5 economic factors to watch in 2025

JACK JANASIEWICZ: Hi, my name is Jack Janasiewicz, lead portfolio strategist and one of the portfolio managers for the model solutions programs from Natixis Investment Managers. 

BRIAN HESS: And I'm Brian Hess, investment strategist. Welcome to Tactical Take. OK, Jack, So. What I thought we could do this month is look at our outlook for 2025. Back on December 20th, you sent out a note, or abbreviated 2025 outlook, that walked through some key concepts we're focusing on. That was a really busy week, everybody trying to get things done before taking a week and a half off. I was swamped. 

But I saw this come in. I thought, oh, great, I'll get Jack's thoughts, abbreviated. I started reading it, kept reading it, kept reading it. He did say abbreviated, right? So I printed it today—

JACK JANASIEWICZ: [LAUGHING] 

BRIAN HESS: --nine pages. But it has a lot of good information in it. So we're going to run through this and not touch on every detail. But let's at least highlight the five big factors we're focused on. And the first one has to do with seasonality, a little bit of the presidential cycle. Why don't you talk through a possible roadmap. I mean, we don't have a crystal ball for the future, but a possible roadmap for the equity market this year. 

JACK JANASIEWICZ: Yeah, sure. And I think that's a pretty good starting place, because there's pretty good evidence that the markets do tend to follow this rhythm. And this rhythm tends to basically, mimic what's going on with the presidential cycles. 

And in this case, when you're looking at first term presidential years, in this case, Trump being newly elected, so to speak, coming off of four years of Biden, so we'll consider this his first go around, if you will, you tend to actually have a pretty good first year. But that first year tends to be bifurcated. You get a pretty good rally, much of it coming in the second quarter. 

But the second half of the year gets a little bit more choppy. And so I think there is a narrative that we could fit around that that would actually mimic that same pattern here, where you get a little bit of chop maybe in the first quarter because you're still trying to figure out some of the policies that the Trump administration might be putting into place, specifically tariff concerns. 

Maybe the second quarter, we finally get a little bit more comfortable, clarity. Earnings are still holding up. You get the rally. And then the third and fourth quarter, the growth concerns start to pop up. So you can make the case that we'd follow that same trajectory here.

BRIAN HESS: OK, yeah, that makes sense. And by the way, anybody who's interested in seeing the full note with the charts, reach out to your Natixis sales person, and we can get you this particular note, but also put you on the distribution list for the rest of 2025. 

All right, so second topic has to do with our bread-and-butter macro. This is US growth. We're looking for the potential for a US growth slowdown, but still not too worried about a recession and see recession odds is low. So let's break that maybe into two components. First off, where would the growth slowdown potentially come from? 

JACK JANASIEWICZ: Yeah. And keep in mind we'll walk through some of the areas that we'd see some slowing and potential headwinds for growth. But we are coming in from a pretty elevated level. So that starting point really does matter. It helps give us a little bit of a cushion to absorb that slowdown. 

And if you think about where real GDP has been running over the last year or so, it's been north of 3%. If you go back to the last 10 years or so, the averages have been about 2.4%. So almost 70 basis points, if you will, on average, of potential cushion there from us to slow. So yeah, we might see some softer numbers coming out. 

But again, we're coming in from pretty elevated levels. So slowing back to normal or average, to me, is our definition of soft landing. And that's not necessarily a bad thing. 

So a couple of headwinds to think about, the first one, defense spending, has been a very, very big contributor to GDP growth over the last quarter. It was almost half a percentage point for a third quarter GDP. That's a big number relative to history. 

And I know we've gotten quite a bit of our stockpile drawn down, so it makes sense we're going to see some replenishing, but probably not at that same pace. So a little bit of that the edge comes off with regard to that. We're seeing, certainly, the labor market softening and cooling. And on the back of that, I wouldn't be shocked if we get a little bit of the consumption pulling back a bit, even though the consumer is still holding up. 

We're not seeing job losses, that sort of thing. We're seeing some slowing there. So expect consumption to slow. 

We've had federal and state and local government spending running at a torrid pace. I certainly think you should expect to see state and local government spending easing off. And then the last one, one of the bigger tailwinds that we've been hoping for some time, and it's the housing market. And with mortgage rates still stuck above 7%, you're probably at least not going to get a tailwind from that. And so that's something that we've been hoping for. That's not going to help either. 

So a bunch of different things that are certainly going to be headwinds. But I don't think they're enough to push us into a recession. And that's the key, I think. 

