There have been just four soft landings in history — in 1968, 1985, 1995, and now, in 2024. Because soft landings are so rare, market participants don’t have a lot of data points to make bold predictions about the future. But, historically, economic growth has accelerated in the years following a soft landing. And that pattern is likely to repeat in 2025.

The soft landing outcome has propelled stocks to all-time highs in 2024. Meanwhile, credit spreads are historically tight and most measures of market volatility are tranquil. Solid corporate profits are forecast to accelerate throughout 2025, especially in the US. And the Trump administration’s policy goals — including deregulation, lower energy costs, and tax cuts — could boost an already growing US economy.

The Federal Reserve Bank of Atlanta GDPNow forecast suggests that the economy will expand at a 2.6% annual rate in the fourth quarter of 2024.Most forecasts predict that US GDP will grow by 2% to 2.5% in 2025, far from recession territory.

The labor market remains resilient. The US has added more than 2.1 million jobs in the past 12 months. The unemployment rate is at a historically low 4.1%.Wages are growing faster than inflation. And businesses are reluctant to lay off workers, a positive leading indicator for the economy.

Fully employed consumers are likely to keep spending. The top 20% of income earners are responsible for 40% of consumption,and they are in great shape.

Somebody’s consumption is somebody else’s profit. S&P 500® companies are projected to grow their earnings by 9.4% in 2024. Remarkably, analysts are forecasting even better earnings growth of 15% in 2025. If S&P 500 companies deliver on earnings, already lofty profit margins would reach all-time highs.

At the same time, inflation continues to crawl back toward the Federal Reserve’s (Fed) 2% target. The Fed’s preferred inflation measure, the Core Personal Consumption Expenditures (PCE) Price Index, has fallen by 0.4% over the past 12 months, from 3.2% to 2.8%.

There’s an old market adage that claims economic expansions don’t die of old age. The implication is that a catalyst is needed to end the good times.

Yet, elevated valuations have rarely been a good predictor of short-term stock market performance. Expensive investments can, and often do, get more expensive in the near term. Failure to meet or exceed sky-high earnings expectations next year could disrupt the market’s rally. Resurgent inflation also could thwart the economic expansion, but rising inflation is more likely a 2026 problem than a 2025 problem. Ultimately, the direction of real interest rates may be the final arbiter on whether this expansion lives or dies.

Still, standing on the precipice of 2025, it’s difficult to envision any of these visible risks as the impetus for an economic contraction and an end to the market’s rally next year.

What did the economy withstand to achieve a soft landing in 2024? From March 2022 to July 2023, the Fed raised interest rates 11 times, the most aggressive pace in 40 years. Fed policymakers increased the target range for the federal funds rate from 0% to a peak of 5.25% to 5.50%. These rate hikes helped cool inflation from a peak of 9.1% in June 2022 to 2.6% in October 2024.

Despite all the rate hikes, the economy avoided recession and the labor market endured. Defying the odds, the Fed slowed the economy enough for inflation to fall, but not so much that it slipped into recession.

Economic growth has slowed from a 4.9% annual rate in the third quarter of 2023 to a 2.8% annual rate in the third quarter of 2024.The unemployment rate climbed from 3.4% in April 2023 to 4.3% in July 2024, signaling a softening labor market.And, with the target range for the federal funds rate notably above current measures of inflation, the Fed began its interest rate-cutting cycle in September, slashing interest rates by 0.75% at its last two meetings. With rates at 4.50% to 4.75% in November, most Fed watchers expect the central bank to cut rates by another 0.75% to 1.00% in 2025.

So, what happens next?

History doesn’t repeat itself, but it often rhymes. The Fed’s tightening cycle prior to the most recent soft landing in 1995 was also aggressive.

From February 1994 to February 1995, the Fed raised interest rates seven times over 13 months. Inflation wasn’t the culprit then; it was an overheating labor market. The Fed doubled the target range for the federal funds rate from 3% to 6% without causing a recession. Fearing that monetary policy conditions had become too tight, the Fed made a series of mid-cycle adjustments, cutting interest rates three times by 0.75% from July 1995 to January 1996. Following the 1995 soft landing, US GDP accelerated from 2.7% in 1995 to 3.8% in 1996.

