Macro Themes for 2025
Macro Themes for 2025
Macro Themes, a quarterly publication from our Macroeconomic Research and Market Strategy Group, spotlights key areas of research and provides updates on our baseline economic outlook. The selected themes reflect the broad range of issues we are analyzing, and demonstrate the economic and market topics that inform our outlook on the U.S. and global business cycles, market forecasts, and policy. The research from our Macroeconomic and Investment Research Group is a key input in Guggenheim’s investment process, which typically results in asset allocations that diverge from broadly followed benchmarks.
Anne Walsh, JD, CFA CIO, Guggenheim Partners Investment Management Macroeconomic Research and Market Strategy Group
Patricia Zobel Senior Managing Director, Head of Macroeconomic Research and Market Strategy
Matt Bush, CFA, CBE Managing Director, U.S. Economist
Maria Giraldo, CFA Managing Director, Investment Strategist
Paul Dozier Director, Economist
Chris Squillante Director, Investment Strategist
Jerry Cai Vice President, Economist
Margaret Kleinman, CAIA Vice President
U.S. Is Well Positioned to Outperform Other Major Economies
Source: Guggenheim Investments, Bloomberg, Haver. Data as of 12.5,2024 for MSCI indexes and 12.31.2023 for population. EPS = earnings per share.
Since the onset of the COVID pandemic, U.S. gross domestic product (GDP) growth has outpaced most major economies. Robust consumer spending and investment, fueled in part by fiscal expansion, supported U.S. growth. Meanwhile, Europe faced headwinds from high energy costs and a global manufacturing downturn, and China struggled under a property downturn.
The U.S. seems likely to continue outperforming in 2025. Protectionist policies of a new U.S. administration could weigh on export-oriented economies such as Germany and China, although it could also spur domestic investment, thereby softening the blow.
Longer-term trends also support the U.S. economy. U.S. investment in AI infrastructure has outpaced other countries, fueling U.S. asset performance and earnings expectations. Over time, this should continue to support strong U.S. productivity gains. The United States also has much more favorable demographic outlook than most other advanced economies, supporting longterm growth.
U.S. exceptionalism favors U.S. assets, over the long term. But with equities fully pricing optimism, we are cautious about corrections in the near term.
Economic Policy Uncertainty Remains Elevated, Keeping Tail Risk High
UMich. Consumer Survey: Changes in Business Conditions Due to Govt. Policy
Our baseline is for moderate growth in the U.S. in 2025. However, the new administration is proposing sweeping changes to policy.
During the last Trump administration a record share of consumers cited government policy as driving economic perceptions, both positively and negatively. We expect a repeat dynamic.
Proposed tariffs and immigration restrictions could create supply shocks on the economy, damping growth and lifting prices.
However, optimism about deregulation and tax cuts could spur business investment and hiring. Surveys show business optimism has already turned up following the election.
We expect this dynamic will keep market volatility elevated, but ultimately policies will be moderated to avoid sharp financial market shifts.
Source: Guggenheim Investments, Haver, Bloomberg. Data as of 10.31.2024 for small business uncertainty, 12.6.2024 for consumer survey.
Global Realignment Under New Administration Creates Opportunities as Well as Risks
The new administration's trade and foreign policy agenda may fundamentally reshape international relationships, offering opportunities for some while risking unintended consequences and new tensions.
Targeted negotiations and strategic trade protections may enhance supply chain security and boost domestic investment. However, broadbased tariffs could strain longterm alliances and slow global growth, especially if met with retaliation.
A different approach to a multipolar world might help resolve ongoing conflicts, but also potentially motivating countries to choose non-U.S. alignment.
Rising geopolitical risks ultimately disrupt the U.S. economy. Investors should carefully identify industries that stand to benefit under the new policies.
Source: Guggenheim Investments, Bloomberg. Data as of 11.30.2024.
U.S. Investment Surges to Meet Demands of the Future
Three-Year Growth Rate of Construction Put in Place by Structure Type Manufacturing vs Total of Transportation, Communication, and Power
Manufacturing
Transportation, Communication, and Power
Source: Guggenheim Investments, Bloomberg, U.S. Census Bureau. Data as of 9.30.2024.
Manufacturing construction tripled compared to three years ago, including data center construction which is running at a $30 billion annualized pace and likely to remain elevated. We are entering the phase where construction gradually reaches completion, but infrastructure improvements in transportation, communication, and power sectors have significantly lagged.
Power demand, in particular, is increasing faster than anticipated, largely due to energy-intensive data centers and semiconductor manufacturing. It may require over a trillion dollars in investment by 2030 to meet growing demand. But the sector has faced meaningful challenges from regulatory hurdles, review backlogs, and limited grid capacity. Deregulation and “all energy” policies could ease some of these bottlenecks.
These trends create opportunities for infrastructure-related investments, which we see offering attractive yield, stable income and uncorrelated performance with other assets.
