The 2025 Investment Outlook from J.P. Morgan Asset Management, led by Chief Global Strategist David Kelly, provides a roadmap for navigating an evolving economic and market landscape. The report tells a compelling story of resilience amid recent turmoil, an era of moderation, and a fog of uncertainty that looms over policy decisions.
A Post-Cycle Economy with Growing Uncertainty
Kelly opens by chronicling the myriad challenges the global economy has weathered over the past few years: pandemic-induced supply chain disruptions, inflation surges, and unprecedented central bank tightening. Despite these headwinds, the U.S. economy displayed remarkable resilience, with 2024 GDP growth estimated at 2.3%, driven largely by consumer spending, which accounted for 80% of growth in the first three quarters.
Looking ahead, Kelly foresees real GDP growth of 2.1% in 2025, supported by continued, albeit slower, consumer spending and stabilizing interest rate-sensitive sectors such as housing and manufacturing. He emphasizes that this is a period of normalization, where moderation replaces the extremes of recent years: "The U.S. economy’s momentum is downshifting into a more normal pace. While this alone is unlikely to trigger a recession, it does leave the economy more vulnerable to shocks".
Policy Uncertainty: A Double-Edged Sword
The re-election of Donald Trump and a Republican-controlled Congress could usher in significant policy shifts. Kelly flags potential tax cuts, stricter immigration policies, deregulation, and tariffs as areas to watch. These could have mixed effects, such as stimulating business investment through lower taxes while exacerbating fiscal deficits and inflation pressures.
On tariffs, Kelly warns of serious risks: "A 10% tariff on all imports and a 60% tariff on Chinese goods could lead to higher inflation, reduced demand, and a stronger dollar, destabilizing markets." He estimates that these tariffs could cost U.S. households between $1,900 and $7,600 in disposable income annually, underlining the potential for disruption.
Fixed Income: Back to the “Old Normal”
As the Federal Reserve’s easing cycle continues, Kelly highlights a return to pre-2008 norms: positive real interest rates, higher yields, and tight spreads. He suggests extending duration in fixed income, favoring high-quality securities such as municipal bonds and corporate credit, which are poised to benefit in a soft-landing scenario. However, he cautions that rate volatility could persist, particularly with long-term rates influenced by fiscal policy debates.
Equities: Broadening Leadership Amid Secular Tailwinds
The U.S. equity market’s 60% rally over the past two years has been fueled by the “Magnificent 7” tech giants. Kelly notes that while their dominance may wane in 2025, earnings growth is expected to broaden to other sectors, including industrials, materials, and financials. This shift is underpinned by easing capital costs and secular trends like the AI boom and energy transition, which continue to drive investment.
He emphasizes that valuation matters: "Investors should embrace diversification, recognizing that while large-cap growth remains attractive, the pendulum must swing to include value and international equities".
International Equities: Opportunities and Risks
Kelly acknowledges the valuation gap between U.S. and international equities, particularly in regions like Japan and India. These markets benefit from structural reforms and growth momentum. However, headwinds persist, especially in Europe and China, where cyclical challenges and geopolitical uncertainties could dampen returns. He advises a selective approach, focusing on regions and sectors aligned with long-term growth drivers.
Alternatives: A Normalization Year
Alternatives, including private equity, real assets, and hedge funds, are set to play a pivotal role in portfolio construction. Kelly highlights the "democratization of alternatives," driven by technological advancements and lower investment minimums, which make these assets accessible to a broader range of investors. He underscores the importance of these assets for diversification, particularly in a world where public market returns may moderate.
The 60/40 Portfolio: Reports of Its Death Are Greatly Exaggerated
Kelly concludes by dispelling the myth of the “death” of the traditional 60/40 portfolio. Instead, he advocates for its evolution, integrating alternatives into a more diversified framework, such as a "50/30/20" allocation. "As macro forces shift and policy changes loom, a well-diversified portfolio is more important than ever to navigate the turbulence ahead".
Key Takeaways
- Normalization, Not Recession: The U.S. economy is entering a phase of moderate growth, with real GDP expected to expand by 2.1% in 2025.
- Policy Risks: Tax cuts, tariffs, and immigration restrictions could introduce volatility, particularly in consumer spending and trade dynamics.
- Fixed Income Appeal: With rates stabilizing, high-quality bonds and credit offer attractive opportunities, but rate volatility remains a concern.
- Broadening Equity Leadership: Earnings growth is expected to extend beyond tech giants, benefiting sectors tied to infrastructure and energy transitions.
- Alternatives as a Necessity: Incorporating alternatives into portfolios enhances diversification and offers new avenues for growth and income.
As Kelly aptly puts it, "The path ahead is one of moderation and careful navigation, where diversification and balance are the compass points guiding investors through the policy fog and toward sustainable returns."
Copyright © AdvisorAnalyst, J.P.Morgan Asset Management
