For Christophe Braun, equity investment director at Capital Group, the main economic factors that will drive 2025 are the same ones as in 2024. “It’s a continuation of inflation and also rates,” he said during an outlook presentation at the asset manager’s Luxembourg offices on 4 February. “Does that mean that 2025 is going to be a smooth and easy work year going forward? No. Actually, it means there will be volatility, because those two economic factors will remain also a question mark.”
Global growth is on a positive trajectory, “but it is starting to come in weaker compared to pre-pandemic [times], and that is predominantly because of [stagnation in] China,” he noted. “But overall, the global growth that we’re currently seeing as stable and moderate is very much dependent on the robustness of the economy in the US.”
A metaphor for the current state of the US economy is the film “The Curious Case of Benjamin Button,” where the main character is born as an elderly man and gets younger and younger through the story, argued Braun. “That’s exactly what we’re observing with the US economy,” he said. Economic cycles can be divided into four phases: early (economic activity accelerates); mid (profit margins peak); late (labour markets tighten); and recession (economic activity declines). “There will be no hard landing, there will be no soft landing, there will be no landing at all. We can see that the economy is going backwards into that mid [phase of the] cycle, where profit margins are peaking, but are still attractive for companies.”
Employment in the US remains low and companies have gotten used to working with higher inflation and interest rates. Credit demand is picking up again, said Braun, “so we are avoiding that recession cycle. And that is what we call the Benjamin Button effect, and that would obviously also have a positive effect on the world economy.”
Rates to stay higher for longer
That being said, “we’re still in that camp of… higher-for-longer rates and inflation,” said Braun. “It’s in particular the inflation that remains very sticky, and I think that’s something that the market has been overestimating for quite some time.”
“When we look at these inflationary trends, we continue to believe that it’s unlikely that inflation in the US, even in Europe, goes back to central bank targets. But what is important--and what we continue to see--is that the disinflationary process is in place,” noted Flavio Carpenzano, fixed income investment director at Capital Group. “We don’t believe that inflation is going to re-accelerate quite sharply, and the Fed will be forced to hike rates.”
Braun added, however, that higher interest rates are not necessarily a risk. “We always like to remind our investors that the interest rate cycle that we saw for the last 20 years was extraordinarily low, right? So we got used to a very low interest rate environment. However, if you look back over the last 120 years, on average, interest rates in the US have always been between--on average--3% and 6%. So actually, we’re going back to the ‘old normal’ with interest rates, and we can see that companies and also consumers are starting to get used to this higher-for-longer cycle of interest rates and inflation. So they are able to work with this very different regime.”
The main message when looking at fixed income is: don’t get fooled by this market volatility
Another part of this new regime is the European Central Bank cutting its rates before the US Federal Reserve, noted Braun. The ECB , whilst the Fed began its cuts in September 2024. The most recent monetary policy decisions came at the end of January 2025, with the ECB (bringing the deposit facility, main refinancing operations and marginal lending facility rates to 2.75%, 2.90% and 3.15% respectively). The Fed, on the other hand, decided to hold its rates steady (at 4.25%-4.50%).
“We should get used to interest rates being higher for longer again,” said Braun. “The last 15-20 years that we’ve seen are actually exceptional.”
And the markets don’t always get it right, added Carpenzano. The market seemed to price in too many rate cuts last year, leading to a “pendulum” in rate cut expectations. “In September, the market was pricing six cuts for the Fed. Today, the market prices probably one or two,” he said. “The main message when looking at fixed income is: don’t get fooled by this market volatility.”
Growth becoming more “heterogeneous”
Growth patterns have changed as well. In the past, growth was more “homogeneous,” said Braun, meaning that when the US was growing, so was China and so were emerging markets. It was “sort of a win-win growth cycle.”
Economic growth has instead become “much more heterogeneous.” Since the pandemic, we’ve seen “mini-recessions” or “rolling recessions,” with individual industries like tourism, semiconductors, oil, real estate or construction falling into recession, he explained. Growth and economic expectations are likely to differ, from one region to another and from one sector to the next.
With the return of Donald Trump as US president, more protectionism and tariffs can be expected, making it difficult to predict how an economy will grow. “India is probably the big winner of supply chains changing, evolving away from China. Globalisation is again evolving,” said Braun. Now, there’s more of an emphasis on the need for supply chains to be stable rather than just cheap or efficient. “We’re going to hear more over the next couple of years about nearshoring, friendshoring and onshoring, and that’s something where opportunities will come across for investors.”
Themes to keep an eye on
Where else might opportunities lie?
Generally speaking, markets are broadening and company profits are picking up. “The last two years have been very focused on the Magnificent 7,” said Braun, referring to Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Meta and Tesla. “But we can now see that corporate earnings are broadening again across other sectors. It’s not just IT or communication services.”
Digital disruption, innovations in the healthcare sector and an “industrial renaissance” are key points to watch, explained Patrice Collette, equity portfolio manager at Capital Group. “When we speak about accelerated digital disruption, it’s not only AI,” he said. Artificial intelligence “obviously is something key,” with companies working on computing power, building infrastructure or developing new AI models, as well as the “real-life beneficiaries.” But there’s also continued growth in software-as-a-service, cloud computing, robotics and more.
When it comes to healthcare, Collette noted that the number of drugs approved by the US Food and Drug Administration has increased from an average of 29 during the period 2007-2016 to an average of 50 for the period 2017-2023. We’ve moved from medications that are purely chemical based to “biologics” and “protein-based therapies,” he said. Many of the new drugs being approved today are monoclonal antibodies, which are proteins that can be used to treat cancer in a targeted manner, amongst other uses. “And the next phase will be the genetic era,” said Collette. “With genetic editing, you can switch on, switch off [gene expression].” The 2020 Nobel Prize in chemistry, for example, awarded Jennifer Doudna and Emmanuelle Charpentier for their discovery of “Crispr/Cas9 genetic scissors,” which can be used to change DNA with high precision, as explained by the Nobel Prize organisation.
Finally, there’s what Collette called the “industrial renaissance.” With Russia’s continued war against Ukraine and other geopolitical tensions in recent years, energy security, supply chains and defence have become increasingly important for Europe. “Globalisation has been evolving,” he said, with more friendshoring and “onshoring. “Sectors have to rethink the way they work,” said Collette. Taking the example of the automotive industry, he continued, “The European automotive industry faced Japanese competition in the 1970s. Suddenly, there were good cars, cheaper, made faster, and they had to reinvent themselves.”
“It’s the same today. Today, with competition in battery electric vehicles from Tesla and Chinese cars, European companies and the industry have to find a new way to compete and to be born again in terms of the way they are doing things.”