BRIAN HESS: OK. And on that recession side of the equation, there seem to be a few things you're looking at. One has to do with this idea of a Powell put and what the Fed might be able to deliver into a growth slowdown. And the other has to do with the Trump put. So maybe just briefly explain to us what you mean by-- I think the Powell put idea is well-known, but the Trump—

JACK JANASIEWICZ: Yeah. And just to reiterate, because we've talked about this on the previous podcast, any sort of slowing on the labor front, I think you're going to see the Fed respond in kind. So expect to have more rate cuts. 

The market's looking at one rate cut between now and June and then maybe a half of a rate cut for the back half of next year or for this year, so not a ton of rate cuts expected now. So you can consider that to be fairly hawkish. So if you do get the labor market slowing, I wouldn't be surprised if you start to hear a little bit more of a dovish tone from Powell. And as a result, expect more rate cuts. 

And the Powell put-- or the Trump put, Trump, obviously, one of our presidents who's going to have a constant eye on the equity markets. And so any sort of turmoil that leads to, I think, a sharp drawdown is probably going to see a reaction coming from the White House as a result. 

BRIAN HESS: So we've got both a potential fiscal put and monetary put. 

JACK JANASIEWICZ: Not a bad little—

BRIAN HESS: Not a bad combination. 

JACK JANASIEWICZ: --four to put in there. 

BRIAN HESS: The other thing on the recession side has to do with the labor market. And we expect less job creation and possible cooling in wages. But explain why we don't see, right now anyway, the scope for big job losses, which is probably what it would take to send–

JACK JANASIEWICZ: Sure.

BRIAN HESS: --that consumption sharply lower and create a recession. 

JACK JANASIEWICZ: Yeah. And this is, I think, the key to that output, where we're thinking about--or the key to the outlook where we think markets still should do well this year because growth holds up, and it's the labor market. And I know the idea right now, I think, is simply that as we continue to see the payroll growth numbers slowing, I think the consensus is now drawing in or extrapolating that slowdown right to, OK, we're actually going to start to see job losses in here. 

And we're a little bit hesitant to make that connection right now, simply because I think you need reasons why you should expect to see companies laying people off. And maybe I should backtrack for a minute here. If you look at a lot of the traditional metrics, whether it's the employment-to-population ratio, the labor force participation rate, those are running at 30-, 40-year highs, meaning we're close to full employment, based on that metric. 

So if we're at close to full employment, it stands to reason it's going to be harder to add more jobs. So you should see a slowing in job ads make sense. But I necessarily don't think you need to extrapolate slowing job ads to job layoffs, firings, that sort of thing. And why is that? Well, you need reasons to fire.

And I think, when we look at the corporate market and the idea of corporate America, there's four things we continue to point to right. One, earnings continue to push higher. Margins continue to expand and are actually at all time highs. Unit labor costs are actually going lower. And productivity has actually been increasing. So those four things, to us, are positives. 

And you need something there to start to soften to, I think, lead to job layoffs or job losses there. And we just don't see that right now. Could it come? Sure, something we're keeping an eye on. But you need a reason to start laying off people. And we just don't see it right now. 

BRIAN HESS: Pretty supportive backdrop from a corporate standpoint, for sure. And on a related note, the next theme in this email is that S&P 500 earnings should continue to grind higher. And that will likely support the stock market. So what are we seeing on the earnings front? 

JACK JANASIEWICZ: When you do a simple bucketing of things like GDP-- in this case, we will look at nominal GDP-- there are certain ranges you'll see where S&P next 12-month earnings estimates come in at x. And then you can verify that by then looking at 12 months prior and how did that match up. And it's not surprising, as GDP starts to grow, you're going to start to see earnings estimates pushing higher. And then the 12-month look back shows that they're increasing. 

When we think about where we expect the economy to end in 2025, we could easily see a case for roughly, let's call it, 4% to 5% nominal GDP growth. And we look at those bins from how much earnings have changed during times when you have nominal growth at 4% to 5%. You get to around 9%. 

And so just as a starting point, if we expect earnings to grow 9%, throw on a dividend yield of a percent or two. Now you're already at double digit returns. You don't even have to have multiple expansions. 

So I don't think it's hard to get to 9%, 10% total return on S&P. I would certainly say that history shows that when we've had 20% returns back-to-back years, not a lot of observations there. But when we have, the market has ended higher, certainly not at the same strength of another 20% return. 

BRIAN HESS: --20-plus percent return is rare. 

JACK JANASIEWICZ: Yeah, it's going to be tough. But you do get good returns in terms of high single digits, low double digits. So it's not unprecedented. And I think that's our base case for expectations as well. 

BRIAN HESS: The table is interesting. The full table is in the note. And it basically shows that anytime nominal GDP grows 3% or higher, you have strong earnings growth. It doesn't mean the stock market will necessarily go higher, because there's the multiple to consider. But at least it creates a favorable backdrop. So for us, the question has to be, what would it take to push nominal GDP below 3%? 

