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Q1 2025 Outlooks
Opportunities and Risks Emerging Through Global Crosswinds
The investment environment continues to exhibit a degree of uncertainty amid economic challenges, a cautious policy stance among central banks, and an ever-changing outlook for fiscal measures across major economies. The aftermath of the US election portends a new policy direction for the world’s largest economy, whose performance has stood out among its peers amid a struggle to find growth in other parts of the globe. Macro headwinds supported central banks’ dovish pivot in 2024, which in turn buoyed risk assets. Going forward, geopolitical tensions and a changing of the guard in US politics underscore the likelihood that economic competition is likely to intensify further, potentially separating winners and losers by region and sector.
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.
As 2025 commences, the backdrop warrants “buy-the-dip (in prices)” and carry-oriented approaches. While we expect additional central bank rate cuts to support moderate global economic growth, this outcome is not immune to additional bouts of market upheaval, possibly aggravated by heightened global competition. Given the historically tight levels on credit spreads, periods of market turbulence may also prompt dislocations across certain markets and sectors. As economies/policies diverge and dislocations lead to sector dispersion, opportunities to add value through active management will surface. Whether it is the potential to buy-the-dip or enhance carry, early identification of the affected countries, industries, and issuers—perhaps within the context of further paradigm shifts—assumes newfound importance going forward.
As we navigate the first quarter of 2025, the investment landscape presents a complex interplay of opportunities and challenges. The remarkable resilience of the US economy continues to anchor global markets, yet diverging regional growth trajectories create both tactical opportunities and potential risks. Similarly, political landscape shifts in the US and structural forces such as the AI evolution will be major drivers of returns and risks. This further reinforces the importance of thorough portfolio construction and a dynamic asset allocation framework, while the evolution of private markets offers compelling diversification potential.
Our base case for the macro environment remains benign, with our US recession sentiment indicator suggesting a low probability of recession and supportive of risk assets. We expect earnings growth, which had been very concentrated in Big Tech during the early part of 2024, to continue to broaden out over 2025. Internationally, the outlook for stocks remains mixed despite undemanding valuations and a moderate earnings growth outlook. Risk assets are supported by solid growth and abundant liquidity yet pressured by significant policy uncertainty. Thus, our expectations are for modest returns and increased volatility for risk assets in 2025. If central banks continue to normalize rates, negative stock-bond correlations could provide a respite for investor portfolios, which are likely to face more volatility and lower compensation for taking on risk.
Markets ended the quarter on a positive note as the tide of global liquidity lifted capital asset prices around the globe. US equities remain underpinned by earnings growth, a resilient albeit slowing economy, historically low unemployment, and inflation trends falling back into pre-Covid patterns. Equity price appreciation has fared better than we initially expected through the first nine months of the year, and we have benefited from our focus on companies with above-average growth rates. We see this trend as likely to continue as the pace of economic activity moderates. We exit 2024 on the back of several strong years of share price recovery, particularly for growth stocks. The strength of corporate profits overall has been an important contributor amidst sustained growth of the US economy. While the rate of inflation has continued to decline, trends have also flattened out in recent months. The path to lower short-term interest rates rests on the dynamics between these factors, and we have less clarity in direction at the end of 2024 than the beginning of the year.
As property value declines subside, we focus on the outlook for the 2025 global real estate landscape. While it’s difficult to ignore the ongoing narrative around needs-based demand versus supply shortages, the varying speeds in which the macroeconomic backdrops are improving around the world continue to drive distinct differences in city and sector outlooks for income growth. All of these factors support an ever-increasing need for high conviction in the year ahead. Our four high-conviction global themes—the living sector, logistics, data centers, and credit—are underpinned by the common thread of resilience and growth: resilience in performance, demographics and societal trends, and growth in income, market opportunities and capital values.
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