Outlook 2025: Highlights and investment implications

Two major uncertainties lie at the heart of the global economic and investment outlook – to what extent will U.S. President-elect Donald Trump translate campaign promises into policy and how successful will China be in reigniting its economy? 

Our view is Trump will not fully deliver what he suggested on tariff increases, migrant deportations, and lower taxes. However, we anticipate he will do enough on these fronts to materially impact U.S. growth as these policies bite into 2026. 

Regarding China, our assumption is of ongoing support, sufficient to deliver a managed deceleration in growth over the coming two years. But these assumptions for the world’s two largest economies will govern the dynamics of the rest of the world. Overall, we expect global growth will remain at 3.2% in 2025 but then ease to 2.9% in 2026. 

Core investment implications 

Trump’s radical policy agenda has fueled some financial market uncertainty, in terms of potential future investment returns. 

Nevertheless, we believe the central macroeconomic outlook remains favorable for both bonds and equities. Ultimately, growth, stable inflation, and lower interest rates should support markets. 

But investment decisions will consider cashflow resilience and valuations, given policy risks and broader concerns. 

For now, we don’t expect a recession in 2025 which should help deliver positive equity returns, while credit markets should provide attractive income opportunities. 

Central scenario: US policy agenda should be positive for equities 

Our view: The underlying macroeconomic backdrop and potential policy mix in the U.S. looks supportive for equities. Trump’s agenda creates a potentially positive growth impetus. Lower corporate taxes and deregulation would also support equity markets.

Earnings momentum will be a key driver, and we expect U.S. equities to continue to lead the way, with potential upside coming from thematic sectors like automation, while continued strong investment in technology and artificial intelligence (AI) could also be a key contributor. Outside the U.S., the outlook is more mixed. Emerging market equities would struggle amid tariff wars and a stronger dollar, and while Europe’s growth and equities earnings outlook is more subdued than the U.S., it potentially offers more compelling valuations. 

We expect earnings growth in the U.S. will continue to be driven by the technology sector with there being no evidence of any softening in demand for AI-related technologies. In 2024, close to half the growth in the entire market’s earnings per share came from the U.S.’s information technology and communications sectors. 

Central scenario: Lower interest rates are good for fixed income 

Our view: The likely path of interest rates should support decent yield in fixed income markets, with credit continuing to potentially deliver attractive income opportunities. 

Prevailing yield levels in developed bond markets provide the basis for robust income returns, which should remain above inflation. On the credit side, the additional return and continued healthy state of corporate balance sheets underpin the attractiveness of both investment grade and high yield bonds. Valuations are a concern, and of course, investor sentiment towards credit will be subject to the uncertain evolution of policy and geopolitical risks but on a risk-adjusted return basis, credit shows potential. 

Central scenario: Risks have increased, short duration stays the course 

Our view: There are numerous risks to consider – the uncertain evolution of policy and geopolitical tensions, as well as the government debt profile of many countries. More cautious investors could consider short-duration credit-focused approaches which may provide a potentially attractive risk-adjusted expected return. 

The additional return and the continued healthy state of corporate balance sheets underpin the potential attractiveness of both investment grade and high yield bonds. This is especially the case for short duration. We continue to see U.S. high yield, a short-duration asset class, potentially delivering healthy returns. 

In short, cash returns could ease further as interest rate cuts continue. But income will likely remain the focus in bond markets and compounding returns from short-duration exposure in credit and high yield remains a potentially attractive area. 

Continued pursuit of net zero ambitions 

Investment in the green transition could remain a major theme globally – even in the U.S., despite the Trump administration’s expected preference for oil and gas production over subsidies for renewable energy. 

Joe Biden's Inflation Reduction Act (IRA) has driven $493bn in clean technology investment in the two years following the IRA’s introduction, so even if some companies backtrack some of those investments in response to the new political climate, many clean manufacturing investments already have steel in the ground.¹  Forecasts of significant increases in electricity consumption – driven by the technology sector and China’s power demand – would promote further integration of solar and wind energy assets into power networks. As such, sustainably-focused investment approaches could continue to benefit from a wide and growing opportunity set.

Our summary outlooks for key countries and regions in 2025:

U.S. – Second term Trump

Trump’s election win has swapped political uncertainty for policy uncertainty - and we’re not convinced his policies will necessarily boost growth. We forecast GDP growth of 2.8% in 2024, 2.3% in 2025 and 1.5% for 2026. Inflation looks set to rise - we expect 2.9% in 2024, 2.8% in 2025 and 3.2% in 2026. This will limit the Federal Reserve’s easing space. We expect a pause in cuts at 4.25% in March but resuming in the second half of 2026 to 3.50% as growth slows.

Emerging markets - Resilience to be tested

Emerging market growth steadied in 2024 while inflationary pressures were broadly contained. However, the external environment presents major challenges i.e. potentially greater US protectionism and China’s continued slowdown. Top-line growth forecasts show the 2025-2026 expansion rate below trend with risks weighted to the downside. Consumer demand is likely to be resilient, but investment could be hit by global trade uncertainty. Further monetary easing to support demand is likely to be constrained in some economies.

UK - Gradual easing in 2025

The UK should be politically more stable and credible than in recent years. We forecast a pick-up in growth to 1.5% in 2025 (from 0.9%) and 1.4% in 2026. Tax increases will keep inflation above target but a softer labour market will push wage growth lower. Overall, stronger-than-expected growth and inflation reinforce our view that interest rates will be cut gradually - we forecast four 25 basis points cuts in 2025, one per quarter – leaving Bank Rate at 3.75% by year end.

Canada - Reduced spare capacity

Canada’s 2024 growth rate appears to have slowed to 1.1% and inflation to 2%. In 2025, Bank of Canada (BoC) policy easing should boost consumer spending with US growth helping GDP quicken to 2.1%. Excess capacity should narrow as potential growth also slows and we expect the BoC to leave policy at 2.75% from March despite inflation forecast at 1.7%. Growth in 2026 is likely to be impacted by a US slowdown; we forecast growth of 1.7% and the BoC resuming rate cuts to 2.25% by end-year.