December 2024
In our 2025 outlook, we discuss the evolving economic landscape and how it is being shaped by monetary policy, fiscal changes, and geopolitical factors. In our view, the new year is likely to bring favorable conditions for fixed income investments, with yields at a three-year high and a dovish Federal Reserve (the “Fed”), advocating for an active, intermediate-term bond strategy. In equities, we expect the growth-value gap to narrow, and thus support allocations in value (and true value) in 2025. We believe consumer spending may remain strong, but high interest rates could present risks. The new administration's policies may enhance domestic investment, though potential tariffs could create uncertainty.
Current Market Backdrop
The current market backdrop indicates that inflation may no longer be a near-term risk, following significant monetary tightening by the Fed. While we’ve seen some disinflation trends, rates remain stagnant at around 2.8%. The Fed implemented a 25-basis point cut in December. We believe that recession risks remain low, with strong labor markets and optimistic consumer spending. However, high interest rates pose a potential downside risk, as inflation data and employment reports continue to influence monetary policy considerations.
Macroeconomic Views
The macroeconomic outlook post-election suggests that while the Trump administration may initially focus on job creation and domestic economic stability, policies could evolve towards avoiding inflation. GDP growth estimates remain strong, and inflation is on a downward trajectory. Expectations of tighter immigration and increased tariffs may impact the economy, but in our view, the effects should be minimal. The Federal Reserve is expected to pause rate hikes amid stable inflation, while productivity growth and manufacturing investments are projected to remain robust. American exceptionalism will endure, and although there may be some concerns about fiscal sustainability, we don’t believe it will be a key theme in 2025.
Fixed Income & Equity Outlook
The corporate sector remains robust, with high margins and strong debt-service coverage, which is supportive of investment-grade bonds. Elevated volatility in the bond market is to be expected, due to fiscal and monetary policy uncertainties, and the 10-year Treasury yield outlook indicates anchored long-term inflation expectations. Portfolio diversification is key, and we see potential opportunities in AI, infrastructure, and global fixed income markets. In 2025, investors should focus on companies with strong fundamentals amid geopolitical risks.
Fixed Income & Equity Opportunities
In 2025, we expect to see attractive fixed-income opportunities, with yields at a three-year high and the Fed’s easing mode. We believe an active, intermediate-term approach for bonds has the potential to perform well for investor portfolios. In equity markets, we expect the growth vs. value gap to continue narrowing as more industries benefit from higher earnings and improving monetary and fiscal policies in 2025. We support an allocation toward value due to its cyclical growth exposure and to ensure investors avoid overexposure to growth in their portfolio. Real assets, especially in natural resources and nuclear energy, are expected to perform well amid inflation and growth.
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