2025 investment landscape: Q&A with our CIOs

We recently sat down with Principal Asset Management’s Chief Investment Officers and Chief Global Strategist, asking about their expectations as investors enter 2025. Although the U.S. continues to lead and pull the world’s markets with it, each offered unique perspectives and ideas about what lies ahead in 2025 and where opportunities may be found.

Seema Shah, Chief Global Strategist

Q: At a macro level, what are you seeing for 2025? Are there any possible surprises lurking on the horizon that investors should be aware of?

A: Going into 2025, we are generally optimistic, especially about the U.S. A recession in the U.S. is unlikely as household and corporate balance sheets are still very strong, with many buffers to handle any kind of surprise that could come along through the year. Additionally, the labor market remains vibrant, even with a slowdown in labor demand expected.

Inflation is obviously the focus for markets, but although sticky, it remains far below the peaks of 2022. With the Fed expected to maintain its easing path, albeit at a slower pace, until it comes to grips with any inflationary impacts from the incoming Trump Administration and its policies, monetary policy is supportive. Moreover, President-elect Trump’s deregulation efforts are likely to spur U.S. economic activity further over time.

Todd Jablonski, CFA, CIO and Global Head of Multi-asset and Quantitative strategies

Q: 2024 was “risk on” throughout most of the year. Will that continue into 2025?

A: The recent U.S. Presidential election, the Fed’s easing path, and open conflict in Europe and the Middle East are all risks and threats for financial markets as investors cross into 2025, but we are cautiously maintaining our risk on bias.

U.S. equities have delivered about a 50% return over the last two years, and that type of momentum is challenging to fight, although we don’t anticipate returns that strong in the next two years. Still, globally, we expect 12% earnings growth in 2025, and 15% in the U.S. In addition, we see strength in investment grade credit and high yield. So, combining all three, we believe that striking the right multi-asset balance in 2025 should lead to another fruitful year for investors, perhaps in the high single digits. Again, the last two years were an anomaly, but we will still see healthy advances in risk on portfolios in 2025.

Q: In 2024, we saw more fixed income volatility than equity volatility, which was surprising given all the geopolitical conflict in Europe, the Middle East and elsewhere. Will that continue in 2025? Reverse?

A: Let’s start with fixed income. I think you’ll see a better behavior pattern from bonds based mainly on the fact that with the Fed in an easing cycle, even one slower than previously anticipated, and even with stubborn and sticky inflationary pressures, is the Fed going to raise rates? Is that even on the table? No. Even if the Fed holds rates steady through 2025, it should still be an easier ride for bonds.

On the equity side, you could see more moderate volatility as war rages on in the Middle East and Europe and the new administration institutes its policy priorities. But that’s OK. Without risk, there is no reward. And without volatility, we lose what we see as favorable entry and exit points in the market.

George Maris, CFA, CIO and Global Head of Equities

Q: U.S. equities continued outperforming their ex-U.S. counterparts in 2024, marking another year in the current trend. Are U.S. stocks still attractive? Are valuations of ex-U.S. stocks catching your eye?

A: As my colleagues pointed out [earlier in the article], U.S. exceptionalism will likely remain a key theme in 2025 as the macroeconomic backdrop remains encouraging. The combination of supportive liquidity, such as the Fed’s easing cycle, and a supportive economy is hard to beat. That said, we anticipate some rotation within U.S. equities, extending the movement away from the “Magnificent Seven,” where earnings growth outside of NVIDIA is converging with the rest of the market.

Rotation does not necessarily mean only rotation into other U.S. equities. The fact the U.S. is doing great does not mean the rest of the world is performing poorly. We anticipate a lot of international markets will also perform well in 2025, some of which is due to expected strength in the U.S. Economies such as China, Japan and Germany, while not experiencing the growth seen in the U.S., are export-driven and, despite the possibility of U.S. tariffs, are likely to see export strength feeding from U.S. domestic demand. Demand strength in the U.S. will help a lot of global equity markets.

Additionally, the U.S. premium over international markets is the highest in a generation or more. This is a dangerous starting point, but returning to the theme of rebalancing, and creates attractive long-term entries outside the U.S. While U.S. valuations seem concerning, this does not mean the U.S. is in an alarming state. It highlights the opportunity for rotation in the U.S. and globally is increasingly compelling.