JACK JANASIEWICZ: Sure. 

BRIAN HESS: And the story you're laying out here doesn't lead us to that. We don't see inflation cratering. I mean, we were going to talk about that in a moment. But we don't see deflation, and we don't see a reversal in real GDP growth to a huge extent. 

JACK JANASIEWICZ: Yeah. And the key is going to be the labor market. So we could certainly, keep an eye on that. We could certainly be wrong on that outlook, where it starts to crack, and you get a sharper slowdown. But to your point, to us, it still seems fairly supportive in here. 

BRIAN HESS: Next topic has to do with US prospects versus the rest of the world. And in our models, we made some trades in 2024, where initially, in the summer, we covered our emerging markets equity underweight. That had been a long-standing underweight, locked in profits there. That was more driven by the Chinese policy pivot. 

But then at the very end of the year in December, we took profits on our developed international underweight, where that had also been a long-standing underweight. It worked really well in 2024. And I think that was also a profit-taking exercise more than anything, where we saw major relative performance differential between US equities and European equities, in particular, plus the currency weakness. 

So we just wanted to lock that in. And we'll revisit perhaps if there's a time to reestablish that underweight. And in this note, you highlight that we do expect US-- I'll just use the term US exceptionalism to continue through this year, which would lead us down that path of looking for opportunities to potentially reassert that underweight, as opposed to go the other way and become overweight international equities.

And I think we talked about this last episode. But what's the quick, just a few bullet points on why we see this, this trend is likely to continue? 

JACK JANASIEWICZ: Yeah, I think it's just a question of that economic backdrop that we just outlined. And when we look at the US relative to the rest of the world, that growth backdrop is much more supportive, I think, for the US relative to someone, let's say, in Europe or Asia, for example. How does that change? I think if you get a pretty significant fiscal package that comes out of China to stimulate consumption, that changes that backdrop, I think. 

And then we'd have to rethink that US exceptionalism trade. But right now, based on what we're seeing, it doesn't seem like that's going to be a base case scenario for us. So when you look at the growth story in the US being far superior to the rest of the world, and also think about the quality of the US companies, and all this works into a lot of the valuation concerns. 

You hear a lot of it about-- a lot of concerns about the premium that the US is trading at, relative to the rest of the world. Is that getting stretched? Look at things like margins. Again, I mentioned it earlier. S&P margins are basically at all-time highs and look like they're continuing to push forward. Return on equity, again, still pushing at all time highs. 

As well, you compare that to rest of the world. We're far ahead of everybody. And so to me, that's a function of the quality of the US companies that you're investing in. And that's a big differentiator here. And those qualities are what I think lend itself to have a premium to the rest of the world. 

And again, I don't see that changing anytime soon, especially because tech is at the forefront of all this. And we talked a little bit about productivity gains. We're just finally starting to see some of the fruits of AI coming out. When you start to read through some of these earnings transcripts, they're talking about actual AI. The benefits are accruing. And that really is flowing right to the bottom line for productivity, which is going to manifest in, I think, that US exceptionalism story. 

BRIAN HESS: There's another angle you took I think that's fantastic from a fundamental perspective and the quality of the companies. That's a great underlying foundation for this US outperformance. You also looked at it from the angle of interest rates and broke down the 2024 rate path into a few different time periods, one with rising rates, one with high rates, one with falling rates.

And it does seem like there's some truth to the idea that high and rising US Treasury yields are holding back international asset performance through the currency channel in one part, but also, just by attracting capital to the US. So until we get some kind of more definitive turn in rates-- and US rates are a lot higher than, say, German rates or Japanese rates.

So if global interest rates are to fall, it's quite likely that US rates will fall more, just because there's a wide spread there and a higher starting point. So that could be another ingredient that we'll need to see in order for the international markets to do a little bit better. 

JACK JANASIEWICZ: Yeah, and if I had to really roll up the market breadth scenario-- and when I say market breadth, I'm talking about not just large cap to small cap, mid, if you will, but I'm also including international and EM in that story. To me it's that rate story. 

I think you need to have the 10-year yield get back down to something closer to 4%. And that's when I think maybe you see that breadth widening out. You see international starting to pick up a little bit more. And I think if I had to distill it all into one metric we're paying attention for that relative value trade to flip-flop, it's the 10-year yield, I think, is going to be the key to that story. 

BRIAN HESS: And the key to the 10-year yield is probably, in part at least, inflation, which is our—

JACK JANASIEWICZ: I see what you did there. 

