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- [00:01]
Host
2024 was a year of transition for economies and global markets. Central banks began easing interest rates, US Elections signaled significant policy change, and generative AI made a quantum leap in adoption and development. Thank you for listening throughout 2024 as we navigated the issues and events that shape financial markets and society. We hope you'll join us next year as we continue to bring you the most up to date information on the financial world this week. Please enjoy some encores of episodes over the last few months and we'll be back with all new episodes in January from all of us at Thoughts on the Market Happy Holidays and a very happy New Year.
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Vishy Thiru Pattor
Welcome to Thoughts on the Market. I'm Vishy Thiru Pattor, Mogastali's chief fixed Income Strategist. Today in the podcast we are hosting a special roundtable discussion on what's ahead for the global economy and markets in 2025. I'm joined by my colleagues Seb Carpenter, Global Chief Economist Mike Wilson, chief U.S. equity strategist and the firm's Chief Investment Officer and Andrew Sheets, Global Head of Credit research. It's Monday, November 18th at 10:00am in New York. Gentlemen, thank you all for taking the time to talk. We have a lot to cover and so I'm going to go right into it. Seth, I want to start with the global economy. As you look ahead to 2025, how do you see the global economy evolving in terms of growth, inflation and monetary policy?
- [01:29]
Seth Carpenter
I have to say it's always difficult to do forecasts, but I think right now the uncertainty is even greater than usual. It's pretty tricky. I think if you do it at a global level, we're not actually looking for all that much of a change around 3ish percent growth, but the composition is surely going to change some. So let's hit the big economies around the world. For the US we are looking for a bit of a slowdown. Now some of that was unsustainable growth this year and last year. There's a bit of waning residual impetus from fiscal policy that's gonna come off in growth rate terms. Monetary policy is still restrictive and there's some lags effects there. So even though the Fed is cutting rates, there's still gonna be a little bit of a slowdown coming next year from that. But I think the really big question you alluded to this in your question is what about other policy changes here? For fiscal policy, we think that's really an issue for 2026. That's when the Tax Cut and Jobs act tax cuts expire. And so we think there's going to be a fix for that, but that's going to take most of 2025 to address legislatively. And so the fiscal impetus really is a question for 2026. But immigration tariffs, those matter a lot. And here the question really is, do things get front loaded? Is it everything all at once right at the beginning? Is it phased in over time, a bit like it was over 2018? I think our baseline assumption is that there will be tariffs, there will be an increase in tariffs, especially on China, but they will get phased in over the course of 2025. And so as a result, the first thing you see is some increase in inflation, and it will build as the tariffs build. The slowdown from growth, though, gets backloaded to the end of 2025 and then really spills over into 2026. Now, Europe is still in a situation where they've got some sluggish growth. We think things stabilize, we get 1% growth or so. So not a further deter, not a huge increase that would make you super excited. The ECB should probably keep cutting interest rates. We actually think there's a really good chance that inflation in the euro area goes below their target. And so as a result, what do we see? Well, the ECB cutting down below their best guess of neutral. They think 2% nominal is neutral, and they go below that. China is another big curveball here for the forecast because they've been in this debt deflation spiral for a while. We don't think the pivot in fiscal policy is anywhere near sufficient to ward things off. And so we could actually see a further slowing down of growth in China in 2025 as the policymakers do this reactive kind of policy response. And so it's going to take a while there. And we think there's a downside risk there on the upside. I mean, we're still bullish on Japan, we're still very bullish on India and its growth. And across other parts of em, there are some bright spots. So it's a real mixed bag. I don't think there's a single trend across the globe that's going to drive the overall growth narrative.
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Vishy Thiru Pattor
Thank you, Seth. Mike, I'd like to go to you next. 2024 has turned out to be a strong year for equity markets globally, particularly for US And Japanese equities. While we did see modest earnings growth, equity returns were mostly about multiple expansion. How do you expect 2025 to turn out for the global equity markets? What are the key challenges and opportunities ahead for the equity markets that you see.
