5 Things on the Horizon for 2025
As we approach the end of 2024, it’s an opportune moment to look ahead to 2025 and identify key trends that are likely to shape the new year. Here are five significant themes to watch.
1. Strengthening Labor Market
The Sahm rule, which signals a recession when the three-month average unemployment rate rises by 0.5% from its 12-month low, was triggered in July and has never failed to coincide with a recession. This sparked concerns about a labor market slowdown and prompted discussions about the Federal Reserve’s response.
However, the unemployment rate has since decreased slightly to 4.2%, with the labor force size remaining stable. We anticipate that continued border enforcement will keep migration levels low, thereby limiting labor force growth and potentially firming up the labor market.
2. Declining Cash Yields
Cash is often viewed as a safe haven or income source when interest rates are high. However, as rates continue to decline, we believe cash is likely to underperform other asset classes. Historically bonds have outperformed cash in 10 of the last 12 cutting cycles.
This trend presents an opportunity for investors to consider reallocating excess cash into assets with higher return potential.
3. Broadening Equity Earnings
Since early 2023, equity returns have been largely driven by the “Magnificent 7,” which have significantly boosted the S&P 500’s performance. However, in 2025, we expect a broader range of companies to contribute to earnings growth.
The remaining “493” companies in the S&P 500 are projected to increase their earnings growth by more than fivefold, reaching 13%. This diversification in earnings could lead to more balanced equity returns.
4. Increased M&A Activity
U.S. deal volume has already surpassed last year’s levels which were notably stagnant. We anticipate even more robust merger and acquisition activity in 2025, driven by expectations of a more favorable regulatory environment under the incoming administration. This optimism is likely to fuel further recovery in the M&A landscape.
5. Continued AI Infrastructure Development
The demand for AI infrastructure is growing, as AI technology holds the potential to be as transformative as the internet. Significant investments are being made by major tech companies in capital expenditures, as well as by private markets in energy providers. Despite these efforts, the development of AI infrastructure, including the energy required to support it, remains a long-term endeavor.
Source: “5 Things on the Horizon for 2025” by Alan Wynne, Global Investment Strategist, Dec. 6, 2024
