Mapping Out the 2025 Investment Landscape Across Asset Classes

Global markets will face powerful disruptive forces next year. How can investors prepare in fixed-income, equity and alternative investment strategies?

Investors are grappling with a multidimensional set of challenges as we turn the corner into 2025. The trajectory of inflation, interest rates and macroeconomic growth all hang in the balance at a moment of acute geopolitical uncertainty. Yet critical junctures in macroeconomic and political history can also create exceptional opportunities for active investors. 

This is a daunting moment for global markets. All eyes are on US President-elect Donald Trump’s incoming administration, which is likely to put in place transformational policies on a range of issues that could trigger macro and microeconomic effects across sectors, industries, companies and countries. Change takes time, and campaign promises don’t always translate neatly into policy. Yet investors cannot wait for clarity to prepare. Our teams are mapping out the contours of the big issues that may define a new era for fixed-income, equity and alternative investment portfolios. 

Fixed Income: Falling Yields Ahead

Having successfully steered inflation lower while avoiding a hard landing, most developed-market central banks are now pursuing easing policies. 

European economies, which continue to struggle to return to meaningful growth post-pandemic, are most vulnerable to an external shock that could push the region into recession. Existing challenges—both structural and geopolitical—could be exacerbated by new uncertainties, such as snap elections in Germany and the policies of the incoming administration in the US. We think these challenges could result in deeper rate cuts—and further yield declines—than the market currently expects. 

Meanwhile, for the US, we think that President-elect Trump’s policies may result in higher US nominal growth and inflation, and fewer cuts than previously expected by the US Federal Reserve. In fact, in the weeks surrounding the US election, US bond yields climbed sharply. Until we have clarity on the tariffs, taxes and other policies of the incoming administration, speculation and rate volatility are likely to persist over the near term. 

Rather than being a setback for investors, however, we see the uptick in volatility and reversal in yields as an opportunity. Yields are currently near cyclical peaks; historically, yields have fallen as central banks ease. Thus, in our view, bonds are likely to enjoy a price boost as yields decline in the coming two to three years. 

Demand for bonds could be exceptionally strong given how much money remains on the sidelines seeking an entry point. And as the Fed has reduced rates since September, the yield on cash has moved lower, which has practically eliminated the yield advantage of cash relative to bonds. In our view, investors should consider extending duration in this environment to gain exposure to rates.

Shifting Landscapes, Shifting Yield Curves
 

Investors can also take advantage of steepening yield curves globally through thoughtful yield-curve positioning. While curves have already begun to steepen, we see room for further steepening as central banks continue to ease, while longer yields remain elevated due to concerns about national debt levels. 

For example, in the US, we expect the slope between five-year and 30-year bonds to increase most. Historically, when the Fed eased, this part of the curve steepened significantly, driven partly by recessionary environments. This time around, this slope has steepened but is still below historical averages (Display). We expect it to steepen more from here, even if we don’t reach past levels. In Europe, the slope between two-year and 10-year bonds may steepen most.

Credit Also Plays a Role
 

Of course, developed-market government bonds represent just one part of the global bond market. In fact, we believe that both government bonds and credit sectors have a role to play in portfolios today.

Though credit spreads are historically tight, credit fundamentals remain strong, and we remain cautiously optimistic. Conditions call for active management and careful security selection. 

Changes in policy will not weigh on all industries and companies evenly. For example, energy and financials are likely to face less regulation. Conversely, import-reliant industries such as retail could be challenged. Overall, we expect investment-grade issuers with the strongest financials to be relatively resilient to tariff pressures. 

High-yield issuers also have generally robust fundamentals and are enjoying strong demand. That said, CCC-rated securities account for the bulk of defaults; steering clear of these bonds makes sense when economic conditions get tougher.

Equities: Sourcing Real Returns in an Evolving Environment

Like in fixed income, we expect equity market volatility to persist until there is more clarity on the details of the Trump administration’s policies. However, two clear principles can already help equity investors prepare for change.

First, since the new US policy mix is likely to foster higher inflation over time, we think equities will remain vital for generating returns above the rate of inflation. Our research suggests that equities have provided solid real returns in diverse inflation environments for over a century. 

Second, we think the best way for equity investors to navigate policy change is to stay focused on company fundamentals and quality businesses. Bottom-up research aimed at determining company exposure to potential top-down change can help distinguish businesses at risk from those likely to benefit from new policy dynamics.

US Stocks: Assessing Policy Impacts Requires an Active Lens
 

US equities are widely expected to benefit from the Trump administration’s direction. Lower taxes and tariffs on overseas rivals should sharpen the advantages of US businesses. 

But distinguishing between the winners and losers might not be straightforward. For example, the likely extension of low corporate tax rates and possible further tax cuts won’t affect all companies in the same way. We believe low tax rates afford higher-quality businesses with better opportunities to strengthen their competitive advantages, supporting long-term earnings growth and return potential.

In addition, campaign promises to slash subsidies may be easier said than done. Some renewable energy incentives have helped create jobs in Republican states, so select renewable energy firms that are perceived as potentially vulnerable could become opportunities if subsidies aren’t cut. 