Today’s Fed mid-cycle adjustments could produce a similar bump to the US economy in 2025.

As the Fed aggressively raised rates through July 2023 to defeat inflation, capital formation plunged.

Initial public offerings (IPOs) are now well below the average of the past 20 years. Mergers & acquisitions (M&A), hindered by higher rates and a tougher regulatory environment, are below 10-year averages.Private equity firms have $3.2 trillion in assets in their portfolios just waiting for an exit plan. Private equity deal values have fallen 60%, deal count has plummeted by 35%, and exit values are down 66%.Businesses' capital expenditures have been constrained by higher rates and stiff regulations, especially in manufacturing industries.

Fed rate cuts combined with lower potential energy costs, lighter regulation, and lower taxes could unleash a period of massive capital formation through IPOs, M&A, and increased capital expenditures. Artificial intelligence (AI) also has the potential to bolster economic growth, increase productivity gains, and create the next wave of innovative new businesses.

The 1995 soft landing also included an enormous increase in computing power that intersected with the global adoption of the Worldwide Web by both consumers and businesses. This fostered an era of exceptional economic growth and the Greenspan productivity miracle.

In fact, the years following the 1995 soft landing up until the TMT Bubble burst in March 2000 were some of the greatest years on record for stock market performance. The S&P 500 returned 37.2% in the 1995 soft landing year, on its way to five consecutive years of annual returns above 20%. Could the year-to-date S&P 500 return of 28.1% in 2024’s soft landing be the start of another historic bull market run?

No pain, no gain. That exceptional post-soft landing bull market run from 1995 to 1999 came with far greater volatility than today’s investors are accustomed to. Some market observers blame the Fed’s monetary policy decisions for causing the Thai baht currency crisis, Russian debt default, and Long-Term Capital Management (LTCM) failure.

Simultaneous transitions in government leadership, monetary policy, and fiscal spending are likely to increase capital market volatility in the current post-soft landing period. Greater market volatility may be the price market participants pay for faster economic growth and potentially higher stock market performance.

The current bull market celebrated its second birthday on October 12, 2024. On average, a bull market lasts a little more than five years. And if the current bull market ended now, it would be one of the shortest on record. Building on the solid gains of the past two years, the current environment suggests the rally may continue in 2025.

What does that mean for investors looking to position portfolios for the year ahead?

Within equities, the Fed’s easing cycle, strong US economic growth bolstered by the Trump administration’s policy goals, and AI-related leadership point to opportunities in US small caps, regional banks, and the broad AI value chain.

Within fixed income, while monetary policy has been the recent driver of interest rate trends, expected trade tariffs, immigration reform, and tax cuts all mean fiscal policy also will likely impact interest rate volatility in 2025. But the Trump administration’s pro-business policies may boost credit’s favorable outlook.

Finally, structural shifts in leadership, monetary policy, and fiscal spending have contributed to the high correlation between stocks and bonds that has destabilized traditional portfolios, making now a good time to consider diversifying to restore balance and help temper a potential increase in volatility.

The government has published a policy statement outlining its plans for local government funding in England next year, and providing further details on longer-term reform plans.

IFS associate director and head of devolved and local government finance David Phillips said:

“The announcement on council funding is a clear statement of intent from the new government.

If all English councils increase their council tax by the maximum allowed (on average, just under 5%), their overall core funding would increase by 5.6%, or 3.2% in real-terms after accounting for forecast economy-wide inflation. And add on new income from the producers of packaging, and the increase will be closer to 5% in real-terms.

But funding increases will be very much targeted at deprived, typically urban, councils. Grants targeted at rural councils are to be abolished to part-fund a new deprivation-based grant. The government is at pains to point out that councils serving rural areas will still see a boost to their overall funding, but this will be substantially smaller than in more deprived areas.

The government has described these changes as a stepping stone to more fundamental reforms from 2026-27 onwards. Its commitment to reform the council funding system with updated assessments of spending needs and local revenue-raising capacity is welcome – and long overdue. Existing funding allocations are based on a range of ad-hoc decisions and data from back as far as the 1990s. The current system is simply not fit for purpose and the government is right to reform it.

