Quarterly Market Outlook - 1Q 2025

  • A complex global picture is emerging, with significant divergence in growth and policy actions.
    While the U.S. continues to thrive, China and Europe are struggling. Proposed U.S. import tariffs threaten to intensify these diverging fortunes, reinforcing the U.S. exceptionalism theme. Policymakers will need to respond accordingly.
  • The U.S. economy remains resilient, but with pockets of weakness requiring careful watch.
    Strong household and corporate balance sheets have created a very resilient economy. Nonetheless, low-income households and small businesses are struggling, highlighting the need for further interest rate relief to prevent weakness from spreading.
  • The Federal Reserve will likely adopt a slower, more cautious approach to policy.
    Recent U.S. economic strength has combined with a rising threat of tariffs to increase upside inflation risks. The Fed is set to cut rates just a few times in 2025, likely hitting a floor of 3.75%. Interest rate relief will be shallow and restricted.
  • Equity market gains may be challenged by elevated bond yields and expensive valuations.
    A strong economic backdrop will support continued solid earnings growth. Yet, expensive valuations imply elevated vulnerability to any earnings disappointment, while the recent rise in bond yields may exert pressure on gains.
  • Fixed income credit spreads to remain range bound, with a bias upwards.
    The shallow Fed cutting cycle means that Treasury yields are unlikely to trend much lower. Credit spreads are near historic tights, but solid fundamentals and elevated starting yields imply credit could generate strong returns in 2025.
  • Flows into cash continue, but in this constructive environment, risk assets are more favorable. 
    While broad valuation concerns and policy uncertainty persist, the numerous pockets of value, coupled with inflation pressures and reinvestment risk, underscore the importance of investors optimizing opportunities in this favorable macro environment.

DISCLOSURES

Investment involves risks. Past performance of any particular fund or product mentioned in this document is not indicative of future performance of the relevant fund or product, and the value of the each fund or product mentioned in this document may go down as well as up. You should not invest solely in reliance on this document. There is no assurance on investment returns and you may not get back the amount originally invested.

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

Equity investments involve greater risk, including higher volatility, than fixed-income investments. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. Non-investment grade securities offer a potentially higher yield but carry a greater degree of risk. Risks of preferred securities differ from risks inherent in other investments. In particular, in a bankruptcy preferred securities are senior to common stock but subordinate to other corporate debt. Emerging market debt may be subject to heightened default and liquidity risk. Risk is magnified in emerging markets, which may lack established legal, political, business, or social structures to support securities markets. Small and mid-cap stocks may have additional risks including greater price volatility. Treasury inflation-protected securities (TIPS) are a type of Treasury security issued by the U.S. government. TIPS are indexed to inflation in order to help investors from a decline in the purchasing power of their money. As inflation rises, rather than their yield increasing, TIPS instead adjust in price (principal amount) in order to maintain their real value. Inflation and other economic cycles and conditions are difficult to predict and there Is no guarantee that any inflation mitigation/protection strategy will be successful. Contingent Capitals Securities may have substantially greater risk than other securities in times of financial stress. An issuer or regulator’s decision to write down, write off or convert a CoCo may result in complete loss on an investment. Real assets include but not limited to precious metals, commodities, real estate, land, equipment, infrastructure, and natural resources. Each real asset is subject to its own unique investment risk and should be independently evaluated before investing. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes.

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