Currency diversification is another important benefit. The dollar has been on a long run of strength that could lose steam.

Look Beyond Large Growth and Tech

US stocks might be pricey at the market level, but if you dig beneath the surface, there are bargains to be had. According to the outlook:

“US technology names have been standout contributors to global equity returns over the past two years, with the valuations of those leveraged to the AI theme appearing relatively full. But there are attractively valued opportunities elsewhere, such as smaller US companies and those in traditional industries that have fallen out of favor.”

In addition to US ascendency, growth stocks beating value stocks, and large companies dominating small have been long-running market trends that carried on through 2024. The Morningstar US Large-Mid Broad Value Index, representing the value half of the market, is well behind its growth equivalent this year. The Morningstar US Small Extended Index has not kept up with mega-caps like Nvidia NVDA and Meta Platforms META. Many investor portfolios have a distinct large-cap growth bias these days.

Remember that market leadership is fluid. A rotation in the third quarter of this year saw value outperform growth and small beat large. After the election, small caps surged on expectations of economic growth and protectionism. I remember the years before the 2007-09 global financial crisis when value and small caps were the places to be. Who knows if they will regain their leadership positions in 2025, but Morningstar equity research sees both segments as attractively valued based on stock-level price to fair value estimates.

Don’t Neglect Bonds

When the US yield curve was inverted and short-term yields were higher than long-term yields, many investors preferred cash over bonds. The curve has uninverted. “Cash is no longer king,” in the words of Morningstar’s 2025 Outlook. The Federal Reserve has not lowered interest rates to the extent most predicted coming into this year, but we have had cuts. More are likely. Morningstar’s economics team forecasts rates falling to the 3%-3.25% range by the end of 2025.

In a falling interest-rate environment, bonds with longer maturities should benefit. “Consider adding a little duration to your portfolio,” write my colleagues in the outlook. The Morningstar US Core Bond Index had a yield to maturity of 4.62% as of the end of November, which is decent in absolute terms, comfortably above the inflation rate, and at least a bit higher than bank deposits. With a core bond allocation, there’s also total return potential if interest rates fall.

Views vary on asset classes within fixed income. Of corporate bonds, the team believes the “risk may not be worth the reward.” Spreads between corporate debt and Treasurys are tight, meaning investors aren’t being adequately compensated for taking credit risks. Just as investors are urged to think globally on the equity side, the outlook also cites opportunities in global bonds. It mentions “attractive real yields in the emerging-markets space.”

Be Prepared to Be Wrong

As investors think about portfolio positioning for 2025 and beyond, it’s important to remember that valuation is a poor timing signal. Who knows what will pan out in the year ahead? As always, there’s no shortage of risks out there, as well as “known unknowns” and “unknown unknowns.”

In her typically measured way, my colleague Christine Benz writes that it’s “reasonable to be skeptical about predicting the market’s direction, especially over the short term.” But she also sees the value in forecasts, which is why she compiles them every year. “The fact is that you need to have some type of return expectation in mind when you’re creating a financial plan.” The key is to maintain a portfolio prepared for a range of outcomes.