The changes made for the coming year suggest these longer-term changes will also have an emphasis on redistributing funding to more deprived areas, to offset cuts they bore the brunt of during the 2010s. Whether that is fair will be in the eye of the beholder. The status quo could not continue indefinitely though, and a forthcoming consultation will allow councils and other stakeholders across England their say on what a reformed funding system should prioritise.”

Head of Global Short Duration Daniel Siluk believes that an extension of the economic cycle in the U.S. and suspect growth elsewhere create an opportunity for bond investors to capture attractive yields and preserve capital by diversifying globally.

In assessing the prospects for global bonds in 2025, investors must consider the inextricable links between the shifting macro and policy environments. In the U.S., even prior to November’s election, markets were calibrating expectations for the Federal Reserve’s (Fed) easing cycle. The combination of a resilient labor market and inflation falling perhaps not as rapidly as hoped lessened the urgency to cut rates as an extension of the economic cycle was priced in.

In many respects, the election of former President Donald Trump increased the likelihood of sustained economic growth, but it also introduced new uncertainties that bond investors cannot ignore. While pro-growth initiatives such as deregulation and tax reform could spur investment and consumption, tariffs and trade barriers could be inflationary at the very least and – at worst – present potential hindrances to global growth should these measures be reciprocated.

Already interest rates have taken notice. The U.S. Treasuries yield curve has risen across all tenors. Shorter-dated yields reflect a more subdued rate cut trajectory, and longer-dated yields have risen as investors account for greater volatility, potentially higher growth, and the possibility that the battle to fully tame inflation isn’t over.

Facing acute headwinds, other regions – much of Europe, for example – may have to be more deliberate in easing policy. It will be the responsibility of investors digging into the details to determine which regions, sectors, and securities will be net beneficiaries of the incoming administration’s policies and which may face new headwinds.

From an investment perspective, diverging economic and policy prospects create both opportunities and risks for bond investors. Across jurisdictions, the battle against inflation has sent yields to levels that can again provide investors with attractive income streams.

The outlook for rates is evolving, however. With Europe facing floundering growth, bond yields may continue to fall farther, representing an opportunity for capital appreciation along the front end of sovereign curves. In the U.S., any pro-growth initiatives or barriers to trade may alter the pace of inflation’s downward trajectory. This could lead to additional volatility in mid- to longer-dated Treasuries.

As different regions travel their own economic and policy paths, investors with a global view have the opportunity to increase diversification within fixed income allocations by incorporating issuance with attractive yields and securities in regions where rates may fall.

One must also consider what’s already been price into markets. In the U.S., for example, the nominal yield on the 10-year note has risen by as much as 80 basis points (bps) since mid-September, with rising expectations for inflation over the next decade accounting for a considerable portion of the increase.

We believe a similar global approach should be applied when seeking opportunities within corporate credits. Diverging economic prospects have implications for corporate issuers’ credit profiles. And with valuations elevated across the asset class, investors have the opportunity to seek out regions where stabilizing – or improving – economic conditions should fortify an issuer’s ability to meet its obligations. In contrast, where growth is more tenuous, richly valued and more cyclically exposed issuance is best avoided.

Furthermore, valuations in some regions appear more favorable than others, often for the same credit rating – or even specific issuer. With volatile currency exposure hedged away, global investors can maximize the potential for excess return with little or no incremental increase in risk.

One way to navigate the still-uncertain economic environment is to focus on shorter-dated corporate issuance. Higher yields relative to much of the past 15 years have resulted in the potential to generate attractive returns due to the steeper roll down of these securities as they near maturity. Over these shorter time horizons, investors tend to have better visibility into an issuer’s ability to service its debts. The rationale for a focus on the front end is reinforced by still-low term premiums, meaning investors are potentially exposing themselves to considerably more volatility for only marginally higher returns.

We expect to gain greater insight into President-elect Trump’s economic priorities during the early months of his administration. His team’s approach to trade, deficits, and the economic aspects of his national security agenda will reverberate globally. Pro-growth initiatives would likely keep Treasury yields high relative to global peers. The accompanying dollar strength would come at the expense of other currencies and also funnel a greater share of global investment toward the U.S. This could aggravate the economic positions of regions like Europe. And to the degree this agenda would alter expected growth trajectories, it would inevitably influence the decisions of the Fed and other central banks.

