Best mutual funds for 2025 based on Wall Street's top themes
Even before Donald Trump returned to the White House, it was clear that 2025 would bring a shift in the markets.
Inflation is easing, interest rates are falling, and capital is rotating into small-cap stocks—key changes that set this year apart from 2024. At the same time, the AI revolution is picking up steam.
According to Morningstar, AI investments in 2025 will likely pivot from hardware and infrastructure to companies that can effectively commercialize the technology.
Investors Observer has identified five major trends shaping portfolios in 2025, drawing insights from experts at State Street, T. Rowe Price, Fundstrat Global Advisors, Fidelity Investments, BNY Mellon, and Morningstar.
Under each theme are top-performing mutual funds positioned to take advantage of these shifts, including funds from Vanguard and Charles Schwab.
| 2025 investment theme | Best mutual funds |
| American exceptionalism to benefit U.S. small caps and regional banks | Vanguard S&P Small-Cap 600 Value Index (VSMVX) American Century Small Cap Growth Fund (ANOIX) Charles Schwab Small Cap Index Fund (SWSSX) Boston Trust Walden Small Cap Fund (BOSOX) |
| Financials to benefit from rising capital markets activity | Fidelity Select Financials Portfolio (FIDSX) T. Rowe Price Financial Services Fund (PRISX) Davis Financial Fund (RPFGX) PGIM Jennison Financial Services Fund (PFSAX) |
| Business cycle favors industrials | Fidelity Select Industrials Portfolio (FCYIX) Vanguard Industrials Index Fund (VINAX) T. Rowe Price Global Industrials Fund (RPGIX) Fidelity Select Defense & Aero Portfolio (FSDAX) Fidelity Select Transportation Portfolio (FSRFX) |
| Cash is no longer king | Fidelity Balanced Fund (FBALX) Vanguard Balanced Index Fund (VBIAX) T. Rowe Price Balanced Fund (RPBAX) BlackRock Global Allocation (MALOX) |
| Big Tech is still a big opportunity | Schwab S&P 500 Index Fund (SWPPX) Fidelity Select Semiconductors Fund (FSELX) DWS Science and Technology Fund (KTCAX) Fidelity Advisor Technology Fund (FATEX) |
American exceptionalism to benefit U.S. small caps and regional banks
There’s a reason why asset managers remain bullish on U.S. stocks. From an investment perspective, the financial landscape is in a period of “U.S. economic exceptionalism,” according to State Street.
Based on consensus earnings estimates, U.S. large- and small-cap companies will continue to outpace the rest of the globe for the foreseeable future.
Although large caps remain attractive, “valuations of U.S. small caps and regional banks appear much more attractive relative to the broad market,” said State Street. This outlook is supported by small caps’ and regional banks’ limited exposure to supply chains and U.S.-led trade wars.
At home, these stocks will continue to benefit from strong GDP growth, a solid labor market, and strong consumer spending. They’re also less likely to be negatively impacted by a stronger U.S. dollar.
According to T. Rowe Price, small caps are “trading at a historic discount to large-caps [and] are poised to benefit from further rate cuts” from the Fed.
With a market cap of less than $2 billion, small-cap stocks have more potential for growth than their larger counterparts. But this upside potential also comes with bigger swings (up and down) in their share price.
Some of the best small-cap mutual funds for 2025 include the Vanguard S&P Small-Cap 600 Value Index (VSMVX), the American Century Small Cap Growth Fund (ANOIX), the Charles Schwab Small Cap Index Fund (SWSSX), and the Boston Trust Walden Small Cap Fund (BOSOX).
Financials to benefit from rising capital market activity
The optimism surrounding regional banks also extends to the major Wall Street firms, with T. Rowe Price forecasting strong growth for financial stocks in 2025. The main reason is a steeper yield curve or the widening interest-rate gap between short-term and long-term interest rates.
“Bank stocks in particular should benefit from expanding net interest margins as yield curves steepen with the Fed cutting rates,” T. Rowe Price said.
Fundstrat Global Advisors’ Tom Lee agrees; he cited decreased regulations, increased capital market activity, and a stronger economy as reasons to be bullish on financials.
Lee also backed regional banks, which are currently trading at lower valuations than their historical average.
Investors betting on financial stocks will likely benefit from the Fidelity Select Financials Portfolio (FIDSX), which has a large exposure to banks and consumer-oriented financial service providers.
The T. Rowe Price Financial Services Fund (PRISX) and Davis Financial Fund (RPFGX) also provide concentrated exposure to financial services, investing at least 80% of their net assets in the industry.
