The global economy has defied expectations in recent years. Forecasts of recession — 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.
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.
In the U.S., the incoming Trump administration is poised to pursue policies that seek to accelerate activity domestically, but which may increase tensions externally. Some controversial policies may also lead to fractious domestic politics in the U.S. and elsewhere.
Amid the inevitable noise, we remain focused on the drivers of global growth, both shorter and longer term, while monitoring the evolving risks.
Continuing Growth, Potential Rising Profits
In our view, global GDP may rise at 2.9% in 2025 and 2026, compared to 2.6% in 2024 — figure 1. Among advanced economies, we see the U.S. remaining as the main engine of growth. We recently upgraded our U.S. growth forecast for 2025 to 2.4%.
| Global Markets | 2020 | 2021 | 2022 | 2023 | 2024E | 2025E | 2026E |
|---|---|---|---|---|---|---|---|
| US | -2.2 | 5.8 | 1.9 | 2.5 | 2.7 | 2.4 | 2.1 |
| China | 2.2 | 8.5 | 3.0 | 5.2 | 4.9 | 5.2 | 4.8 |
| EU | -6.3 | 6.2 | 3.4 | 0.5 | 0.7 | 1.2 | 1.6 |
| UK | -10.3 | 8.6 | 4.8 | 0.3 | 1.0 | 1.1 | 1.5 |
| Global | -3.2 | 6.0 | 3.3 | 2.6 | 2.6 | 2.9 | 2.9 |
| CGWI EPS Forecasts (%) | |||||||
| Global Markets | 2020 | 2021 | 2022 | 2023 | 2024E | 2025E | 2026E |
| S&P 500 | -13.5 | 46.9 | 6.0 | 0.6 | 9.2 | 7.6 | 7.6 |
| EPS Level | 122 | 209 | 222 | 223 | 244 | 262 | 280 |
As in his first administration, Donald Trump will aim to boost growth while trying to avoid stronger U.S. demand simply “leaking abroad” as the U.S. consumes more imports. Deregulation and tax cuts are key to his growth agenda. We will be watching U.S. small business confidence particularly for signs that the prospect of loosening regulation is enhancing currently depressed sentiment.
Of course, Trump’s agenda comes with risks. Any capital spending boom could see misallocation of resources. The US economy might simply “run hotter” without any increase in its growth potential.
If enacted, tariffs and tough action on illegal immigration would also likely raise goods prices and squeeze the supply of labor, feeding through into higher inflation, one of the primary issues of the campaign for voters across the country.
That said, we suspect Trump’s domestic and external policies may prove rather different from his campaign speeches.
For now, we expect U.S. core inflation to drop to 2% during the first half of next year thanks partly to the strong dollar and cheaper imports. We think the Fed may be able to cut policy rates, if more gradually, through the first half of 2025. The Fed funds target range may bottom around 3.5%-4% in 2025.
Against this backdrop, we look for further growth in corporate profits both in the U.S. and the rest of the world. Once more, this “breaks the rules.” Interest-rate cutting cycles have typically occurred at times of falling rather than rising profits.
Forecasts may not be attained. Past performance is not indicative of future results. Views/opinions are subject to change.
Geopolitical Discord
We expect Trump to pursue some version of the swiftly imposed 60%-or-higher tariffs on imports from China that he promised in his election campaign. Only in time will we learn if this is a negotiating gambit to achieve other China-related goals.
We are skeptical that much will be achieved other than a shift in production and trade between countries. Some U.S. companies would almost inevitably face harsh retaliatory measures from China.
The blanket 10-20% tariffs Trump promised on all other countries’ imports may be intended as a bargaining chip to persuade others to lower their tariffs on U.S. goods. The European Union — where we already expect further limp GDP growth in 2025 — looks vulnerable given its export reliance on U.S. trade.
We consider trade disputes among the greater risks to U.S. and world equity markets resulting from the U.S. election. Even if a full-blown trade war is avoided, headlines about U.S. policy are likely to cause market volatility, as in 2018.
Much of the bull market in risk assets since late 2022 has occurred amid heightened geopolitical tensions, including the wars in the Middle East and Ukraine.
Such events have not historically changed the direction of the global economy or markets.
There is now greater uncertainty over how the new U.S. administration will approach these and other geopolitical challenges. Trump prides himself on unpredictability in foreign affairs and believes that rivals and potential foes will be more cautious on his watch.
Nevertheless, geopolitical tensions and flashpoints look set to persist in the years ahead — leaving market volatility in their wake.
Forecasts may not be attained. Past performance is not indicative of future results. Views/opinions are subject to change.
Staying the Course: Broadening Portfolio Horizons
In recent years, U.S. focused investors could have achieved strong results. US equities and US bonds would have returned 45.3% and 7.7% respectively since the end of 2022, compared to 28.3% and 12.3% for non-US equities and fixed income.1
We think this is much less likely to recur over the next decade.
- Richly valued large-cap U.S. equities — the main constituent of developed equities — may produce only modest returns averaged between now and 2035.
- Equity valuations from other developed markets and emerging markets suggest scope for potentially improving returns.
Of course, our call is not to abandon either U.S. equities or Treasuries. Both are core components of almost any diversified asset allocation and will remain so for the long term. Instead, we argue for not overlooking entire markets and asset classes worldwide.
- We frequently encounter investors whose portfolios are much narrower than their long-term investment plans envisage.
- Large cash holdings, exposure to a single equity market, investment grade fixed income only and, among suitable and qualified investors, a complete absence of any alternative asset classes are all too common.
Naturally, broadening allocations is not a free lunch. The potential returns to be sought from high yield fixed income or alternatives entail taking on additional risks, which may be unfamiliar.