1. Calls for Emmanuel Macron to resign after French government toppled in no-confidence vote.

2. Fed's Daly says no sense of urgency to lower interest rates.

3. Beige Book shows slow employment growth in the U.S.

4. Powell says Fed can afford to be a little more cautious.

5. U.S. services sector expands moderately.

6. Fed's Musalem says time to pause rate cuts may be near.

The French National Assembly passed a no-confidence vote against French Prime Minister Michel Barnier on Wednesday, so Barnier will resign. This marks the first time the French government has been dismissed since 1862. Additionally, the French Patriots Party launched a petition on their website demanding President Macron's resignation.

"Now, we should use this vote to force Emmanuel Macron to step down. For years, he has shown contempt for the French people; for years, his policies have been a complete failure in every sector. Over the last seven years, he has caused unimaginable damage to the country: dividing the nation, creating insecurity, and diminishing France's international status. He has invested in wars, weakening the country's international standing, making France's voice in the EU and NATO smaller, and implementing disastrous policies required by the EU. He has caused the collapse of sectors such as agriculture, industry, healthcare, energy, and immigration. He must resign," the petition reads.

Florian Philippot, leader of the French Patriots Party, called for a protest march this Saturday (December 7) demanding Macron's resignation. 63% of the French public want Macron to resign after the no-confidence vote, according to a survey by the French research and consulting firm Elabe for BFMTV.

To keep the economy in good shape, we must continue to adjust policies, whether in December or later, said San Francisco Fed President Mary Daly on Monday. We will discuss this in the next meeting, but rate cuts are still under consideration by Fed policymakers. Currently, supply and demand are roughly balanced, and inflation continues to decline. The Fed should focus on reducing rates. However, even if we cut rates again, the policy will remain restrictive, which is important.

The neutral interest rate level may already be "close to 3%." However, given the uncertainty surrounding the neutral rate, I believe we can proceed slowly and adjust as the economy provides more information.

Currently, there is no urgent need to cut rates. The Fed needs to "prudently adjust" its policy to ensure that inflation is reduced without unnecessarily slowing the labor market.

The Federal Reserve released its Beige Book on December 4, showing that economic activity has slightly increased in most Districts, with three Districts seeing moderate or modest growth. However, two Districts reported flat or slightly declining economic activity. At the same time, consumer spending remained generally stable, with consumers becoming more sensitive to prices. Mortgage demand was generally low, and commercial real estate loans were similarly sluggish.

In terms of employment, most Districts saw stable or slightly increasing employment levels, with low employee turnover, limited recruitment activity, and minimal increases in workforce numbers. Layoffs were also low. Most Districts expressed cautious optimism about a recovery in recruitment activity. Additionally, wage growth has slowed to a moderate pace in most Districts, with further moderate growth expected in the coming months.

Prices increased moderately across most Districts. Most businesses saw input prices rise faster than sales prices, leading to a decline in profit margins. Businesses expect price growth to remain at current levels. However, several Districts noted that the potential for tariffs on foreign goods under President-elect Trump could pose significant upside inflation risks.

The U.S. economy is doing well, and there is no reason to believe this situation cannot continue, Fed Chairman Jerome Powell said on Wednesday. The risks to the labor market appear small, economic growth is definitely stronger than we thought, and inflation is slightly higher. Despite the lower-than-expected risks, the Fed can still cautiously move toward a neutral rate.

The U.S. budget is on an unsustainable path and needs better coordination between revenues and expenditures. The central bank cannot consider debt and deficits when setting rates; it must focus on inflation. The Fed is not in a fiscal leadership role, but rather uses its tools to achieve its dual mandate of inflation and employment.

The Institute for Supply Management (ISM) reported on Wednesday that the U.S. non-manufacturing PMI slipped to 52.1 last month, the first decline since June. The new orders index hit a three-month low at 53.7. The business activity index fell to its lowest level since August.

The drop was mainly driven by declines in business activity, new orders, employment, and supplier deliveries. However, 14 industries saw growth in business activity, and 13 industries saw increases in new orders. This reinforces the view from recent months that the services sector is showing sustained growth.