- [04:42]
Mike Wilson
Yeah, this year was interesting because we had what I would say was very modest earnings growth in the US in particular relative to the performance. It was really all multiple expansion. That's probably not going to repeat this year. We're looking for better earnings growth given our soft landing outcome from an economic standpoint and rates coming down. But we don't think multiples will expand any further. In fact, we think they'll come down by about 5%. But that still gets us a decent return in the base case of sort of high single digits. Japan is the second market we like relative to the rest of the world because of the corporate governance story. So there too we're looking for high single digit earnings growth and high single digits or 10% return in total. And Europe is one. We're sort of down ticking a bit because of tariff risk and also pressure from China where they have a lot of export business. You know, the challenges I think going forward is that growth continues to be below trend in many regions. The second challenge is that, you know, high quality assets are expensive everywhere. It's not just the U.S. it's sort of everywhere in the world. So you get what you pay for. You know, the S and P is extremely expensive, but that's because the ROE is higher and growth is higher. So you know, in other words, these are not well kept secrets. And so just valuation is a real challenge. And then of course the consensus views are generally fairly narrow around the soft landing and that's very, very priced as well. So the risks are that the consensus view doesn't play out. And that's why we have two bull and two bear cases in the US just like we did in the mid year outlook. And in fact what happened is one of our bull cases is what played out in the second half of this year. So the real opportunity from our standpoint, I think this is a global call as well, which is that we continue to think there's going to be pretty big rotations around the macro outlook, which remains uncertain given the policy changes we're seeing in the US potentially and also the geopolitical risk that still is out there. And then the other big opportunity has been stock picking. Dispersion is extremely high. Clients are really being rewarded for taking single stock exposures. And I think that continues into next year. So we're going to do what we did this year is we're going to try to rotate around from a style and size perspective depending on the macro outlook.
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Vishy Thiru Pattor
Thank you, Mike. Andrew, we are ending 2024 in a reasonably good setup for credit markets with spreads at or near multi decade tides for many markets. How do you expect the global credit markets to play out in 2025? What are the best places to be within the credit spectrum and across different regions?
- [07:05]
Andrew Sheets
I think that's the best way to frame it, to start a little bit about where we are and then talk about where we might be going. I think it's safe to say that this has been an absolutely phenomenal backdrop for corporate credit. Corporate credit likes moderation and I think you've seen an unusual amount of moderation at both the macro and the micro level. You've seen kind of moderate growth, moderating inflation, moderating policy rates across dm. And then at the micro level, even though markets have been very strong, corporate aggressiveness has not been M and A has been well below trend. Corporate balance sheets have been pretty stable. So what I think is notable is you've had an economic backdrop that credit has really liked. As you correctly note, we've pushed spreads near 20 year tights based on that backdrop. But it's a backdrop that credit markets liked but US voters did not like and they voted for different policy. And so when we look ahead, the range of outcomes I think across both the macro and the micro is expanding. And I think the policy uncertainty that markets now face is increasing both scenarios to the upside, where things are hotter and you see more animal spirits and risk to the downside, where potentially more aggressive tariffs or action on immigration creates more kind of stagflationary types of risks. So one element that we're facing is we feel like we're leaving behind a really good environment for corporate credit and we're entering something that's more uncertain. But then balancing that is that you're not going to transition immediately. You still have a lot of momentum in the US and European economy. When I look at the forecast from Seth's team, the global economic numbers, or at least the DM economic numbers into the first half of next year still look fine. We still have the Fed cutting, we still have the ECB cutting, we still have inflation moderating. So part of our thinking for this year is it could be a little bit of a story of two halves that we titled our section on borrowed time that credit is still likely to hold in well and perform better in the first half of the year, yields are still good, the Fed is still cutting, the backdrop hasn't changed that much. And then it's the second half of the year where some of our economic numbers start to show more divergence where the Fed is no longer cutting rates, where all in yield levels are lower on our interest rate forecast, which could temper demand. That looks somewhat trickier in terms of how we think about what we like within credit. We do think the levered loan market continues to be attractive. That's part of credit where spreads are not particularly tight versus history. That's one area where we still see risk premium. I think this is also an environment where regionally we see Asia underperforming. It's a market that's both very expensive from a spread perspective, but also faces potentially kind of outsized economic and tariff uncertainty. And we think that the US might outperform in context to at least initially investors feeling like the US is at less relative risks from tariffs and policy uncertainty than some other markets. So with Vishi, I'll pause there and pass it back to you.
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Vishy Thiru Pattor
Thanks Mike, Seth and Andrew. Thank you all for listening. We are going to take a pause here and we'll be back tomorrow with our Year Ahead Roundtable continued where we'll share our forecast for government bonds, currencies and housing. As a reminder, if you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.
- [10:42]
Seth Carpenter
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