REWRITING THE CREDIT PLAYBOOK
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Q2 2025 Outlooks
Resilient Growth Amid Dislocating Markets
The US economy faces heightened recession risks as tariff measures and softening consumer sentiment weigh on growth. At the same time, rapid shifts in trade, fiscal, and monetary policies are driving significant market disruptions. With inflation, interest rate expectations, and fiscal deficits in focus, managing risk amid this uncertainty is critical for maintaining portfolio resilience. For institutional investors, the key to navigating this challenging environment will be balancing defensive positioning with tactical allocations to emerging areas of value as policy trajectories become clearer.
To help investors look through this complexity, PGIM brings together the following perspectives from its affiliates examining the opportunities and risks that are emerging across asset classes.
After a pause in Q4 2024, the bond bull market resumed in Q1, but with wide variations by sector and region. While our favorable outlook for the bond market dating back to the end of 2022 stands — especially for the higher yielding sectors — stark risks remain given the rapidly evolving investment environment. Early Q2 could be one of the more fraught periods of the Trump presidency with bouts of volatility likely to create both risks and opportunities. We remain optimistic on the market’s longer-term return prospects. From a more contemporary perspective, bonds may be far better positioned than equities and cash to weather — or even benefit from — serious market downdrafts that would push rates lower and consequently boost bond returns.
After relative synchronization across global markets, we are entering a period of extraordinary divergence – across asset classes, regions, and sectors – creating both unprecedented challenges and potential alpha opportunities for institutional investors. The catalyst? A dramatic escalation in protectionist policies by the new administration, resulting in global trade tensions and confusion that upended the traditional market reaction function, followed by a sudden 90-day pause on reciprocal tariffs. While the sudden pause in punitive tariffs has resolved some near-term trade risks, we anticipate that uncertainty may not fully abate. This landscape highlights many challenges, but also presents opportunities for investors who can adapt to the ever-evolving regime and dynamics.
While the macro environment remains modestly supportive of risk assets, the Trump administration’s focus on growth-negative policies, such as tariffs and immigration, as growth-positive policies like taxes and deregulation take a back seat, is likely to keep risk assets volatile in the near term. While a recession is not yet evident in US data, the risk of one over the next year has risen – particularly if the trade war escalates and higher tariffs are implemented. A critical factor in assessing the outlook for risk assets in the coming months will be the confidence firms have in their future prospects. High-frequency measures of management sentiment, derived from our company transcript analysis, indicate that both US and global sentiment have continued to improve year to date, reaching even higher levels in mid-March.
Our immediate concerns center on the potential impact on overall consumer demand, inflation, input costs, margins, and profits. The magnitude of the Trump administration’s policy change requires careful monitoring of how our government’s actions will influence trading partners, as retaliatory measures could pose a significant headwind to economic expansion while simultaneously fueling inflation. The administration’s aggressive and antagonistic approach to global trade is without precedent in our lifetimes. While acknowledging that the landscape is rapidly evolving, we are focused on navigating its complexities. We anticipate that economic growth will slow, with inflation likely to rise. Companies will likely face mounting pressure on profit margins, depressing earnings and valuation assumptions. We remain focused on identifying resilient opportunities in the face of the challenging trade landscape and resulting market dynamics.
It is too early to evaluate the flood of policy proposals of the Trump administration, but one thing is clear: long-term interest rate expectations have risen. Despite this, we maintain our conviction that real estate remains fairly valued today. If the economy is growing at a relatively strong pace and real estate supply growth is constrained by higher interest rates (and potentially higher material costs due to tariffs), that should translate to higher real estate income growth. Meanwhile, a coming shift in the composition of U.S. economic growth has significant implications for relative real estate market performance. If we are moving toward an economy driven mostly by productivity, the outlook is brighter for some of the laggard markets of the last cycle.
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