2025 CIO Portfolio Outlook
In 2025, diversification will continue to be the key to a healthy portfolio. Though we believe U.S. markets will once again outperform their international rivals, high equity valuations, tightening bond spreads, a new Presidential administration, and an unstable geo-political environment could lead to heightened volatility and economic uncertainty. These risks highlight the importance of a well-diversified portfolio across asset classes, sectors, and geographies to mitigate risks while capitalizing on emerging opportunities, especially in the private markets.
Economists expect the U.S. economy to grow around 2.3% in 2025. Although slower than 2024, this steady growth indicates economic resilience, providing a foundation for continued investment opportunities. Odds of a recession have also fallen to around 25%. Not including the post-Covid stimulus of 2021, this is the lowest starting point we have seen since 2018. With a strong, yet slowing, economy and potential corporate tax reform, we expect profits to continue to grow in 2025. Historically, equities prices have risen lockstep with underlying earnings, which all point to another positive year for equity returns.
S&P 500 Price Index vs. Earnings
However, persistent inflation could cause the Federal Reserve to pause further interest rate cuts, which may temper the robust equity returns we have seen since the pandemic lows.
If borrowing costs remain above their historical averages, credit will continue to be an attractive asset class in 2025. As spreads continue to tighten in the public markets, private credit, especially, will continue to offer investors an attractive premium. Despite growing significantly in 2024, the private credit market is still a fraction of both public debt markets and private equity investment. As the capital markets continue to loosen after three years of uncertainty, we expect increased deal flow in 2025, which, along with broader acceptance of the private credit markets, should provide a tailwind for both direct and asset-backed lending. However, we are watching default rates and interest coverage ratios of underlying borrowers closely, while ensuring our fund managers are adhering to their strict underwriting criteria.
An increasing fiscal deficit and the heightened geopolitical risks are potential causes of volatility in 2025. However, U.S. government debt is projected to remain manageable for the next decade, though fiscal reforms are essential to maintain stability. Policy announcements from the new administration, along with tax and debt ceiling negotiations in Congress, will be watched closely. Internationally, China's aggressive posture toward Taiwan, escalating trade wars, and increased cyberattacks on U.S. infrastructure all further complicate the geopolitical equation. Furthermore, Russia's ongoing war in Ukraine, Iran's internal instability, and North Korea’s military advancements -- coupled with its alliance with Russia -- continue to exacerbate global tensions. These factors underscore the fragile state of global security and its potential economic repercussions. The intricate interplay of trade, security, and technology highlights the necessity for a well-diversified portfolio.
As we look ahead to 2025, navigating global market complexities requires a disciplined and proactive approach to portfolio management. With U.S. economic growth expected to moderate and geopolitical risks remaining elevated, broad diversification across both public and private markets is more important than ever. While equities are poised to benefit from steady earnings growth, private credit and other alternative investments offer attractive opportunities amid tightening bond spreads and elevated borrowing costs. By maintaining a balanced and diversified strategy, our clients can position themselves to weather potential volatility while seizing opportunities where they arise. We remain committed to helping you achieve your financial goals.
Given that each investor's risk tolerance and objectives are unique, we encourage you to consult with your financial advisor to assess how this information might affect your overall investment strategy.
For more information, please email us at contact@ballastrockpw.com should you have an questions.
