US & Euro 4Q24/2025 Preview Outlook

Summary

The Global Strategy team hosted its 2025 Preliminary Outlook for the US, Euro and Sterling markets, highlighting themes for the next year and providing initial forecast scenarios.  

Winnie Cisar, Global Head of Strategy, was joined by Zachary Griffiths, Head of US Macro & IG Strategy, and Logan Miller, Head of European Strategy, to discuss how the outcome of the US election may dictate market performance, the path of central banks and risks to the outlook.  

Below we provide a link to the replay and polling results from questions posed to the audience during the webinar.  

What do you expect will be the outcome of the upcoming US Presidential and Congressional elections? Over 60% of responses aligned with recent polling and the market’s implied base case expectation of a Harris victory and divided congress (presumably Republican senate/Democratic house). Expectations for consolidation of power in a blue wave (9%) were slightly higher than a red wave (6%).

In 2025, what do you see as a bigger risk to markets? Perhaps not surprisingly given the expectation of divided government in 2025, audience members are slightly more concerned by a dramatic growth deceleration (53%) than an inflation reacceleration (47%). 

Where do you think the 10Y UST yield will end 2025? With more focus on growth downside, expectations for long-end UST yields are generally rangebound to lower with the 3.5%-4.0% level garnering the most votes (40%), followed closely by 3%-3.5% (37%). A mere 1% of respondents see the 10Y moving higher than 5% while 14% see the path to 4%-5% as on the table. 

What is the most attractive duration segment for high quality fixed income (US/Euro IG, USTs, MBS)? Respondents showed some comfort with extending duration into the belly of the curve and the 5-7 year segment took the top spot at 42% of the vote. Investors are less enthused about the very front-end and longer duration segments, which each garnered 10%-11% of the overall tally. 

What market do you expect to generate the strongest total returns in 2025? Across markets, over 30% of respondents expect another strong year of performance for US HY, which has gained +7.9% in 2024, a strong performance after 2023’s +13.4% return. US IG is second on the list, capturing 22% of the vote as the YTD performance of +5.7% follows a robust 8.4% in 2023. Fewer respondents showed enthusiasm for the Euro markets given lower starting yields and cash is also generally expected to be a drag on portfolios with only 5% of the vote. The preference for fixed over floating is event as US leveraged loans are behind US IG/HY and US Treasuries with only 10% of respondents selecting the floating rate asset class. 

What is the biggest risk to markets in 2025? The looming US election and subsequent policy fallout topped the list of risks for 2025, with over 40% of the audience selecting it as the biggest risk next year. Along the same trend, geopolitical took the second spot at 27%, followed closely by weakening fundamentals (24%). Only 1% of respondents think that “Everything is Awesome!”, which appears the driving sentiment in the equity markets currently. 

Where will US IG spreads end 2025? As of close Sept. 25, the US IG index closed at 92 bp and has held a very narrow range, spanning a modest 24 bp (tight of 88 bp and wide of 112 bp). This marks the least spread volatility since 2021 (19 bp) and is the second tightest range since 2004. Reponses skewed to a year of slightly wider spreads with 101-120 bp taking almost half the votes, followed by 81-100 bp. Slightly more respondents (6.3%) expect spreads to crack through 80 bp, setting new cyclical tights, than see a move greater than 150 bp (2.5%) as likely.