Five for 2025
Our senior investment leaders discuss their market and investment themes for the coming year.
Macro: Going for Goldilocks
1. A Year of Above-Trend Growth
While the politics may change, industrial policy aimed at influencing domestic production patterns will continue, whether achieved via government spending and investment, tax policy, trade policy, deregulation or other means. If inflation can be contained—and we think it can—central banks can stand aside and allow economies to run a little warm. That is a recipe for above-trend U.S. GDP growth, which could drag some of the world’s other economies with it. The debt and deficit implications, and the question of whether capital is being well allocated, may surprise investors by being manageable concerns in 2025.
2. Expanding the Soft Landing by Broadening Real Income Growth
The detrimental impact of high inflation on lower-income consumers and small businesses has been an important driver of this year’s political uncertainty. Countries and governments that deliver moderate inflation and broader participation in positive real wage growth and positive real revenue growth will increasingly come to define success, visible in data points such as higher consumer confidence, political approval ratings and GDP growth rates. While it remains to be seen whether specific policy mixes can achieve this, we see evidence that the incoming U.S. administration at least recognizes the objective, and active industrial policy is evidence of growing recognition elsewhere.
The Soaring Cost of Staples Over the Years
Consumer Price Index rises, October 2020 to October 2024
Source: FactSet. Data as of November 18, 2024.
Equities: The Market Opportunity is More Than Seven Stocks
Opportunity in Value Stocks, Small Caps and Non-U.S. Markets
Five-year annualized price appreciation and current valuation
Source: FactSet, Standard & Poor’s, MSCI, Neuberger Berman. Data as of November 11, 2024.1
3. The Stage is Set for Broadening Equity Market Performance
Deregulation, business-friendly policies, moderating inflation and lower rates may allow a broadening of earnings growth and price performance. At the same time, mega-cap technology growth rates are likely to decelerate and normalize as capital expenditure ramps up. Value and small-cap stocks, and sectors such as financials and industrials, could begin to catch up with mega-cap technology. Non-U.S. markets could perform more strongly on higher global growth and lower commodity prices. Relative valuations, as well as fundamentals, should provide support for this theme.
Fixed Income: Fed Up With Fed-Watching
4. Bond Markets Will Focus on Fiscal Rather than Monetary Policy
For more than two years, bond markets have been dominated by inflation data and the responses of central banks. We think a reacceleration of inflation can be avoided next year, and that central banks will settle into the dull routine of debating where the neutral rate sits. Bond investors will likely shift focus to the growth outlook through most of 2025, and possibly deficits and the term-premium question late in the year and into 2026. The result will be moderately steeper yield curves and a migration of bond market volatility from the short end of the curve to the intermediate and long parts.
Are High-Grade Corporate Bonds Becoming the New Safe Haven?
U.S. Treasury and corporate bonds, yields and credit spread, November 2023 to November 2024
Source: FactSet. Data as of November 18, 2024.2
Alternatives: The Art of the Deal
M&A Fell to a 20-Year Low this Year
Number and value of worldwide merger and acquisition transactions, 1985 to 2024
Source: Institute for Mergers, Acquisitions and Alliances (IMAA). Data as of November 11, 2024.3
5. Mergers and Acquisitions Are Set to Surge
Numerous factors are aligning to release a pent-up torrent of corporate dealmaking: above-trend growth; buoyant public equity market valuations; a more stable inflation and central bank outlook; the return of banks to the leveraged lending market; declining rates and tight credit spreads; and, perhaps most importantly, an expected change in regulatory stance in the U.S. That said, private equity secondaries and co-investments will continue to flourish as liquidity is still required to work through a huge backlog of mature investments, and it will remain challenging to raise new primary funds. Event-driven hedge fund strategies will benefit from a big new opportunity set.
Solving for 2025
Our senior investment leaders discuss their market and investment themes for the coming year.
Meet the Team
1 Source: FactSet, Standard & Poor’s, MSCI, Neuberger Berman. Indices: Equal-weighted portfolio of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla with no rebalancing; S&P 500 Value Index; Russell 2000 Index; MSCI EAFE Index. The P/E multiple for Magnificent 7 is the mean of the seven constituents as of October 31, 2024. The P/E multiple of the Russell 2000 Index is calculated with negative earners excluded. Data as of November 11, 2024.
2 Source: FactSet. Indices: Bloomberg U.S. Aggregate—Treasury Index; Bloomberg U.S. Aggregate—Corporate (A or >) Index. Data as of November 18, 2024. Nothing herein constitutes a prediction or projection of future events or future market behavior. Historical trends do not imply, forecast or guarantee future results. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
3 Source: Institute for Mergers, Acquisitions and Alliances (IMAA). Data as of November 11, 2024. Nothing herein constitutes a prediction or projection of future events or future market behavior. Historical trends do not imply, forecast or guarantee future results. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
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