Five themes for 2025

Section 4: Five themes for 2025

1. Relative yields and credit selection, more than risk-free rates, should drive returns in public and private debt markets.

   As we explained in the previous section, we expect the Fed and other central banks to continue cutting rates modestly. But that won’t necessarily translate into broad market bond yields moving lower given upward pressure from other sources. This dynamic should produce a steeper U.S. yield curve over the coming quarters, yet we don’t think investors should extend duration to seek returns.

   Rather, we think it makes sense to emphasize credit selection and broad fixed income diversification, with a particular emphasis on market segments that continue to offer yields at extremely attractive entry points, on both an absolute basis and relative to their history (Figure 2).

   We offer more details on specific areas of the fixed income market we favor in the following section, but several areas merit highlighting. Emerging markets debt has grown increasingly attractive, and we continue to favor securitized assets and senior loans. While some investors have expressed concern about how weakening growth could negatively impact private credit, we believe deal activity remains robust and continue to favor conservative structures with lower leverage and stronger covenants — especially in the middle market segment.

2. Municipals are still the borrower of choice for investors in it for the duration.

   There is much to like about municipal bonds right now. Fundamentals remain solid for state and local governments: Tax revenues have been climbing, cash balances are high and defaults remain quite low. Municipal bond yields are also elevated, thanks in part to growing new supply. That surge in supply has caused municipal bond returns to lag the broader fixed income market this year, creating what we view as excellent value opportunities.

   With the municipal bond curve steeper than the Treasury curve, this looks to be an area of the market where investors may be well compensated for accepting some duration risk. From a credit perspective, we see compelling opportunities across both high grade and high yield municipals.

3. Real estate reality: the trends are positive.

   Real estate markets appear to be in the early stages of a positive turnaround. Returns have been positive for the last few quarters following a two-year downturn driven by falling values, oversupply and weak demand. We believe the first two headwinds have been largely mitigated, and we are seeing meaningful progress on the third.

   Real estate values appear to have found a floor and bottomed out. The oversupply issue that emerged at the end of the pandemic is finally fading as construction starts decline. While demand uncertainty for real estate broadly does remain a concern, we are witnessing robust demand in specific sectors such as medical office, grocery-anchored retail and affordable housing.

4. The world may be decoupling; markets are not..

   While some of the tariff turmoil from earlier in the year has subsided, ongoing trade policy uncertainty and geopolitical tensions suggest that globalization may be a distant memory. But from an economic perspective, growth and monetary policy trends are generally still moving in the same direction globally.

   We continue to hear discussion around a “sell the U.S.” trade, sparked by a sense that U.S. global economic leadership may be waning. However, we think this trend may be misguided. We maintain our positive stance on U.S. large cap equities, as we believe fundamentals remain strong and that the U.S. will remain the primary beneficiary of the AI boom.

   Regarding other areas of the global equity market, we remain broadly neutral toward non-U.S. developed markets, though we view European equities as potentially representing a long-term value opportunity. In contrast, emerging markets equities appear less attractive given heightened global trade policy risks.

5. Energy demand charges ahead of capacity, creating opportunities amid political changes.

   The demand for energy continues to surge. Many of the world’s largest technology companies are investing billions in new data centers, AI infrastructure and power generation. While tech companies themselves should benefit from this trend, we also see significant opportunities in power-related infrastructure investments across public and private markets.

   U.S. political and regulatory shifts do affect the relative attractiveness of energy-generating investments. On balance, we expect the global green energy transition to continue, particularly in Europe, but investments in natural gas, pipelines and traditional energy should benefit from Trump administration policies. With power demand outstripping existing supply capacity from conventional sources, we could also see increased investment in nuclear and geothermal energy generation. In contrast, we expect areas such as U.S. wind power and electric vehicle charging infrastructure to face greater headwinds.