BRIAN HESS: --our last theme from this note, where I think consensus is starting to move into a direction where we're more worried about inflation re-accelerating. We're worried about tariffs. We're worried about immigration policy driving wages higher. 

Our Natixis view is one where we see inflation continuing to retreat towards that 2% target. So let's just break that down. And what are you seeing that gives you confidence that the Fed and inflation are still on track to get to target? 

JACK JANASIEWICZ: Yeah. And maybe I'll be so bold as to say, maybe our biggest surprise for 2025 is how much maybe inflation drops. And I think that could be one of the bigger surprises for this year. Certainly, we've seen a lot of weird things happen over the last couple of months in terms of maybe more idiosyncratic bumps that we've seen for line items that have maybe made inflation appear to be more sticky, if you will.

But if I step back and take a big picture view here-- let's look at the forest, not the trees, so to speak-- I think that you can narrow it down to a few things. The first one is simply shelter, housing. That, I think, when you look at core PCE, it's close to about 18% or 17% of core PCE, core CPI, which is, obviously, not the one the Fed pays attention to. Core PCE is the one. 

But you're looking at something closer to 45% for shelter. You look at the real-time pricing there, there is disinflation. And you're starting to finally see that manifest in those core CPI numbers. So the housing market, which I think has been pretty much one of the big culprits to the sticky inflation scenario, we're finally starting to see that roll over. And we look at those forward-looking indicators, real-time pricing. To us, there's a lot more disinflation coming from housing.

The second one, to have, I think, an inflationary impulse, you need to have demand pull, if you will. And that comes from the labor market. Which means either you have accelerating job growth. And more importantly, wages are starting to pick back up. That's the key there. 

And we don't see either of those. We continue to see the labor market cooling. All the metrics we pay attention to, whether it be the employment cost index, unit labor costs, average hourly earnings, the Atlanta Fed's Wage Tracker, those are all trending down. In some cases, we're back to pre-pandemic levels. 

So we're not seeing the impulse coming from the labor side of the equation either. And you're still seeing supply chain normalization. When you look at delivery supplier times, those are basically continuing to push higher. So a lot of these bottlenecking issues that plagued the inflation story earlier, those are all gone, too. 

So again, let's step back and look at the big picture. And maybe the last thing to talk about, too, one of the things that are, I think, still adding to that sticky side-- and, again, shelter is part of this equation. But there's a few other things to talk about. It's the imputed prices, things that are implied. You're not directly observing in the market, so to speak. 

And one of the ones we'd like to talk about is financial management services. It's a function of assets under management. The stock market's going up. Your portfolio is going to be worth more. And if I'm taking a 1% fee on that, I'm going to be making more on the dollar value just because the market has gone up. And that looks like inflation, the way it's calculated in PCE, in imputed price. I don't really think that's a natural reflection of demand inflation because—

BRIAN HESS: Broad-based increase in prices, that's for sure. Yeah. 

JACK JANASIEWICZ: I mean, if you look at the last print for PCE, I think those imputed prices for financial services account for almost 20% of the month-on-month gain. So, again, we need to step back and really look at the bigger picture. And we just don't see the ingredients there for a sustained re-acceleration of inflation, and rather just the opposite. We think it continues to push down. 

BRIAN HESS: And you say this is maybe our boldest call or one that we think could be the biggest surprise for this year. And it could be one of the most important from a market standpoint. 

JACK JANASIEWICZ: 100%. 

BRIAN HESS: Because you think about your comments on international versus the US. We think about the increase in real yields we've just experienced. Breakevens have widened a bit. So we're set up in the bond market, where if we get a big downside surprise in inflation, and the Fed has that runway to lower the policy rate a bit further-- I mean, maybe they decide not to because growth is strong enough. 

But at a minimum, that should support bond prices and probably push yields down, which has a lot of implications for whether you want to be down in cap, or tilting towards value, or even looking internationally. And the good news is, with our models, we're coming in with a fairly clean slate. We have an equity overweight maybe around 4%, depending on the model. But it's concentrated in the US for now.

But we're not making a lot of big tilts right now. And so we're in a position to look at these themes, assess the incoming data flow, like you say in the note. We're just like the Fed. We're data dependent. And then position accordingly. 

So it'll be fun to track how these progress as we move through the rest of the year. Thanks for the great note and for running through it with us today. 

JACK JANASIEWICZ: Yeah, a lot fun. Great. I always love talking about our prospects. I can't wait to look back and see how close we come in getting this right. And hopefully, we get more right than wrong. But that's markets, and that's what makes it fun. 

BRIAN HESS: Exactly. Sounds good, Jack. Thanks. 

JACK JANASIEWICZ: Thanks, Brian. Great.