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2025 Perspectives: Optimism through the obstacles

December 17, 2024
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The 2024 playbook centered on U.S. exceptionalism, decelerating global inflation, and central bank pivots amidst political uncertainties. As we move into 2025, the U.S. economy is set to remain a beacon of strength, upheld by strong consumers and corporate balance sheets. However, challenges exist with European and Chinese economies struggling to keep pace. Investors must be strategic as they navigate through heightened uncertainties and emerging opportunities across asset classes. Here’s a closer look at key insights from our experts.

Macro

Seema Shah on the macro landscape

Key takeaways

  • U.S. strength continues: Despite political and economic upheaval, U.S. economic growth is set to remain above trend, at least in the first half of 2025, driven by resilient household wealth and strong corporate balance sheets.
  • Persistent challenges: Lower-income households face pressures from high rates and elevated prices, while sectors like construction struggle amidst high borrowing costs.
  • Interest rate path: Labor market resilience complicates the path for interest rate cuts, leading the Federal Reserve to take a cautious approach, likely cutting rates at every other meeting instead of every meeting.
  • Global divergence: European and Chinese economies are expected to continue underperforming, with disinflation in Europe and slow growth in China, partially due to U.S. trade policy uncertainty.
  • Risks to watch: Policymaker errors, particularly with misjudging the neutral rate, could introduce volatility. The new U.S. administration’s policies, especially on trade, add another layer of uncertainty.

Equities

George Maris on equity market expectations

Key takeaways

  • Constructive backdrop: Improving economic conditions, corporate earnings growth, and solid balance sheets provide a favorable environment for global equities in 2025.
  • U.S. policy tailwinds: Potential deregulation and lower taxes under the new administration could spur additional economic growth, capital formation, and M&A activity.
  • Sector opportunities: Opportunities are likely in economically sensitive industries like materials, consumer cyclicals, and financials. Small and mid-cap stocks may offer attractive valuations.
  • Innovation drives growth: Continued advancements in AI and healthcare (e.g., weight loss treatments and therapeutic customization) are likely to be significant growth drivers.
  • Valuation caution: Elevated valuations mean that any disappointments could be punished. Vigilance is required given the high expectations priced into markets.
  • Global perspectives: While the U.S. has driven recent equity performance, markets like India and Japan have also performed well. Depressed valuations in Europe may offer entry points for long- term investors.

Fixed Income

Michael Goosay on fixed income market expectations

Michael Goosay

Michael Goosay

Chief Investment Officer, Fixed Income

Key takeaways

  • Heightened uncertainty: The FOMC’s efforts to lower policy rates are being complicated by resurgent inflation expectations, fueled by the outcome of the U.S. election and economic resilience.
  • Starting yield levels: Elevated yield levels in early 2025 offer attractive entry points for fixed income investors. Increasing duration now may help capitalize on a potential rate decline later in the year.
  • Credit spread dynamics: Credit spreads are expected to remain rangebound with a modest widening bias. Tight spreads reduce appetite for aggressive risk-on positioning, but yields remain attractive.
  • Sector focus: Financials and Energy sectors are likely to benefit from anticipated deregulation, while Utilities could face negative headwinds due to potential tax impacts.
  • Opportunities amid volatility: Uncertainty and episodic volatility will create opportunities in fixed income markets, with high-quality, longer-duration assets expected to perform well.

Multi-Asset

Todd Jablonski on multi-asset market opportunities

Todd Jablonski, CFA

Todd Jablonski, CFA

Chief Investment Officer, Multi-asset

Key takeaways

  • Cautious optimism: Entering 2025, multi-asset investors are navigating increased market volatility with a slightly reduced risk appetite but retaining a modest equity overweight.
  • Conditions for optimism: Key assumptions include a U.S. soft landing and no reacceleration of inflation—both essential for valuations to hold up.
  • Macro dependence: The U.S. share of G7 GDP and equity capitalization highlights its central role in driving global markets. Our base case assumes Fed rate cuts and improving financial conditions.
  • Barring a recession: U.S. equities could potentially see a +10% gain, with core fixed income also potentially delivering attractive returns in 2025. A diversified multi-asset strategy is likely to perform favorably.
  • Rising risks: We anticipate heightened volatility across equities, fixed income, and currencies in 2025, positioning multi-asset portfolios accordingly.

Private Markets

Todd Everett on private market opportunities

Key takeaways

  • Clearing air in light winds: Private markets are increasingly seen as a strategy to optimize returns amid economic uncertainty, providing lower volatility and diversification.
  • Attractive valuations: Material adjustments in private real estate valuations, particularly in sectors like office, present opportunities, while resilient sectors (e.g., data centers) remain strong.
  • Resiliency matters: Private market fundamentals are on solid footing, with infrastructure and credit sectors well-positioned to support investor returns in 2025.
  • Sector-specific insights:
  • Real Estate Equity: Expected recovery with improving capital flows, but an uneven path.
  • Private Infrastructure: Favorable macro tailwinds, low volatility, and high investor demand for digital infrastructure and renewable energy projects.
  • Private Credit: Attractive valuations, with covenant discipline and opportunities in direct lending and asset-backed lending. High yield credit remains appealing due to spread premiums over public bonds.

Watch the highlights from our 2025 Perspectives webinar

 
Macro views
Asset allocation
Equities
Fixed income
Listed Infrastructure
Real estate
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Risk considerations

Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Asset allocation and diversification do not ensure a profit or protect against a loss. Inflation and other economic cycles and conditions are difficult to predict and there Is no guarantee that any inflation mitigation/protection strategy will be successful. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed‐income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Real estate investment options are subject to risks associated with credit, liquidity, interest rate fluctuation, adverse general and local economic conditions, and decreases in real estate values and occupancy rates. Infrastructure companies may be subject to a variety of factors that may adversely affect their business, including high interest costs, high leverage, regulation costs, economic slowdown, surplus capacity, increased competition, lack of fuel availability, and energy conservation policies. Investments in private debt, including leveraged loans, middle market loans, and mezzanine debt, are subject to various risk factors, including credit risk, liquidity risk and interest rate risk. Fixed-income investment options that invest in mortgage securities, such as commercial mortgage-backed securities, are subject to increased risk due to real estate exposure. Private credit involves an investment in non-publicly traded securities which are subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. Terms, conditions, fees, expenses, pricing and other general guidelines and provisions are subject to change. As a general matter, commercial mortgage lending entails a degree of risk that is typically only suitable for sophisticated institutional and professional investors for whom such an investment is not a complete investment program and who fully understand and are capable of bearing the risks associated with such strategy. Commercial mortgage lending is subject to the basic risk of lending and direct ownership of commercial real estate mortgages -borrower default on the loan and declines in the value of the real estate collateral. Defaults can be complicated by borrower bankruptcy and other litigation including the costs and expenses associated with foreclosure which can decrease an investor’s return. Declines in real estate value can result from changes in rental or occupancy rates, tenant defaults, extended periods of vacancy, increases in property taxes and operational expenses, adverse general and local economic conditions, overbuilding, deterioration in the physical condition of the asset, environmental issues at the mortgaged property, casualty, condemnation, changes in zoning laws, taxation and other governmental rules. Commercial mortgage investments are also very dependent on the financial health, operational expertise, and management skills of the borrower.

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