Meanwhile, the PGIM Jennison Financial Services Fund (PFSAX) also provides exposure to insurance companies, brokerage firms, asset managers, and mortgage banks.
Business cycle favors industrials
One of the most overlooked themes for 2025 is the strong investment potential of industrial stocks. To understand why, it’s important to look at the business cycle.
As Investors Observer recently reported, a key measure of U.S. industrial output—the ISM manufacturing PMI—reached a nine-month high in November.
However, it remains in contraction territory below 50, which according to Tom Lee, provides a perfect opportunity to buy industrial stocks on the cheap.
In other words, the U.S. manufacturing industry is on the cusp of a major breakout. As Real Vision’s Raoul Pal explained, the economy lags the PMI indicator by about a month.
Fidelity Investments portfolio manager David Wagner wrote in December that the industrial sector has a “bright” outlook in 2025.
He cited “potential value in a number of specific segments and themes, including reshoring, an aging air fleet, and improving new orders as manufacturing continues to recover from COVID-sparked disruptions.”
Onshoring—or the return of manufacturing business to the United States—is a major policy goal of the current Trump administration.
For investors seeking exposure to manufacturers and producers, the best mutual funds include the Fidelity Select Industrials Portfolio (FCYIX) and the Vanguard Industrials Index Fund (VINAX). The T. Rowe Price Global Industrials Fund (RPGIX) also invests in foreign manufacturers.
For more concentrated bets, the Fidelity Select Defense & Aero Portfolio (FSDAX) and Fidelity Select Transportation Portfolio (FSRFX) provide direct exposure to the defense and transport industries, respectively.
Cash is no longer king
The disinflationary trend that began in 2023 is expected to continue in 2025. While the Consumer Price Index (CPI) remains above the Federal Reserve’s 2% target, it’s inching closer to the finish line, having fallen from a high of 9.1% in mid-2022 to 2.7% in November 2024.
Perhaps more importantly, the Core CPI rose less than expected in November, signaling that inflationary pressures were cooling.
According to BNY Mellon, most major central banks are “focused on sending interest rates lower, but the pace will depend on regional economic factors.” In the U.S., the Fed is on track to cut interest rates twice this year.
As rates continue to edge lower, investors need to rethink the “cash is king” narrative, which reigned supreme in the last two years as money market funds offered yields of 5% or more.
When interest rates are rising, cash is considered king because the price of existing bonds typically declines, resulting in a capital loss for bondholders. Meanwhile, cash held in a high-yield savings account or money market funds can potentially earn a higher return.
However, with the Fed cutting rates, “staying in cash implies significant reinvestment risk because maturing money market instruments, such as Treasury bills, must be rolled over at a time when yields are likely trending lower,” BNY said.
In this environment, BNY recommends a traditionally balanced portfolio of 60% U.S. stocks and 40% U.S. bonds.
The best mutual funds offering this type of exposure include the Fidelity Balanced Fund (FBALX), the Vanguard Balanced Index Fund (VBIAX), and the T. Rowe Price Balanced Fund (RPBAX). Investors wishing for more international exposure may also opt for the BlackRock Global Allocation (MALOX).
Big Tech is still a big opportunity
Despite a rocky start to the year for technology stocks, the sector will continue to provide ample room for growth, especially as more companies integrate and monetize artificial intelligence.
However, unlike in previous years, the value will be created not just by chipmakers and California tech titans but by companies integrating and monetizing emerging technologies like AI.
Morningstar cited Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), Arista Networks (ANET), ServiceNow (NOW), and Walmart (WMT) as companies that have “wide” economic moats in AI. That’s just a fancy way of saying they have a strong competitive advantage.
State Street Global Advisors took a slightly different approach than Morningstar. The investment manager said America’s leadership around AI will translate into bigger profit margins for several S&P 500 companies integrating the new technology.
“A constructive macroeconomic backdrop supports U.S. companies’ ability to meet those growth expectations—and for growth to broaden beyond Tech,” State Street said.
In this environment, it might not be a bad idea to hold a broad-based mutual fund, such as the Schwab S&P 500 Index Fund (SWPPX).
For more concentrated tech plays, the Fidelity Select Semiconductors Fund (FSELX) invests primarily in chipmakers, the DWS Science and Technology Fund (KTCAX) invests mainly in U.S. tech companies with robust earnings growth, and the Fidelity Advisor Technology Fund (FATEX) invests in U.S. and foreign tech companies.