Reading the economic and financial market outlooks for 2025 so you don’t have to
What’s priced in?
The turn-of-the-year economic and financial market outlook is a much-derided genre. But these level setting exercises are nonetheless useful for identifying what is priced in, as well as potential contrarian bets against the market consensus.
I gave year ahead outlooks from nine institutions to ChatGPT and asked it to synthesize the consensus economic and market outlook, the risks and opportunities posed by the incoming Trump administration and the top trade recommendations.
The institutions in no particular order were Goldman Sachs, J P Morgan, UBS, Vanguard, KKR, Robeco, Cambridge Associates, Richard Bernstein and Apollo. The output is shown below the divider. All words by ChatGPT, without any further intervention from me.
Economic Outlook and Financial Market Outlook
US Economic Strength Continues:
The US economy is expected to maintain above-trend growth, with GDP growth estimates ranging between 2.1% and 2.8%.
Consumer spending remains resilient, supported by strong labor markets and wage growth, although the pace may moderate.
The labor market will likely remain stable, with unemployment rates hovering around 4%.
Global Growth Moderation:
Global GDP is projected to grow around 3.1%, in line with long-term trends.
Europe and China face slower growth, with Eurozone GDP expected to grow by approximately 1.2% and China at 4.5%.
India continues to stand out, with projected GDP growth of 6.8%.
Inflation and Monetary Policy:
Inflation will likely continue its downward trajectory but may remain above central bank targets, especially in the US and parts of Europe.
Central banks, including the Federal Reserve and European Central Bank, are expected to cut interest rates in 2025, with total cuts ranging from 75 to 100 basis points.
The Fed’s policy rate could end 2025 around 3.5% to 4%.
Financial Markets Outlook:
Equities:
Equities are forecasted to deliver moderate returns of approximately 10% in 2025, with earnings growth driving performance rather than valuation expansion.
US markets are expected to outperform global peers, although gains may be more subdued than in 2024.
Sectors related to technology (especially AI), infrastructure, and energy transition are poised for growth.
Bonds and Fixed Income:
Bond markets are expected to benefit from easing monetary policies, with bond returns outperforming cash as interest rates decline.
Credit spreads remain tight, suggesting limited upside for high-yield bonds but steady returns for investment-grade securities.
Private Markets and Real Assets:
Private equity and venture capital are projected to see improved performance as the overhang from 2021–22 investment cycles fades.
Infrastructure investments, particularly in energy and AI-driven sectors, are expected to thrive.
Real estate markets in the US may underperform equities but present opportunities in distressed assets.
Risks and Uncertainties:
Geopolitical Tensions and Trade Policies:
Trade wars, potential tariffs (especially between the US and China), and geopolitical instability remain key risks that could affect inflation and global growth.
US Policy Shifts:
The return of Donald Trump’s administration may introduce tax cuts, increased tariffs, and immigration restrictions, adding inflationary pressures and market volatility.
Debt and Deficits:
Expanding fiscal deficits and debt levels, particularly in the US, could keep long-term interest rates elevated.
Consensus Themes for 2025:
Cautious Optimism for Risk Assets: Equities are favored over bonds, but volatility may rise.
Interest Rate Easing Cycle: Central banks are likely to continue cutting rates, supporting bond markets and consumer demand.
Selective Sector Focus: AI, infrastructure, and energy transition will drive sector performance.
Global Divergence: The US is expected to outperform, while Europe and China lag behind.
Financial Market Risks and Opportunities from the Trump Administration in 2025
Risks:
1. Tariffs and Trade Wars:
- A potential 20% tariff on imports from Canada and Mexico and a 10% tariff on imports from China are anticipated. These policies could increase inflation and reduce GDP growth by raising consumer prices and escalating trade tensions.
- A broader 10% across-the-board tariff could increase inflation to around 3% and lower GDP growth, with particular impacts on sectors heavily reliant on imports.
2. Fiscal Expansion and Deficits:
- Trump’s proposed tax cuts and infrastructure spending could expand the fiscal deficit, putting upward pressure on interest rates. Rising net interest payments, now larger than defense spending, may exacerbate fiscal risks.
