Macro Pulse for January 12: Top 5 Questions for 2025

Q1. Will the economy see above trend growth (>2%) this year?

No, not likely. Though we have a constructive economic view for this year, we expect growth to slow towards trend over the course of the year. Although the Fed is cutting rates, the overnight rate remains above the neutral rate, meaning the Fed is intent on moderating growth without reigniting inflation. We looked through the data and found that since 1974 the labor market hasn't strengthened during Fed cuts, suggesting we're likely to see a gradual slowdown rather than an acceleration. This isn’t to say we won’t see a quarter or two of solid growth – as evidenced by the strong December jobs report. We believe headwinds may pick up later in the year due to a combination of spending, trade, and immigration policies that may impact growth.

Q2. Is recession risk off the table?

Likely yes, in the near term, in our view. It would be imprudent to claim that the probability of the U.S. economy experiencing a recession in the next 6 months is zero, but we do believe the chance are low, potentially less than 10%. Growth is resilient, consumer spending is holding up, and the labor market remains robust. Additionally, we see few imbalances in the economy – both in the consumer and corporate sectors – that would lead to a significant pull back in economic activity (see Chart A below).

Q3. Should the market be worried about inflation?

Yes, inflation is likely to remain a key risk for the Fed and markets in 2025, in our view. Inflation has remained sticky because Fed hikes have had little impact on economic activity – the extended low-rate environment allowed for deleveraging and refinancing both in households and corporates. Additionally, the threat of tariffs and rising manufacturing activity hint at further inflationary pressures ahead.

On the yields front, particularly at the longer end of the curve, we’ve seen increases due to a higher term premium. Nevertheless, persistent inflationary pressures are likely to keep a floor under yields. We expect that the 10-year Treasury bond would find strong buying interest if its yield reaches 5%, effectively setting a ceiling at that rate. Conversely, a liquidity boost in the first half of the year could ease yields, potentially establishing a floor around 3.75% for the U.S. 10-year yield.

Q4. How should investors navigate a higher, more volatile interest rate environment?

Deploy cash at higher rates. With money market returns being high, staying in cash has been appealing, yet the current yield environment presents an opportunity to deploy cash at higher rates. Said simply, cash looks better than it used to, but so does everywhere else on the curve Considering credit investments, we still like short-duration high yield credit as it’s offering the best yield per year of duration risk (see Chart B below). Leveraged loans also remain an attractive option due to higher yields compared to similar asset classes.

Q5. Will U.S. equities outperform non-U.S. equities this year?

Likely yes, in our view, though this is a broad assertion. Last year, the S&P 500 outperformed non-U.S. equities by the widest margin since 1997 (see Chart C below). From a valuation perspective, the case for non-U.S. equities is clear. However, as we like to say, valuation often represents the scope of an opportunity, not the timing. Both non-U.S. developed and emerging markets have been struggling – Europe is experiencing slowing growth, Japan is facing higher interest rates, and China is attempting to deleverage while facing trade challenges. Though U.S. markets may not win by the same margin this year, we believe U.S. equities have the potential to continue outperforming until U.S. growth slows or the rest of the world catches up.