Our economic and market outlook for 2025: Global summary

U.S. equities have generally delivered strong returns in recent years. 2024 was no exception, with both earnings growth and price/earnings ratios exceeding expectations. The key question for investors is, “What happens next?”

In our view, U.S. valuations are elevated but not as stretched as traditional metrics imply. Despite higher interest rates, many large corporations insulated themselves from tighter monetary policy by locking in low financing costs ahead of time. And more importantly, the market has been increasingly concentrated toward growth-oriented sectors, such as technology, that support higher valuations.

Nevertheless, the likelihood that we are in the midst of a valuation-supporting productivity boom, akin to the mid-1990s, must be balanced with the possibility that the current environment may be more analogous to 1999. In the latter scenario, a negative economic development could expose the vulnerability of current stock market valuations.

While the median of our U.S. return outlook over the next decade appears cautious, the range of possible outcomes is wide and valuations are rarely a good timing tool. Ultimately, high starting valuations will drag long-term returns down. But history shows that, absent an economic or earnings growth shock, U.S. equity market returns can continue to defy their valuation gravity in the near term.

International valuations are more attractive. We suspect this could continue as these economies are likely to be most exposed to rising global economic and policy risks. Differences in long-term price/earnings ratios are the biggest driver of relative returns over five-plus years, but economic growth and profits matter more over shorter horizons. Over the past few years, persistently lackluster growth in the economies and earnings outside of the U.S. kept international returns lukewarm relative to the remarkable return in the U.S. market. Within emerging markets, China is the sole reason valuations are below fair value, but the risks of rising trade tensions and insufficient fiscal stimulus in China pose additional headwinds.

IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class. Simulations as of November 8, 2024. Results from the model may vary with each use and over time. For more information, please see the Notes section.