Economic Outlook
We anticipate the major driving forces that are likely to impact the global economy in 2025 and for some time to come include the current technology race in artificial intelligence and quantum computing, demographics including openness to immigration, and deglobalization/trade tensions. Other factors that are likely to influence local economies include inflation, interest rates, public policy, investment, and consumption.
The U.S. economy has many things going for it as we kick off 2025. We anticipate that technological innovation, improving labor productivity, and expectations for business-friendly policies by the incoming administration should support continued above-average growth. Most economists expect that for a developed economy like the U.S., a normal rate of growth would be close to 2% in terms of Real GDP; Pathstone expects to top that this year. It is likely that we will face a bit of a tug-of-war between pro-growth and pro-inflationary forces that leads to greater uncertainty around the impact to interest rates and, ultimately, equity valuations. Corporate earnings growth expectations for 2025 are well above normal, setting a high bar and therefore creating a bigger risk to equity valuations if we fall short of that bar. We put a low probability of inflation rates reaching the Fed’s 2% target in 2025, and therefore we expect the Fed to limit further interest rate cuts in 2025.
Downside to our economic outlook is possible should the President’s policies around tariffs, immigration, and foreign policy backfire, though we are still cautiously optimistic that the rhetoric is more bark than bite. Of the three constituents to the U.S. economy (government, corporate and household), the government appears to be in the most challenged position to carry on spending at the same levels as the recent past. Households, buoyed by low debt service levels and strong gains in overall net wealth, remain resilient, but we are mindful of the impact of the aggregate increase in the prices of goods and services in recent years and how even a modest decline in net wealth could slow spending. We expect the corporate world to be the strongest pillar in 2025 with an eye towards deregulation and more favorable tax treatment, which we anticipate may stimulate mergers & acquisitions and open the window for more companies to pursue public listings.
More challenges exist globally. Economies in Europe and China remain burdened by shrinking working populations, heavy social safety net burdens, regulatory policies that stymie innovation, and even trade tensions between the two blocs. However, while China faces many challenges, not the least of which was created by their allegiance with Russia and threats against Taiwan, they still have a massive domestic economy, households that have been saving at very high rates compared to the U.S., and a very capable technology sector. The sum of it all is that with a pickup in global tensions, both military and trade-related, and a commensurate move to be more protectionist, there is a bit of a wet blanket weighing on the global economy. At this point, we believe the burden appears to be less weighty to the U.S. European markets do not appear to be as competitive and face regulations that may make improvements difficult in the shorter term. Japanese and Korean markets have shown some encouraging signs when it comes to supporting shareholder value in their publicly traded companies, but investors appear to be waiting for results before committing more capital. Lower interest rates, less inflation, and relatively weaker currencies are potential tailwinds that could support economic growth in markets outside the U.S.
Investment Outlook
Our core investment outlook for 2025 would see the U.S. roll on while the rest of the world rolls over — in which case it is likely we will see similar performance as in 2024, with U.S. markets leading the way. However, as more and more investors have been leaning that way, the risks and opportunities have also shifted. As we consider the outlook for 2025 it is not just the economic fundamentals that we must forecast correctly, it is also how financial markets may be influenced by investor sentiment, which regularly swings between periods of fear and greed. The U.S. equity market, currently highlighted by a forward price-to-earnings multiple for the “Magnificent 7” of 32.0x, [1] feels more greedy than fearful. The current forward price-to-earnings multiple for the MSCI China Index, on the other hand, indicates more fear than greed at 10.1x (MSCI data). Other segments of the equity markets including U.S. small caps, developed non-U.S. (Europe/Japan) and the developing markets, while perhaps not as cheap as Chinese equities, represent more conservative valuations than U.S. large caps.
Investors’ challenge for 2025 is not just coming up with accurate economic forecasts. Rather, success will likely depend on marrying solid economic outlooks with a refined understanding of the expected payouts. Our point here is to emphasize that while economic forecasts seem more favorable for the U.S. than for other markets, stock prices reflect a level of optimism that may reduce the prospective returns available. Conversely, as other markets have been dismissed by many investors, they are priced such that a modest improvement may be followed by a much more robust investment return.
Conclusion
We anticipate positive if slightly uneven global economic growth in 2025, led by the U.S. economy. Domestic policies, foreign trade, and military tensions across borders will be watched closely for signs that the drivers of economic growth could be stymied. For investors, we encourage a more thorough assessment of how the prices being paid for various assets relate to the implied growth rates and urge caution not to invest by looking in the rearview alone.
Related insights:
2025 Investment Outlook
Key Market Themes & Opportunities for 2025
If you have any questions or would like to discuss the economic outlook further, please contact us.
¹The “Magnificent 7” includes Microsoft, Apple, Amazon, Meta, Tesla, Google and Nvidia. Forward PE: Factset.
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This communication and its content are for informational and educational purposes only and should not be used as the basis for any investment decision. The information contained herein is based on publicly available sources believed to be reliable but is not a representation, expressed or implied, as to its accuracy, completeness or correctness. No information available through this communication is intended or should be construed as any advice, recommendation or endorsement from us as to any legal, tax, investment or other matters, nor shall be considered a solicitation or offer to buy or sell any security, future, option or other financial instrument or to offer or provide any investment advice or service to any person in any jurisdiction. Nothing contained in this communication constitutes investment advice or offers any opinion with respect to the suitability of any security, and this communication has no regard to the specific investment objectives, financial situation and particular needs of any specific recipient. Past performance is no guarantee of future results.
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