Columbia Threadneedle - 2025 Macro Outlook: Slower growth amid geopolitical uncertainty, but opportunities remain

With equity markets rising 25% in 2023, there was not really an expectation going into 2024 that we would see a further 20% gain. [1] So there has been an extraordinary equity run – particularly in the US. Why? Economic growth in the US has been solid, hovering around 3% year-on-year since the third quarter of 2023, and inflation has steadily decreased from 9% in 2022 to 3% as we entered 2024 and now down to around 2.5%.2 Both these things have been supportive.
In addition, earnings growth forecasts for 2025 in the US remain optimistic, at around 15%. This continued resilience is to some extent a little surprising, because the global economy is not without risks as we move into 2025. 

Headwinds are blowing

The geopolitical dangers we have experienced in 2024 have so far not led to a slowdown. But further escalation of multiple tensions remains a distinct possibility. The war continues in Ukraine, with both sides taking ground and no end in sight. In the Middle East the situation seems to be escalating, despite multiple pleas for a ceasefire. Both of these are human tragedies first and foremost, but it is our job to look beyond this at the economic consequence. Short-term volatility is a real concern, and in the long term the possible re-emergence of inflationary pressures, both of which will impact companies directly.

In the US, we have recently seen a victory for Donald Trump in the race to become President of the United States. We also saw the Republicans gain control of the Senate and the House of Representatives, which will make it easier for them to make their desired changes. This could mean lower taxes (not withstanding tariffs, which could go up) and reduced regulation, and have implications for international trade as we head through 2025.

Economic nationalism is increasingly baked in. Tariffs and sanctions tend to elicit reprisals and have the potential to spiral. This will likely be an important theme in coming years.

Divergence on a downward path

Many global economies suffered the same inflationary shock from 2023 onwards, but we are now seeing diverging approaches to subsequent recovery and economic growth.

The Bank of Japan is an outlier, having raised rates by 25bps in July. Elsewhere, the European Central Bank was the first to move with two 0.5% interest rate cuts. The Bank of England has been more cautious, with a cut-pause-cut approach, as high wage growth remains a concern. And in the US the Federal Reserve started late but did so with an aggressive 50bps cut and followed it up with a further 25bps in November (Figure 1). At the moment it appears it has been able to engineer a “soft landing”, but it’s all eyes on the labour market for signs of persistent weakness.

Figure 1: Rates tracking down … at differing paces

Source: Bloomberg, as at November 2024

Figure 2: The inflationary shock has subsided … for now

Source: Bloomberg, as at November 2024

Risks and opportunities in 2025

A new terminal interest rate means a new environment for companies to navigate. The rate-cutting cycle should create a favourable backdrop for high-quality bonds, but we think credit dispersion will increase in 2025. Balance sheet health across industries is not uniform, with highly leveraged companies particularly within high yield potentially vulnerable.

Equities enjoy a falling rate environment. But the likelihood of rates not returning to previous lows means companies’ capital allocation decisions will be key to successfully navigating this new environment. The US continues to be the most expensive market, trading in excess of 25x forward earnings; by contrast, the MSCI All-country world index ex-US is at 16.30x. That gap is near its widest in more than two decades. But the US also remains the most dynamic market in terms of diversity of companies, with some of the most advanced semiconductor equipment firms and artificial intelligence and generative AI businesses.

At some stage the US will be too expensive, but underperformance is most likely to happen when other areas grow faster. If, for example, Europe grows faster it will look attractive because it is that much cheaper. Do we expect it to do so? No. Elsewhere, China disappointed in 2024 and although we are now seeing that stimulus come through, will it be sufficient to drive sustainable higher economic growth? Coupled with challenges around its demographics and uncertainties over tariffs and global trade, there is some risk there.

Five years out from 2030

The energy transition will continue with further investment in alternative energy likely. But we would also expect that as we get closer to the 2030 deadlines, we will see a further dilution of energy transition targets. There is also the potential for these negotiations to become more political as well as pragmatic, with trade tariffs playing an increasing role.

Deficits: a new year concern

Budget deficits are not a worry until they become a worry – and they ought to become a worry. Major global economies – from the US, the UK and Japan to much of Europe – are running deficits of 5%-6% (despite Europe’s supposed 3% limit). That may be manageable if interest rates are low, but if deficits continue to rise and rates don’t come down as much as expected, financing the deficit becomes increasingly problematic. When this eventually becomes a focus, it will become a market-moving factor.

Bottom line

For equities to continue their exceptional performance we would need geopolitical risks to stabilise; growth, but not too much; steady but low inflation so rates can come down … a lot has to go right. So although we expect gains, we wouldn’t expect a continuation of the 20%-25% growth in the US stock market. Fixed income should start 2025 from a good base: yields are attractive and central banks are engaged in supportive, rate-cutting cycles, but disparities will exist. Stock and credit selection will be paramount.

All market data is Bloomberg as at November 2024 unless otherwise stated.

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.

Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. Risks are enhanced for emerging market issuers.

The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either.

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This is an advertising document. This document and its contents have not been reviewed by any regulatory authority.