St. Louis Fed President Alberto Musalem said on Wednesday that the Fed is close to achieving its goals for employment and price stability, and monetary policy is in a favorable position. Given the "strong" economic conditions and inflation levels under current labor market conditions, a patient monetary policy stance is appropriate. Musalem believes a patient monetary policy stance is appropriate given the current level of inflation in a "strong" economy and job market that is at levels consistent with full employment.

It seems important to keep the option of slowing or pausing rate cuts open, as the timing may be approaching to carefully assess the current economic environment, the information received, and the changing outlook.

UTC+8 14:45 Switzerland Unemployment Rate (Nov)

UTC+8 18:00 Eurozone Retail Sales MoM (Oct)

UTC+8 00:30 Next Day: Richmond Fed President Barkin Speaks

UTC+8 01:00 Next Day: Bank of England MPC Member Greene Speaks

Just when inflation was starting to get (dare I say) boring again, the potential for higher tariffs, a central element of the incoming Trump administration’s agenda, has reignited concerns about inflation. With the much-anticipated Federal Reserve easing cycle just underway, markets must now consider the potential consequences for monetary policy if disinflationary trends were to reverse.

We can look to Trump’s previous term for insight into the Fed’s approach to inflationary pressures from tariffs. In September 2018, the Fed modeled a scenario involving a 15% tariff on all non-oil imports with foreign economies responding in-kind. If the Fed reacted to the resulting inflation spike by raising rates, they projected a mild recession. Conversely, if the Fed looked through the rise in import prices, growth slowed to a mere 0.5% but a recession could be avoided. The Fed concluded that this “see through” response would be most appropriate. However, if inflation expectations rose, which would be more likely in a very tight labor market, then the preferred response could be to hike interest rates.1

More recently, Minneapolis Federal Reserve Bank President Neel Kashkari shared a similar perspective, describing tariffs as a one-time increase in prices that is not inherently inflationary in the long term. However, he warned that a “tit-for-tat” trade war could exacerbate inflationary pressures, sending prices higher.

Today’s economic environment also differs meaningfully from 2018—while the inflation heatwave is mostly past us, its embers are still alive.

Recent events have reminded companies of their pricing power, and workers are now more attuned to cost-of-living increases in wage negotiations.

Although market-based long-term inflation expectations are anchored around 2.0%, consumer expectations have hovered around 3% since May 2021, half a %-point higher than their range in 2018-19.

The recent experience of being slow to respond to “transitory” pandemic-related inflation may prompt FOMC members to adopt a more cautious approach to rate cuts next year, especially in the context of resilient economic growth.

Additionally, several other trade war effects could influence the economy, such as slowing global growth, declining productivity and policy uncertainty weighing on business investment, all of which add complexity to any tariff projections. Investors should also be wary of placing too much emphasis on any specific cabinet appointments. Regardless of whether the incoming administration is staffed with tariff “hawks”, the former President has a track record of initiating trade negotiations with large, ambitious demands that are ultimately whittled down, and look significantly different, to the final agreements.

While it may be premature for the Fed to incorporate tariff implications into monetary policy decisions, current data on resilient growth, healthy labor markets and other factors suggest that the Fed's path will be gradual, possibly settling at a higher level than their latest projections indicate. For bond markets, this, along with the impact of higher deficits, could keep long-term yields elevated in the year ahead.

Donald Trump’s re-election as president of the United States on 5 November has stirred both optimism and apprehension in global financial markets. As his administration embarks on a policy agenda heavily focused on tax cuts, trade protectionism, deregulation, and stricter immigration policies – collectively known as Agenda 47 – investors and analysts are evaluating the implications for the economy and equity markets. This column explores the impact of Trump’s victory on financial assets and highlights how political ‘proximity’ to his agenda shaped firm-level returns. 

On 5 November, Donald Trump secured a second term as president of the United States. His victory was driven by a policy agenda focused on accelerating economic growth via tax cuts, increasing tariffs and trade protectionism, enforcing stricter immigration controls, reducing government intervention, and decreasing regulation.

As Trump’s victory became evident – reflected in betting markets that rapidly incorporate election-relevant news in an information-efficient manner (Karau and Fischer 2024) – financial assets likely to be influenced by Trump’s agenda began reacting significantly (Figure 1). US 10-year Treasury yields rose sharply, increasing from 4.28% at 7:00 PM Eastern Time to 4.46% by 10:30 PM, driven by expectations of fiscal stimulus and inflationary pressures. Bitcoin prices surged as the cryptocurrency industry anticipated benefits from deregulation. The dollar index surged in response to higher expected yields and anticipated trade barriers, with larger depreciations against the dollar observed for currencies of countries likely to be significantly affected by heightened trade protectionism and stricter migration policies, such as the Mexican peso.

