Opportunities, Risks for a “Rule-Breaking” Expansion
What happened last week?
The S&P 500 and Dow fell by -0.64%, and -1.82%, respectively, while the Nasdaq rose by 0.34%.
This week the Fed is expected to lower rates by 0.25% on December 18, following the European Central Bank 0.25% cut last week and larger 0.50% cuts by both the Bank of Canada and Swiss National Bank.
As we describe in our newly released Wealth Outlook 2025, the global economy has defied expectations.
Forecasts of recession in recent years — backed up by usually reliable indicators — came to nothing. Despite the sharpest and most synchronized interest rate hiking campaign by global central banks in decades, growth has endured. Corporate profits in the U.S. recently reached new highs, with profits elsewhere closing in on their former peak.
3 Things to Know
The Hidden Recession and its Impact on 2025 and 2026
The persistence of growth despite numerous contraction signs is the reason we call it a “rule-breaking expansion.” Since 2020’s collapse and rebound, annual measures of global growth haven’t fallen below 2.5%. US growth over any 12-month period hasn’t fallen below 1.3%.
In 2025 and 2026, we expect this rule-breaking expansion to continue. We also expect the growth to be accompanied by further geopolitical and political discord. Amid the inevitable noise, we remain focused on the drivers of global growth, both shorter and longer term, while monitoring the evolving risks.
Growth Masked the Economic Weakness from 2022–2024
So why did broad economic output and employment endure in growing? The rebound from the uniquely severe collapse in services during the pandemic allowed related industries to recover.
This offset the losses in cyclical industries, those most impacted by central bank tightening and fears of a wider downturn.
Meanwhile, the bear market of 2022 in bonds, with another 25% intra-year drop in the S&P 500 was the “double dip” that some investors still fear today.
For Investors Seeking a Bear Market, It May Not Happen in 2025
Much of what we’ve just explained about the economy should be considered hindsight for investors.
The S&P 500’s 58% total return over the past two years came from a depressed point in 2022. But EPS for US large cap shares rose just 10% over the same period, with much more of the gains in profits expected to be delivered ahead.
We must consider too that the S&P 500’s strong performance for the past decade, 13.3% annualized, and stark outperformance versus most other assets alters the long-term return outlook. A key message of our Wealth Outlook 2025 is to broaden investment horizons and avoid building a portfolio solely dependent on S&P 500 returns going forward.
We were overweight US large caps through November and continue to be overweight to some degree in US equities overall. But for the coming year, we’ve chosen a tactical mix that diversifies and broadens to many of the less expensive US and global assets that have been left behind.
See our weekly CIO Strategy Bulletin for more details