Northern Trust Asset Management 2025 Global Investment Outlook: Expect U.S. Stocks to Outperform; High Yield Bond Market Is Attractive

Published: November 29, 2024

Northern Trust Asset Management (NTAM) expects strong earnings and healthy sales growth to support U.S. stock outperformance in 2025. In the fixed income market, income potential combined with generally higher credit quality make high yield bonds attractive for investors.

Summarizing the outlook, NTAM Chief Investment Officer of Global Asset Allocation Anwiti Bahuguna, Ph.D., said: “In multi-asset portfolios, we maintain a preference for equities over fixed income. We expect U.S. equities to benefit from an economic soft landing and healthier corporate profits than most other regions. In 2025, we expect more modest gains for 60/40 portfolios with U.S. equities leading the charge again.”

NTAM Chief Investment Officer of Global Fixed Income Christian Roth added, “Within fixed income, we continue to favor high yield bonds because of elevated yields, strong fundamentals and a supportive market backdrop. Credit ratings upgrades are outpacing downgrades, and the overall credit quality of the high yield market remains historically high.”

NTAM’s 2025 Global Investment Outlook across all asset classes globally may be found here.

Asset class highlights include:

• U.S. Equities: We expect softer but continued U.S. economic growth to still translate into healthy earnings and revenue growth. We are also constructive on small cap equities, which will likely benefit from lower interest rates as about half of small cap debt is floating interest rate.
• High Yield Bonds: Above-average yields, combined with historically high credit ratings in the high yield market, support a strong outlook.
• Money Markets: Money market funds remain an attractive alternative to other cash management options like deposits or Treasury bills, even as the Federal Reserve has started to cut rates. We see little chance of money market rates returning to near-zero. The Bank of England, with concerns over inflation, will likely cut rates at slower pace than European Central Bank while we expect Japan to increase its policy rate slowly.
• Treasury Inflation-Protected Securities (TIPS): While U.S. inflation likely will settle into a range above the Federal Reserve's target of 2% for 2025, we expect the path to be bumpy. We believe TIPS are an important defensive portfolio component for unanticipated inflation.
• Private Credit: We believe private credit has room to grow, supported by the shift of lending from traditional capital providers to private credit asset managers, while lower interest rates encourage potentially more mergers and acquisitions in 2025.

Global Economic Outlook

In the U.S., NTAM’s base case economic outlook for 2025 is a soft landing. NTAM expects economic growth to settle slightly below 2024 levels, inflation to ease further toward 2% and the Federal Reserve to proceed gradually cutting rates. However, NTAM sees two risk cases from the economic effects of policy initiatives of the incoming administration of President-elect Donald Trump: reflation and supply restraint. In both cases, the net effect of restrictive immigration, higher tariffs, income tax cuts and deregulation could create economic conditions that disrupt the current soft landing path.

In Europe, the economic picture straddles growth and contraction. A resilient labor force and target-level inflation is coupled with manufacturing sector contraction and risks of further geopolitical tensions and trade barriers. In the U.K., NTAM expects the Bank of England to maintain a gradual and cautious approach to further interest rate cuts.

In Asia, while the overall optics are for favorable growth, the outlook for China remains a central concern, with economic growth falling short of the government’s 5% target. A slowing economy is deepening a deflationary loop, with consumer price inflation slightly above zero and producer prices deep into deflation. Japan’s economic growth in 2024 was unspectacular, but wage gains that may support consumer spending are spreading across the economy and those gains may continue into 2025.