Q: We’ve seen equity markets shrug off wars, elections, and even a pandemic in retrospect and keep plowing ever higher for years. What’s fueling this?

A: This extended bull market in equities confounded experts as equities moved past one disruptive event after another. A key factor underlying this resilience is strong liquidity. In the U.S., fiscal and monetary policies are aggressive providing ample liquidity – at least until the Fed began tightening in early 2022. But the Fed is back to a more balanced rates approach, if not outright easing. As for its aggressive fiscal policy, Washington, D.C. is faced with national debt exceeding $36 trillion and running deficits north of $2 trillion. This level of debt and deficit is unprecedented during peacetime. If this fiscal situation results in liquidity becoming more limited, equities could falter as we saw following the December FOMC meeting when the Fed’s dot plot removed two of four anticipated rate cuts in 2025.

Michael Goosay, CIO and Global Head of Fixed Income

Q: We just saw the Fed ease another 25 basis points in mid-December. What are your expectations for Fed policy going forward? Do you agree that the Fed may slow its easing pace to every other meeting, given the stickiness in price pressures and uncertainty surrounding the new administration’s policies?

A: I think the Fed’s policy response will largely depend on the labor market rather than monthly inflation prints. If the labor market remains robust and healthy, the pace of rate cuts will likely slow. There have been some emerging signs of deterioration in the labor market, particularly in lower-income segments, but nothing serious enough to keep the Fed on an aggressive easing path.

Moreover, bringing inflation down from the 2022 highs to today’s core rate of 3.3% was a relatively easier gap to close than the remaining gap to the Fed’s 2% target, especially given the factors keeping inflation higher. The tight labor market and the incoming Trump Administration’s tariff threat are chief among these.

Q: How do you approach this environment as a fixed income investor?

A: Amid a Fed rate-cutting cycle, even one as glacial and shallow as suggested by the revised 2025 dot plot forecast, rates should decline across the curve. In this environment, duration becomes your friend as the Fed continues to lower its funds rate target and the yield curve steepens.

Spreads are very tight across all segments of the fixed income market. But as we all know, investors eat yield, not spreads. So, our approach is yield-focused, and from an income of carry perspective, yields are extremely attractive. Going into a new year, we’re comfortable maintaining positions in both investment grade and below investment grade securities.

Todd Everett, Global Head of Private Markets

Q: Todd, how is 2025 shaping up in the private markets? Are specific markets emerging from the challenging environments of recent years?

A: We believe 2025 is shaping up to be an advantageous year for private markets as an alternative source of alpha in investment portfolios. The performance drivers will likely be a mixture of economic, market cycle and other factors. Notably, the cost of leverage appears to have peaked in 2024 as the Fed embarked on its long-awaited easing cycle, and that should help reset valuations, especially in the private real estate market. A resilient U.S. economy, strong demand, government support for infrastructure projects and private market fundamentals should be on solid footing in 2025.

Traditional private market lending sources have ceded ground to new leverage providers in the alternative credit, direct lending, and real estate market, opening the door to more supply for these non-commercial banking lenders. In addition, underwriting standards across the sectors are leaning more towards cyclically conservative versus peak-of-market, providing a good environment for debt investment.

We believe that all the primary reasons for investors to sacrifice liquidity and venture into private market (enhanced return, lesser volatility, and low correlation) are well supported looking into 2025.

Q: Is there one particular slice of the private markets that intrigues you most heading into next year?

A: Commercial real estate may be the most interesting now among the various facets of the private market space. Commercial real estate valuations have reset, and we have a better sense of market normalization and price discovery with increasing transaction activity. Market vacancy levels have remained within historical equilibrium ranges, excluding the office property type. We are favoring investment into the specialty sectors such as data centers and cold storage and see recovering fundamentals in the historically resilient property types of industrial and multi-family.

Infrastructure is also attractive, especially within the digital space, including fiber and telecom. LNG, energy storage, and transportation investments such as ports, airports, and rail could also be appealing in 2025. While the incoming administration’s tariff policies bear monitoring, these markets are starting in a decent fundamental position.