A year of policy and productivity A year of policy and productivity http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\robot-manufacturing-small.jpg January 10 2025 January 10 2025

A year of policy and productivity

Three things to watch in 2025.
Published January 10 2025
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The AI boom The AI revolution continues to drive significant investment in infrastructure, benefiting industrial and electrical companies involved in building and maintaining data centers, modernizing energy distribution and supplying parts for complex systems. As AI becomes more deeply integrated into industries, these infrastructure investments will have long-term, transformative effects on the economy. AI-related investments could kickstart stagnant US industrial activity, boosting capacity and output. While the infrastructure story is compelling, the real power of AI lies in its ability to transform businesses. Companies will increasingly leverage AI to reduce costs, improve productivity and drive innovation. Sectors with high labor costs as a percentage of revenue—such as health care, software, industrials and retail—stand to gain significantly.

Productivity and efficiency take center stage As inflation pressures ease and the consumer-driven growth of recent years slows, companies are expected to shift focus from capacity building to investments in productivity and efficiency. This pivot could unlock significant economic value. From automation tools to enhanced uses of AI, businesses will allocate capital toward technologies that drive higher output per worker. Historically, total factor productivity (TFP) growth has been a key driver of rising living standards. By fostering innovation, these investments could revitalize US productivity, which has stagnated since the early 2000s. Trade barriers may push companies to innovate domestically, offsetting cost pressures with productivity gains. Also, as economic conditions stabilize, corporate focus will shift to efficiency gains, fueling sustained improvements in profitability.

Biotech and Health Care: A rebound in sight After three years of underperformance, the Health Care sector, particularly Biotech, appears poised for a breakout. Since inflation began rising in 2021, Health Care stocks have lagged due to macroeconomic pressures, notably higher interest rates. Biotech, a sector heavily reliant on external financing, has been particularly sensitive to these rate hikes. However, 2025 could mark a turning point. As economic growth moderates and deflationary policies take hold, interest rates are expected to decline, easing financing burdens for biotech companies. Furthermore, with the worst of regulatory fears likely priced into stocks, including concerns over presidential appointments, anti-pharma rhetoric and stricter drug price regulations, the sector could gain breathing room. Innovation in drug development, coupled with broader health care adoption of artificial intelligence (AI), will drive efficiency and breakthroughs, potentially catalyzing renewed investor interest.

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