This race will have “material implications” for financial markets, the asset manager noted.

State Street Global Advisors (SSGA) quantified the technology positions of the major blocks using data from the Australian Strategic Policy Institute’s Critical Technology Tracker. The analysis assigned a cumulative quantitative score in eight categories comparing the “two main antagonists”, the US and China.

“In a direct bilateral comparison, China is well ahead of the US in all eight areas,” the SSGA said in its Global market outlook 2025: finding the right path.

However, it stressed that the outlook "drastically changes" when considering US allies in Europe and the Asia-Pacific region. In this context, China leads in two areas: renewable energy and advanced materials, SSGA added.

The Critical Technology Tracker tracks levels of research in eight areas: sensing, timing and navigation; quantum, energy and environment; defense, space, robotics and transportation; biotechnologies, gene technologies and vaccines; modern materials and manufacturing; modern materials and manufacturing; modern information and communication technologies and AI technologies.

The SSGA also noted that current technologies are "profoundly different", representing a "technological leap" rather than an innovation, and some technological advantages may consolidate.

“This all-encompassing competition may take place in research laboratories, but it takes place in global channels that feed the industrial-technological complex. These battles have significant implications for financial markets,” the asset manager said.

The three main arenas of competition were identified as real (military) wars, trade wars and fiscal 'wars'.

"While one arena or the other may subside for a time, the underlying drivers of increased friction remain intact and are unlikely to dissipate in 2025," it said.

A macro perspective

SSGA outlined its macroeconomic outlook, forecasting continued interest rate cuts and economic resilience through 2025, and reaffirmed its long-standing forecast of a US soft landing.

Looking ahead to 2024, the asset manager noted that equity markets have delivered strong returns amid a resilient environment, while major central banks have embarked on an easing cycle.

The rate-cutting cycle is expected to continue "for some time to come", although a Trump-led Republican US election victory could see the narrative change in the second half of 2025.

Additionally, according to SSGA, investors will need to navigate both short-term uncertainties and deeper structural changes, such as demographic shifts, geo-economic fragmentation and the rise of transformative technologies.

While within global capital markets, a resilient economic backdrop is providing support for earnings, particularly in the US. Outside the US, the picture will be "more nuanced, but there are pockets of opportunity in different markets."

As Japanese stocks are expected to face potential volatility and Chinese stocks struggle to maintain higher growth and strong performance, SSGA believes that US large caps will retain a structural advantage over other developed market stocks.

Meanwhile, in emerging markets, investors will need to balance economic and earnings growth as well as inflationary pressures against geopolitical risk and a strong dollar.

"As we enter 2025 we remain cautiously optimistic, with expectations of a soft landing in the US looking set to become reality,” said Lori Heinel, Global Chief Investment Officer.

"While there are a number of uncertainties to contend with, investors may want to consider above target allocations to stocks and should continue to consider portfolio construction."

Investors should also look beyond the traditional 60/40 balanced portfolio and consider alternative exposures for diversification, risk reduction and alpha generation.

In SSGA's perspective, private equity, private credit, real estate and infrastructure bring non-traditional elements to the traditional asset mix while offering higher returns, lower volatility and enhanced portfolio diversification potential.

"The investment opportunities in the private markets are huge, interesting and growing. Because investment information in the private market is not as widely available as in the public markets, there is the potential to benefit from more widespread market inefficiencies,” the asset manager said.

"However, as solutions and products are not publicly traded, illiquidity should also be an important consideration in portfolio construction, and a long-term perspective and careful manager selection are key."

Separately, the firm highlighted the emergence of the Gulf Cooperation Council region as an investment location worthy of greater attention, as well as the disruptive power of transformative technologies such as generative AI and tokenization.