Our glass is still half full - but expect lower returns and more volatility in 2025
We think the potential for investors who ascribe to our top-down thesis to generate above-average returns is still compelling.
Without question, we are living in extraordinary times, where perspectives on the world vary dramatically.
On the one hand, rising GDP-per-capita in many countries, significant advancements in healthcare, and incredible technological discoveries all represent meaningful positive momentum. In addition, soaring asset prices have materially boosted net worth, especially for those heavily invested in the S&P 500 and housing. At the same time, however, a contrasting narrative emerges for many global citizens, especially those adversely impacted by inflation and/or military conflicts.
Governments across the globe are grappling with ballooning deficits amidst the need for huge investments in infrastructure, security, workforce development, and supply chain needs. Many nations face increasingly complex demographic shifts as well as political discontent with the ‘establishment’, driven by a ‘revolt of the public’ against established institutions by digitally empowered citizens.
Moreover, for those not invested in the equity or housing markets, a stark divide between the ‘haves’ and ‘have-nots’ has contributed to record levels of inequality. At the same time, the traditional distinction between economic and national security has become increasingly blurred as we transition from a period of benign globalisation to one of heightened geopolitical tensions.
Yet, despite all these cross currents, our investment outlook for 2025 still tilts positive. So, leveraging a refrain from our 2024 Outlook, our 2025 mantra remains that the Glass is Half Full. To be sure, investors should expect lower returns and more volatility along the way than in 2024.
Still, stronger U.S. productivity, easy financial conditions, robust nominal earnings growth, and lack of net issuance, give us confidence that not only is the cycle not over but more gains for investors could lie ahead in 2025. Equally as important, we still see several mega investment themes that we believe will require trillions of dollars of private capital over the next 10 years to fulfill their destiny. Against this backdrop, we think the potential for investors who ascribe to our top-down Regime Change macro thesis to generate above-average returns is still compelling.
The most important things to know
- Asynchrynous recovery: We now live in a world where the ECB is cutting earlier and faster than the Fed this cycle, a sequencing that has never occurred before. Meanwhile, in Asia, the Bank of Japan is raising rates. At the same time, China needs to create internal demand to offset deflationary trends and a major deleveraging cycle reminiscent of 2008 in the United States. Japan’s 30-year bonds now yield more than China’s, while in Europe, once maligned Greece now has bond yields that are essentially on par with those of France.
- A higher bar: Unlike the past two years, the more aggressive GDP and EPS growth estimates for the U.S. to start the year will challenge and set a higher bar for an ‘upside surprise’ in 2025. Additionally, this Fed cycle will likely be less dovish than previous ones. So, look for large domestic-oriented economies, such as the U.S. and India, services-based economies like Spain, and corporate reform-minded economies, such as Japan, to outperform. In this context, we think earnings growth now matters more than multiple expansion.
- Currency markets are an achilles’ heel: Most investors are now focused on a surging 10-year yield. By comparison, we are more focused on currency volatility. Tariff wars and big fiscal imbalances can create volatility shocks that differ from recent cycles.
- Oil: For the first time in years, we are below consensus on our near-term outlook. Specifically, our 2025-26 forecasts of $65 per barrel are now modestly below futures pricing. However, our longer-term 2027-28 estimates of $70-75 per barrel remain comfortably above futures at around $64 per barrel. In the bigger picture, as AI scales, we believe energy security will become even more entwined with national security.
- Productivity holds the key: U.S. productivity is surging, elevating both earnings and growth. Until this slows, we think the cycle will continue. When it does slow, however, the downturn will be faster and more significant than the consensus believes.
- Regime change thesis intact: Recent election outcomes around the world put an exclamation point on our Regime Change thesis, which is driven by bigger deficits, heightened geopolitics, a messy energy transition, and stickier U.S. inflation. Our top-down framework suggests flatter returns, which will likely require a different playbook for capital deployment.
- New growth drivers amidst heightened global competition: We envision a blurring of economics and national security across all regions, likely encouraging political leaders to develop ways to expand investment, including increased savings, more private sector involvement, and a focus on driving down the cost of capital. As part of this transition, we see key growth markets emerging in India, the Middle East, and other parts of Southeast Asia. As a result, we think Intra-Asia trade will continue to accelerate.
This wire is an excerpt from KKR's 2025 Outlook
To read the full outlook and gain insights into our views on the big picture, asset allocation, and where we think expected returns will fall during the rest of this cycle, download the PDF or click the below link.
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Henry H. McVey is CIO of the KKR Balance Sheet and is Head of the Global Macro, Balance Sheet and Risk team. He oversees Firm wide Market Risk at KKR, and co-heads KKR’s Strategic Partnership Initiative. As part of these roles, he sits on the Firm’s Investment Management & Distribution Committee and the Risk & Operations Committee. Mr. McVey is also a member of the Pritzker Foundation Investment Committee, a board member of the University of Virginia. Mr. McVey also serves as a member of the Financial Sector Advisory Council for the Federal Reserve Bank of Dallas. He earned his B.A. from the University of Virginia and an M.B.A. from the Wharton School of the University of Pennsylvania.
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Henry H. McVey is CIO of the KKR Balance Sheet and is Head of the Global Macro, Balance Sheet and Risk team. He oversees Firm wide Market Risk at KKR, and co-heads KKR’s Strategic Partnership Initiative. As part of these roles, he sits on the...
Expertise
Henry H. McVey is CIO of the KKR Balance Sheet and is Head of the Global Macro, Balance Sheet and Risk team. He oversees Firm wide Market Risk at KKR, and co-heads KKR’s Strategic Partnership Initiative. As part of these roles, he sits on the...
Expertise
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