Macro house view
- Economic growth: Consensus 2025 U.S. real GDP growth of 2.0% appears optimistic given current policy uncertainty. In a landscape this fluid, base cases are more guesswork than guidance. Tariff policy threatens to slow things down, but we do not see it derailing the expansion in most scenarios.
- Labor market: The labor market has stabilized following a summer 2024 scare. Most measures of unemployment look benign even though hiring has slowed, and wage growth remains almost 1% higher than pre-COVID levels, supporting spending. DOGE cuts will likely curtail government hiring, while job growth in the private sector should broaden beyond health and education.
- Consumers: Spending grew at an unsustainable 7% annualized rate in 2H 2024. That was bound to slow, especially amid uncertainty. Real wages continue to grow at a healthy rate, supporting solid consumption even in the case incremental caution creeps in.
- Businesses: Uncertainty has risen due to tariff and immigration policy. Earnings results have been strong, and the corporate sector is not over-levered. Businesses will need policy clarity for investment to broaden beyond the AI infrastructure boom.
- Housing: Housing activity remains subdued amid affordability challenges. In this environment, the secular home shortage is keeping prices rising. Homebuilder activity has been resilient but souring sentiment points to lower construction starts going forward.
- Inflation: Inflation progress stalled prior to tariff impacts. Services prices are rising at a roughly 1% faster pace than pre-COVID, while goods prices face upside risks. The Fed now sees core PCE rising 2.8% in 2025, up from a 2.2% estimate six months ago.
- Monetary policy and interest rates: The Fed sees lower growth and higher inflation impacting policy in opposing directions. Uncertainty will keep them from tinkering with the economy, and the bar for rate cuts has risen. Long-term rates have thus far reacted more to growth risks rather than inflation risks, skewing the rate outlook to the upside.
Asset class views
- U.S. equities: U.S. stocks declined in Q1 for the first time in six quarters, but the S&P 500 still trades near 20x earnings. A weaker growth outlook presents risks to robust forward earnings growth expectations, especially for large firms exposed to trade risks.
- Core fixed income: Stagflationary outcomes pose significant risks to bonds, driving volatility and higher correlation with stocks. We see the value proposition of bonds having fundamentally declined post-COVID, both in absolute and portfolio terms.
- Cash: A Fed more inclined to cut than hike, along with the likelihood of rising inflation, put twin pressures on real returns for cash.
- Private equity: The M&A outlook has turned from euphoric to cautiously optimistic amid policy uncertainty. Reasonable valuations and a long-term investment horizon favor private equity over public equity. Lower multiples, lower leverage and a focus on firms less exposed to trade risk argue for middle market over large-cap buyout.
- Private credit: The spread premium to public markets remains around 200bps despite asset class growth. Combined with the Fed keeping base rates high, all-in yields will remain elevated. Default rates are low, but tariffs will cause performance dispersion across industries. Private credit’s ability to drive double-digit returns in this environment is highly attractive.
- Commercial real estate: Market sentiment was optimistic coming into the year, and the decline in rates will be welcomed. CRE prices have stabilized but upside is limited, especially with the Fed paused. CRE debt looks like a better way to capture improving fundamentals while reducing downside risk.
