Vanguard, a major asset management firm, has released its economic and market outlook for 2025. The firm takes a cautious stance on equities compared to bonds, citing the resilience of the US economy due to supply-side factors rather than monetary policy.
Vanguard predicts a GDP growth of 2.1% for the US and only 0.5% for the eurozone. The firm emphasizes that the US economy's strength is driven by increased productivity and a broader labor supply. However, there are concerns that strict implementation of protectionist policies could undermine these advantages and contribute to inflationary pressures. Vanguard expects real GDP growth in 2025 to settle closer to 2% than 3%.
There is a significant divergence in monetary policy between the US and the eurozone, with the European Central Bank expected to implement sharper interest rate cuts. The US Federal Reserve's key interest rate is projected to decrease only modestly. Vanguard does not anticipate a return to ultra-low interest rates and expects positive real interest rates.
While the outlook for bonds is optimistic, Vanguard expresses caution regarding the US equity market due to high valuations. The firm questions whether these valuations reflect rational market behavior or "irrational exuberance." Vanguard suggests that equity markets outside the US may offer better value for investors seeking growth.
The firm highlights the importance of supply-side factors in driving economic growth and challenges the notion that monetary policy is the primary driver. Vanguard cautions that protectionist policies and restrictive immigration measures could threaten the US economy's structural advantages and lead to inflationary pressures.
Investors are encouraged to adopt a balanced approach to their portfolios, considering the positive outlook for bonds and the nuanced picture of the equity market. Understanding the interplay between supply-side factors and monetary policy is crucial for making informed investment decisions.