These may include illiquidity and even a total loss of principal. Diversification doesn’t guarantee a profit or protect against loss in falling markets.
Over time, though, we believe that globally diversified portfolios may prove be equipped to seek growth and endure tougher times. Concentrated and cash heavy allocations are likely to disappoint. We advocate for staying the course and broadening where appropriate for individual investment objectives.
1 Bloomberg, as of Nov 5, 2024. U.S. and non-U.S. equities are represented by MSCI USA and MSCI ACWI ex USA respectively, US Fixed Income by Bloomberg US Aggregate Bond Index and Global Aggregate ex US indices.
Forecasts may not be attained. Past performance is not indicative of future results. Views/opinions are subject to change.
Equities: Shifting Leadership in an Ongoing Bull Market
We believe corporate earnings can keep rising over the coming year. More sectors saw earnings progress in 2024 than in 2023, which further potential in 2025. If so, we may see broader participation in the bull market, extending further beyond the U.S. technology giants that have led for much of it.
Naturally, there are risks to our positive view. Valuations in the U.S. are high by past standards. On a ten- year view, we believe this may point to more modest returns for developed equities, of which the U.S. makes up some 70% - see The Long-Term View for Asset Classes - Moderate Optimism. High valuations leave equities more exposed when things go wrong.
- The incoming Trump administration could widen the already-gaping U.S. fiscal deficit further. In turn, this could stoke inflationary fears.
- If the U.S. Federal Reserve then reversed its current interest-rate easing cycle, it might choke off the bull market.
- Emerging markets (which are sensitive to rising U.S. rates and a stronger U.S. dollar) might be hit.
- Trade policy is another uncertainty. Were the U.S. to impose sweeping tariffs on imported goods (likely provoking retaliation in kind) companies’ supply chains could be disrupted.
Nevertheless, we see potential in various parts of equities for 2025 and thereafter, both in the U.S. and well beyond.
Forecasts may not be attained. Past performance is not indicative of future results. Views/opinions are subject to change.
Fixed Income: Credit at the Core
The U.S. Federal Reserve looks set to continue cutting overnight interest rates cautiously in 2025. The Fed Funds rate could fall from its current 4.75% to about 3.75% by year-end 2025.2 These declines may be enabled by a slowly declining inflation rate and a weakening yet positive employment picture. The U.S. central bank has repeatedly said that it will keep reducing rates based on improving inflation data, and that it will cut even more aggressively if the labor market unexpectedly weakens.
What Might this Mean for Fixed Income
Investors?
Rate cuts typically boost bond prices. But we believe that U.S. Treasury yields already priced in most of the expected rate cuts and are now pricing in the possibility of higher government deficits and therefore an increasing supply of bonds. For example, the 5-year U.S. Treasury yield is currently near 4.28%.2
Likewise, we believe the 10-year yield may rise slightly from its current 4.42% to about 4.75% by end-2025.2 It is likely that only a data indicating an increasing possibility of a recession or a geopolitical shock might push yields much lower.
In those cases, we could see investors flock to U.S. Treasuries, pushing prices up.
Given the likelihood of further but limited Fed rate cuts, and uncertainty around the new administration’s fiscal plans, investors might focus on a diversified fixed income portfolio with intermediate duration rather than bank deposits and Treasury bills.
2 Bloomberg, as of Nov 13, 2024
Forecasts may not be attained. Past performance is not indicative of future results. Views/opinions are subject to change.
Unstoppable Trends
AI: Getting More Real
The International Data Corporation forecasts AI-related spending on hardware, software, and services to rise from $232 billion in 2023 to over $500 billion by 2027. This has boosted profits and the share prices of those that design and make AI chips, servers and related equipment. (Source: Citi Research, Gartner, as of Aug 2024. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events.)
In 2025 and thereafter, we see AI adoption spreading. We highlight six areas in tech and beyond where AI may create investment potential.
Reinventing Software:
While chips and hardware are the engines that power AI, software companies are at the forefront of building programs and services that integrate AI with legacy applications.
Smarter Healthcare:
New possibilities for diagnostics, treatment planning and patient care are emerging. In many cases, AI analyzes X-rays, MRIs, and CT scans faster and more accurately than humans.
Financial Services’ New Frontiers:
Financial institutions are using AI to improve operations, data analytics and customer care. On the investment side, trading activities are being refined by processing market data at scale, enabling better execution techniques.
Rise of Robotics:
Thanks to AI, robots across many industries are performing more complex tasks. AI-enhanced robots can increasingly adapt to new environments without human intervention. In manufacturing, for example, they are performing high-precision work such as assembling microelectronics.
Empowering Education
Language translation tools and AI tutoring systems are boosting education access. Students in remote areas, for example, can now learn more easily in their native languages.
Enhanced Agriculture:
AI is making agriculture more sustainable and efficient. Precision agriculture uses real-time data from sensors, drones and satellites to monitor crop health, soil and weather.
Potential AI Opportunities and Risks:
We believe the AI revolution has far to go, creating ongoing demand for many of the chips and other AI infrastructure and services. We expect both the potential business benefits and investment performance of AI to spread out. One risk is that investors grow impatient with AI investment, penalizing firms that cannot convert capital expenditures into earnings quickly. As AI models are deployed by some, stragglers may face disruption.
Forecasts may not be attained. Past performance is not indicative of future results. Views/opinions are subject to change.
For more details on our Market Outlook, including Long-Term View for Asset Classes, Private Asset Classes, Hedge Funds, Dollarization of Cryptocurrencies, and Opportunistic Ideas check out the full report:
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