The equity market’s response was equally dramatic. On 6 November, the S&P 500 posted a gain of around 2.5%, marking its strongest one-day performance following election results in over a century. Market volatility, as measured by the VIX index, plummeted by more than four points, reflecting the resolution of pre-election uncertainty and optimism about corporate earnings growth under Trump’s pro-market administration (Albori et al. 2024). Sectoral performance, however, was heterogeneous: banks, energy, and industrials – sectors expected to benefit from corporate tax cuts and deregulation – experienced the largest gains (Figure 2).

To assess the relationship between firm-level returns and political proximity to Trump’s 2.0 agenda (commonly referred to as Agenda 47), we construct a textual based firm-level sentiment indicator following the methodology of Hassan et al. (2019). This indicator measures the share of the conversation between analysts and firm management that centres on terms linked to Agenda 47 and, by conditioning on positive and negative tone words, provides a proxy of firms’ attitudes toward Trump’s programme. Higher sentiment scores indicate stronger alignment with Trump’s policy priorities. 

On average, firms in the energy, financial technology, and industrial sectors exhibit higher sentiment values, while those in the renewable energy and pharmaceutical sectors show lower values, reflecting their lower likelihood of benefiting from the Trump administration’s policies (left column of Figure 3). A firm-level event study shows that firms with higher sentiment scores experienced significantly higher abnormal returns in the days following the election. We first estimate a capital asset pricing model (CAPM) for each firm over the period  from 15 November 2022, when Trump announced his candidacy for a second term, to 4 October 2024, one month before the election. We then compute abnormal returns around the election date, as differences between actual returns and those predicted by the CAPM model. A one-standard-deviation increase in political proximity was associated with a 7% higher abnormal return on 6 November, with the effect persisting over the subsequent two days and peaking at around 10% (see Figure 3, right column).

While equity markets celebrated Trump’s re-election, other indicators suggest a more nuanced picture. The Economic Policy Uncertainty (EPU) index (Baker et al. 2016), derived from media coverage of policy-related terms, rose significantly in the immediate aftermath of the election, contrasting with the decline in the VIX equity volatility index (Figure 4). This divergence likely reflects differing time horizons. The decline in the VIX likely captures the resolution of pre-electoral uncertainty and anticipation of near-term policies, such as the renewal of the Tax Cuts and Jobs Act (TCJA), which is expected to face fewer obstacles in a Republican-majority Congress and boost corporate profits. On the other hand, the increase in the EPU index may reflect analysts’ uncertainty about Trump’s policies that may matter more in the medium to long term. In particular, uncertainty surrounding more controversial measures in Agenda 47, such as new tariffs and stricter immigration policies, looms large. Analysts fear that these measures could dampen long-term economic growth and exacerbate inflationary pressures (e.g. McKibbin et al. 2024, IMF 2024), even as fiscal stimulus and tax cuts provide short-term support.

We also uncover a potential disconnect between the equity market responses and those implied at the macroeconomic level due to sectoral composition. In this context, assessing the effects of Trump’s election based solely on equity returns could be partially biased, as certain sectors (e.g. information technology and financials) that reacted positively to the news are overrepresented in the stock market relative to their weights in the real economy. When returns are reweighted by GDP shares,the contribution of these sectors diminishes, underscoring potential disparities between financial market reactions and real economic prospects (Figure 5).

We argue that the favourable response of US equity markets to Trump’s victory should be interpreted with caution, particularly when attempting to extract meaningful signals about the real economy outlook. First, firm-level equity returns were partially influenced by firms' political proximity to Trump’s agenda. Second, index-level returns may not accurately reflect real-economy prospects, as economic sectors’ weights in equity indices differ significantly from their contributions to GDP. Third, while equity volatility declined, measures of economic policy uncertainty increased following the election, highlighting that, especially in the longer term, there remain numerous unknowns about the implementation of Trump’s agenda.