The economic outlook for 2025 is a mix of optimism and caution. Global economic growth is expected to be just over three percent, with the United States leading the developed world in momentum, although slightly lower than in 2024. Europe is projected to have slightly better growth, but still lag behind the United States. Emerging markets are also expected to see a slight increase in growth, although China's performance is expected to soften compared to the previous year.
Inflation trends are expected to decline in most regions, with central banks likely to implement further interest rate cuts. However, the outcome of the upcoming U.S. elections and the resulting economic policies could introduce inflationary pressures, particularly affecting the Federal Reserve's interest rate trajectory.
Corporate Profit Expectations
Corporate profit expectations remain optimistic, especially in the U.S., but there is an anticipation of a more balanced distribution of profit contributions across sectors compared to the previous two years.
In the bond market, yields on European government bonds are expected to continue declining, particularly for German government bonds. Risk premiums for Italian and French bonds are also expected to decrease. On the other hand, yields on U.S. and Canadian bonds are expected to fall more sharply, as economic conditions in the Eurozone are perceived to be weaker. Credit spreads for both high-yield and investment-grade corporate bonds remain near their lows, making them vulnerable to corrections. While there has been a slight increase in risk premiums for high-yield bonds, investment-grade risk premiums remain exceptionally low. The debt service ratios of the corporate sector are solid, leading to a slightly positive outlook for investment-grade corporate bonds, while a more cautious stance is maintained for high-yield bonds.
In the equity markets, the U.S. has shown resilience with strong earnings performance. Optimistic expectations for future quarters are supported by a mixed set of indicators, leading to a neutral stance among investors. However, emerging equity markets are facing headwinds, particularly due to concerns about the potential impact of a Trump presidency on trade policies. This uncertainty has led to a decline in performance relative to developed markets, with manufacturing sector companies being particularly vulnerable to protectionist measures. The performance of emerging markets will be crucial in determining their future trajectory, as the implications of U.S. trade policy will likely shape investor sentiment and market dynamics.
In the commodity markets, cyclical industrial metals and energy commodities have experienced price declines, while precious metals have gained traction despite rising yields. This divergence highlights the complexities within the commodity space, where different asset classes respond differently to economic conditions and investor sentiment. Currently, there is no tactical allocation in commodities, reflecting a cautious approach amid market volatility. Investors are advised to remain vigilant as the dynamics within the commodity markets evolve, considering broader economic indicators and geopolitical developments.
Geopolitical risks continue to be a concern, with the hope that existing armed conflicts can be resolved or de-escalated. However, there is a significant potential for increased global economic tensions, especially with anticipated trade restrictions from the newly elected U.S. administration. These factors contribute to an environment of uncertainty, which could influence market sentiment and investment strategies moving forward.
Despite these challenges, the overall conditions for capital markets in 2025 appear constructive for both equities and bonds. Investors are entering the new year with a neutral stance, balancing optimism with caution as they navigate the complexities of the evolving economic landscape. The interplay between economic growth, inflation trends, and geopolitical developments will be crucial in shaping investment decisions in the months ahead.