Fed Policy Responds to a New Economic Environment
Household 3yr Ahead Inflation Expectation*
Income Level
Household 3yr Ahead Inflation Uncertainty**
Income Level
Source: Guggenheim Investments, New York Fed Survey of Consumer Expectations. Data as of 11.30.2024. *Median expected inflation rate between two and three years from survey date. **Uncertainty is calculated as the median difference between respondents’ 75th and 25th percentile inflation expectation..
After years of Federal Reserve (Fed) policy driving markets, the economic policies of a new administration will take center stage in 2025.
Defying most forecasts, the Federal Open Market Committee (FOMC) has been able achieve a substantial reduction in inflation with little cost in terms of jobs or growth. Importantly, inflation expectations were preserved through the inflationary episode, with surveys showing a return to mandateconsistent levels.
But the job isn’t done, and the FOMC will be responding to a shifting economic landscape in 2025. Many stated policies of the new administration could have meaningful impact on growth and inflation.
We expect the FOMC to ease cautiously in 2025. Inflation uncertainty is still elevated particularly among lower income households. With people attentive for signs of new inflation pressures, the Fed will have less scope to look through price level shifts associated with supply shocks.
Even so, we see more downside than upside risk to short rates. Policy rates are still restrictive. The environment has high potential for shocks and uncertainty will necessitate data dependance, which increases risk of a policy error. The FOMC has room to ease aggressively if needed.
Solid Corporate Fundamentals and Demand for Yield to Contain Credit Spread Widening, Absent a Shock
The positive post-election market reaction was driven by expectations for pro-business initiatives. Credit risk premiums are near all-time tights.
We continue to see strong demand for U.S. fixed income, especially from international investors. The Bloomberg U.S. Aggregate Index yield is 4.6 percent, which is 2 percentage points higher than in Europe and almost 3 percentage points higher than in Asia, making them attractive to foreign buyers.
Corporate fundamentals look solid, supported by positive earnings growth and stable leverage. The current spread/leverage ratio for investment-grade corporates appears normal outside of recessions, and is only slightly below the nonrecessionary average. There is room to revisit historical lows.
These dynamics should anchor spreads and keep them within a low range. We think this is a good time to buy credit.
However, tight spreads do leave little room to absorb unexpected macroeconomic or geopolitical disruptions, so tail risks are skewed to the downside. Investors should continue to focus on higher quality credit for opportunities.
Source: Guggenheim Investments, Bloomberg, S&P Global Ratings. Data as of 12.5.2024.
Yields Enter A More Normal and Stable Trading Range
After over a decade of U.S. 10-year yields mostly below 3 percent, yields have risen notably and are trading in a higher range. Yields at this level are not unusual in U.S. history and with strong U.S. fundamentals, we see yields staying in a broad range absent a new economic or financial shock.
Deleveraging after the Global Financial Crisis combined with below-mandate inflation kept yields mostly under 3 percent for over a decade. The recent rise in rates reflects reflation and a return to more normal expectations for long-term growth.
Looking back at a long history, stable inflation expectations appear to drive range-bound 10-year nominal yields.
With less volatile CPI and gradual easing by the Fed, our 2025 base case is for rates to trade in a higher range of 3.75–4.50 percent as term premiums rise to make room for more government debt. We expect this range to endure absent any shocks to inflation or long term growth expectations.
Although we expect considerable noise within the range as policies of a new administration take hold, these bouts of volatility should be viewed as opportunities to tactically add or decrease duration exposure based on our rangebound expectations.
Fiscal Outlook Creates Long-Term Challenge for U.S. with Potential for Market Volatility
U.S. debt to GDP has risen over 20 percentage points since the onset of the pandemic and the CBO projects it to reach 122 percent by 2034, higher than at any point in U.S. history.
Interest expense could climb to almost 4.5 percent of GDP by 2034 if the Tax Cuts and Jobs Act (TCJA) is extended in excess of what most would consider long run U.S. growth potential challenging fiscal sustainability.
The new administration’s aim to reduce deficits could shift this trajectory, but it comes with difficult choices. Abrupt cuts could weigh on U.S. growth. Gradual adjustments would ease the transition, but may require changes to large and growing mandatory programs or higher taxes, which are politically challenging.
In terms of implications, the U.S. has more capacity to sustain high debt levels than almost any other country due to its deep markets and reserve currency status. However, price sensitive investors many highly levered have absorbed an increasing share of debt in recent years, which may lift the return required to absorb increasing issuance.
Source: Guggenheim Investments, LHC: Congressional Budget Office, Z1 Financial Accounts Report. RHC: CBO Historical and 10-year Projection July 2024..
Our baseline expectation is for term premiums to rise modestly further. The first half of 2025 should offer a respite in terms of new issuance; however, there is a small, but growing chance for a disorderly move higher over time if confidence in fiscal responsibility is challenged.
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