Overview: Balanced Optimism
Our positive outlook for the first quarter of 2025 is based on three pillars: moderate global growth buttressed by an outperforming US economy, synchronized monetary policy easing, and robust corporate profits. These trends are an extension of the macroeconomic environment from last year. We agree with the forecast from the International Monetary Fund for global GDP growth to hold steady at 3.2%, consistent with 2024 levels, and that further disinflation from post-pandemic highs will permit major central banks to further lower their benchmark interest rates. While we expect these encouraging fundamentals to persist over the next six months, the medium-term outlook is clouded by greater uncertainty. Rising global trade tensions, inflation’s “last mile” to target levels, and the potential for interest rates to stay elevated longer than anticipated loom large. Conversely, the “soft landing” could continue apace, additional stimulus from China could bolster growth, or propitious 2026 corporate profit expectations could provide an upside surprise. Shifting risks could alter the landscape considerably throughout the year, in particular those that impact the fundamentals of growth, monetary policy, and earnings.
US Economy: Powering Ahead
The US economy continues to surpass expectations, driven by upbeat consumer spending, a pickup in business investment, and productivity gains. We project that GDP growth will again beat consensus estimates of 2.1% (FactSet) in 2025. A thriving labor market will be essential for another year of outperformance. Indeed, there has been a modest cooling in hiring and the unemployment rate ticked slightly higher for the second consecutive year to 4.2%. Nevertheless, unemployment remains below historic averages, job openings have been above pre-pandemic norms, and wages have risen faster than inflation. We are keenly watching the progress on inflation, with core PCE stalled at 2.8%. This level is higher than the Federal Reserve’s 2.0% target. If inflation does not move lower, it may inspire a change in Fed policy and keep interest rates elevated for a longer period than many had hoped. Though higher borrowing costs have begun to impede some discretionary spending, particularly in the housing market, doubting the US consumer’s resilience has been a fool’s errand. Indeed, consumer spending accelerated in the fourth quarter and a recent pickup in existing home sales suggests that underlying housing demand is intact. The biggest revelation in the US economy has been the rapid adoption of AI-driven technologies, fueling business investment in data centers, energy infrastructure, and specialized equipment. While this AI-inspired growth is a tailwind for now, its eventual plateau could pose challenges to meeting elevated expectations.
US Stock Market: Earnings Keep the Bull Running
The US stock market is on solid footing, boosted by a projected 15% surge in 2025 corporate profits. This earnings path would provide essential support for valuations, which are currently high but can be sustained as long as companies deliver. Narrow market leadership continues to be a defining feature of this bull market, with the technology-focused “Magnificent 7” stocks now making up one third of the S&P 500 Index. In 2024, these 7 companies had higher returns than the broader S&P 500. We are watching closely the Magnificent 7 earnings, expected to grow 20% or higher this year. While impressive, that would mark a decline from 2024’s towering 30%+ growth. This deceleration will occur while the profits of the other 493 stocks in the S&P 500 are set to accelerate to double-digits from single-digits. This new dichotomy in trajectories may be the catalyst to inspire new leadership, which we would view as a positive. A broadening of the rally beyond mega-cap and AI sectors would enhance market stability and provide a firmer foundation for a long-term bull market cycle.
International Economies and Stock Markets: Uneven Progress, Pockets of Opportunity
International financial markets have underwhelmed for several quarters, but there are potential bright spots emerging. Positive effects from easing monetary policy in Europe, Canada, and China should drive a modest boost in 2025. China, in particular, has launched a series of stimulus measures aimed at shoring up its economy. While history suggests that such interventions often serve as buy signals, we are somewhat cautious for now. Valuations across the international investment horizon are compelling compared to their US counterparts, offering opportunities for patient investors.
Bonds Yields: Higher for Longer?
The fourth quarter brought about a surprise spike in interest rates as the Fed revised their 2025 rate guidance. We forecast that this upward move will prove temporary, and the bond market will stabilize. The Fed’s ongoing rate cuts in 2025 will push short-term yields lower, while medium and longer duration bonds will settle into a narrow range. This dynamic would represent an opportunity for investors to capture attractive yields in high-quality bonds, which continue to offer better returns compared to the ultra-low rates of the 2010’s. As short-term rates decline, investors may want to consider modestly lengthening duration to lock in higher yields before further easing lowers rates. However, unprecedented government debt levels could introduce additional volatility in bond markets, underscoring the advantage of holding bonds to maturity rather than buying bond funds, which have additional principal risk.