Northern Trust Asset Management 2025 Global Investment Outlook: Expect U.S. Stocks to Outperform; High Yield Bond Market Is Attractive

Earnings Growth Backs U.S. Equities; Strong Credit Quality Supports High Yield Market; U.S. Money Market Funds Remain Attractive; Private Credit Has Room to Grow

Northern Trust Asset Management (NTAM), a leading global investment management firm with $1.3 trillion in assets under management as of September 30, 2024, expects strong earnings and healthy sales growth to support U.S. stock outperformance in 2025. In the fixed income market, income potential combined with generally higher credit quality make high yield bonds attractive for investors.

Summarizing the outlook, NTAM Chief Investment Officer of Global Asset Allocation Anwiti Bahuguna, Ph.D., said: "In multi-asset portfolios, we maintain a preference for equities over fixed income. We expect U.S. equities to benefit from an economic soft landing and healthier corporate profits than most other regions. In 2025, we expect more modest gains for 60/40 portfolios with U.S. equities leading the charge again."

NTAM Chief Investment Officer of Global Fixed Income Christian Roth added, "Within fixed income, we continue to favor high yield bonds because of elevated yields, strong fundamentals and a supportive market backdrop. Credit ratings upgrades are outpacing downgrades, and the overall credit quality of the high yield market remains historically high."

NTAM's 2025 Global Investment Outlook across all asset classes globally may be found here: https://www.northerntrust.com/united-states/insights-research/2024/investment-management/global-investment-outlook

Asset class highlights include:

• U.S. Equities: We expect softer but continued U.S. economic growth to still translate into healthy earnings and revenue growth. We are also constructive on small cap equities, which will likely benefit from lower interest rates as about half of small cap debt is floating interest rate.
• High Yield Bonds: Above-average yields, combined with historically high credit ratings in the high yield market, support a strong outlook.
• Money Markets: Money market funds remain an attractive alternative to other cash management options like deposits or Treasury bills, even as the Federal Reserve has started to cut rates. We see little chance of money market rates returning to near-zero. The Bank of England, with concerns over inflation, will likely cut rates at slower pace than European Central Bank while we expect Japan to increase its policy rate slowly.
• Treasury Inflation-Protected Securities (TIPS): While U.S. inflation likely will settle into a range above the Federal Reserve's target of 2% for 2025, we expect the path to be bumpy. We believe TIPS are an important defensive portfolio component for unanticipated inflation.
• Private Credit: We believe private credit has room to grow, supported by the shift of lending from traditional capital providers to private credit asset managers, while lower interest rates encourage potentially more mergers and acquisitions in 2025.

Global Economic Outlook

In the U.S., NTAM's base case economic outlook for 2025 is a soft landing. NTAM expects economic growth to settle slightly below 2024 levels, inflation to ease further toward 2% and the Federal Reserve to proceed gradually cutting rates. However, NTAM sees two risk cases from the economic effects of policy initiatives of the incoming administration of President-elect Donald Trump: reflation and supply restraint. In both cases, the net effect of restrictive immigration, higher tariffs, income tax cuts and deregulation could create economic conditions that disrupt the current soft landing path.

In Europe, the economic picture straddles growth and contraction. A resilient labor force and target-level inflation is coupled with manufacturing sector contraction and risks of further geopolitical tensions and trade barriers. In the U.K., NTAM expects the Bank of England to maintain a gradual and cautious approach to further interest rate cuts.

In Asia, while the overall optics are for favorable growth, the outlook for China remains a central concern, with economic growth falling short of the government's 5% target. A slowing economy is deepening a deflationary loop, with consumer price inflation slightly above zero and producer prices deep into deflation. Japan's economic growth in 2024 was unspectacular, but wage gains that may support consumer spending are spreading across the economy and those gains may continue into 2025.

About Northern Trust Asset Management

Northern Trust Asset Management is a global investment manager that helps investors navigate changing market environments in efforts to realize their long-term objectives. Entrusted with $1.3 trillion in assets under management as of September 30, 2024, we understand that investing ultimately serves a greater purpose and believe investors should be compensated for the risks they take — in all market environments and any investment strategy. That's why we combine robust capital markets research, expert portfolio construction and comprehensive risk management in an effort to craft innovative and efficient solutions that seek to deliver targeted investment outcomes. As engaged contributors to our communities, we consider it a great privilege to serve our investors and our communities with integrity, respect and transparency.

Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

About Northern Trust

Northern Trust Corporation (NASDAQ:NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 24 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of September 30, 2024, Northern Trust had assets under custody/administration of US$17.4 trillion, and assets under management of US$1.6 trillion. For more than 135 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit us on northerntrust.com. Follow us on X (formerly Twitter) @NorthernTrust or Northern Trust Corporation on LinkedIn.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at https://www.northerntrust.com/terms-and-conditions.

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