Changes to regulation—and possible deregulation—will require a focus across sectors, and the outcomes won’t be one dimensional. Deregulation could be beneficial for a wide range of companies, as it could remove an overhang for some mega-cap technology stocks as well as help the largest US banks through a pickup in M&A activity. We believe diversified equity exposures to a broader set of US companies could capture earnings and return potential that may be unlocked in the coming years.

Trade wars and tariffs could widen the range of potential outcomes for companies and investors. If implemented, new tariffs could incentivize American companies with overseas operations to bring production back to the US. But the impact will not always be clear cut—US manufacturers that rely on parts produced overseas could face new cost challenges if immediate domestic solutions aren’t available.

Valuation is always an important consideration, and especially in uncertain times. In some cases, investors may find opportunities when temporary share-price dislocations are triggered by uncertainty about policy moves. And much of the good news to US economics may have already been priced into equity markets; the outperformance of US stocks versus equities in the rest of the world has reached historically wide levels, which is reflected in regional valuations (Display). We believe investors should make sure that individual holdings, portfolios and allocations are sufficiently diversified to counter equity valuation risk.

From Europe to China: Can Stocks Overcome Hurdles?
 

Non-US stocks will face formidable headwinds. Tariffs—the hallmark of Trump’s policy agenda—are perhaps the most powerful force that could disadvantage European and Asian exporters to the US. 

But we don’t yet know the scale of tariffs. And here, too, we think opportunities could surface in companies that may be unfairly seen as being disadvantaged. Some Japanese and European companies have factories in the US that may actually benefit from some of Trump’s policies. Non-US businesses with dominant positions in niche markets may be able to overcome tariff pressures. And high-quality companies that don’t rely on exports to the US shouldn’t be derailed by US policies. 

Emerging markets are seen as particularly susceptible to an evolving environment. Yet certain types of low-cost manufacturing—from toys to apparel—are unlikely to come back to the US. Over the last five years, even amid higher tariffs, Chinese companies have increased their share of world exports, according to our analysis of International Monetary Fund data. Despite higher hurdles in non-US equity markets, we think the potential for generating alpha could be enhanced for investors who identify stocks with underappreciated resilience. 

We believe equity investors should distinguish between what happens to countries and regions and what happens to specific companies. That’s because equity performance is ultimately driven by earnings growth. In our view, portfolios that target companies with superior earnings growth potential that may be mispriced because of policy uncertainty should offer investors strategic exposure to the real return potential that will continue to be prized in the years ahead.

Private Credit: Not All Debt Is Created Equal

Private credit opportunities appear likely to persist in 2025—and possibly expand if the US economy avoids falling into a recession. So far, the odds of a soft landing appear strong. Lower rates are likely to relieve pressure on corporate borrowers and should stimulate buyout activity at a time when private equity sponsors have plenty of dry powder to deploy and face pressure to return already invested capital to investors. 

The result may be higher new deal volume in direct lending—a $1.5 trillion market that serves as the cornerstone of most private credit allocations. Even at lower rates, return potential is likely to remain attractive relative to that available in public credit markets.

But like many assets, not all private debt is created equal. Loans to core middle market companies—loosely defined as those with an enterprise value between $200 million and $2 billion—typically give private lenders more power to negotiate strong protective covenants. These include caps on the amount of leverage a borrower can use or a required minimum level of liquidity. 

Covenants also provide lenders with negotiating leverage to amend loan terms in their favor if a borrower underperforms. This can improve downside mitigation potential. We see the most attractive opportunities in lending to companies in non-cyclical sectors with predictable and repeatable return streams. One example: enterprise software firms that provide sophisticated and tailored software solutions for large companies and organizations.

Protective covenants are a less common feature of loans extended to larger firms, as the size of these companies gives them more borrowing options, including that of tapping the broadly syndicated bank loan market. Having bank financing as an option beyond private credit often results in more favorable terms for borrowers and fewer protections for lenders.

Don’t Count Out the Consumer
 

With other forms of lending, however, banks are increasingly embracing a “capital light” model as they adapt to evolving regulatory rules. Doing so allows them to maintain loan sourcing and customer relationships while distributing much of the risk to asset managers, insurance companies, pensions and other investors.

This creates openings for investors to purchase seasoned residential or consumer loans from banks or enter into forward flow agreements to acquire new ones that meet predetermined credit criteria. These are just some of the opportunities available in asset-based finance, a $6.3 trillion-and-growing market that provides much of the financing for cars, credit cards, small business loans, commercial equipment and many other forms of credit. Loans are secured by financial or hard assets and can help to diversify exposure to direct corporate lending.

Consumer debt typically offers a wide and attractive opportunity set for investors, and we expect that to continue. But a moderate increase this year in consumer loss and delinquency rates has underscored the need for managers to demonstrate strong loan sourcing and underwriting skills—and the ability to build downside protection into forward flow arrangements. For example, a manager might structure a deal to purchase a certain amount of nonprime auto loans over a predetermined period. As a protection, the deal might require the originator to forego part of its servicing fee if the loans fail to deliver a predetermined yield. 

We also expect to see additional opportunities in aircraft leasing, where supply and demand dynamics remain favorable. In the US, the new administration may slow renewable energy development. But the low cost of renewable power and forecasts of surging electricity demand for the data centers needed to power artificial intelligence are likely to provide support for projects financed by private capital.