3. Immigration Policies:
- Stricter immigration controls could lead to labor shortages in sectors such as agriculture and construction, contributing to wage inflation.
4. Geopolitical Tensions:
- Tensions with China, Russia, and the Middle East may heighten economic uncertainty, potentially disrupting financial markets and global supply chains.
Opportunities:
1. Equities:
- The S&P 500 is projected to reach 6,600 by the end of 2025, driven by AI advancements, tax cuts, and deregulation. Technology, utilities (for AI data centers), and financials are expected to benefit the most.
- M&A activity is expected to rebound, supported by lower interest rates and improved corporate confidence.
2. Bond Markets:
- Yields on 10-year US Treasuries, currently above 4%, are likely to decrease as the Federal Reserve pursues rate cuts, potentially supporting fixed income markets.
3. Currencies:
- The US dollar, having strengthened post-election, may weaken slightly against the euro in 2025, creating potential investment opportunities in international markets.
4. Infrastructure and Energy:
- Deregulation and increased investment in domestic energy production and AI infrastructure could provide growth opportunities in related sectors.
Balance of Risks and Opportunities:
Equity Markets: The outlook is positive but tempered by inflation risks from tariffs. While sectors like technology and financials may thrive, industries exposed to international trade could face headwinds.
Bonds: Falling interest rates are expected to bolster bond prices, but rising deficits and inflation could cap gains.
Currencies: The dollar may initially strengthen due to trade protectionism but could face depreciation pressures if deficits grow and global trade tensions ease.
Overall, the market sees a blend of stimulative policies that could support growth but acknowledges significant downside risks from trade wars and fiscal imbalances. Investors are encouraged to diversify across asset classes and consider hedging strategies to navigate potential volatility.
Top market trades recommended by various institutions for 2025
Equities:
Long US Technology and Utilities – Driven by AI advancements and infrastructure needs for data centers.
Long S&P 500 (Target: 6,850) – KKR expects the S&P 500 to outperform and reach 6,850, driven by strong earnings growth (11%) and above-consensus US GDP growth.
Value over Growth – Cambridge Associates recommends value stocks over growth stocks, citing attractive discounts and potential benefits from central bank rate cuts.
European Equities – Expected to improve relative to US equities, driven by rate cuts and more favorable valuations.
Emerging Markets (EM) Equities – Select EM equities are favored, particularly if US fiscal risks do not materialize. EM stocks could benefit from relief on trade war fronts.
Bonds and Credit:
Long US Treasuries – Anticipating Fed rate cuts, several institutions suggest adding duration to bond portfolios, focusing on investment-grade bonds.
Agency MBS and Asset-Backed Securities – Recommended for stable yield with reduced credit risk.
Direct Lending – Continues to be favored over liquid credit markets, with higher returns expected from private credit markets.
Avoid High Yield – KKR advises against low-rated unsecured high yield bonds due to limited yield pickup compared to risk.
Currencies and Commodities:
Long USD Optionality – Goldman Sachs suggests maintaining long USD positions, particularly against EUR, CAD, SGD, and KRW, citing geopolitical uncertainties.
Gold and Oil – Retaining exposure to gold and oil is recommended as a hedge against inflation and geopolitical risks.
Short GBP and EUR – Some institutions recommend short positions on GBP and EUR relative to the USD, anticipating policy divergence.
Infrastructure and Real Assets:
Long Infrastructure Equities – Driven by energy transition and AI-related infrastructure projects.
US Private Real Estate (Distressed Deals) – Opportunities in distressed real estate assets are expected to yield above-average returns.
Hedging and Optionality:
Use of Options – Goldman Sachs recommends call options on US equities and deep downside hedges on European equities due to geopolitical risks.
Add FX Hedging – KKR highlights the risk of volatility in currency markets, suggesting hedging strategies to mitigate FX risk.
While some institutions lean towards risk assets (KKR, Goldman Sachs), others like Cambridge Associates emphasize caution, favoring value equities and fixed income over riskier credit. The diversity in strategies reflects differing views on inflation, fiscal policy, and geopolitical stability.