Global Perspectives: U.S. Investment Outlook 2025

Lara Castleton: Hello and thank you for joining this episode of Global Perspectives, a podcast created to share insights from our investment professionals and the implications they have for investors. I’m your host for the day, Lara Castleton.

Thank you all for being here on the back of the release of our 2025 Market GPS Outlook. I’m thrilled to be here to guide a discussion on where Janus Henderson thinks the markets will be for the year ahead. I also want to remind you that our annual Market GPS is available for download. So I would highly encourage you guys to click that link or download it for your viewing after this.

2024 was the year of brain rot. So says Oxford Dictionary, with their choice for word of the year. But I promise, the next 30 minutes are going to prove to be the exact opposite. I feel very good about our ability to energize your brains, maybe a little more than the addicting, albeit entertaining, TikTok dancing videos. I do want feedback also after this on whether we were able to achieve that or not.

Before I turn it over to our panelists, though, I do want to take a moment to reflect on what happened in the markets for 2024. So, coming into the year, we started with inflation around 3.4%. Expectations were for 175 basis points of rate cuts. Equity valuations were of concern. But the median expectation was for the S&P [500 Index] to end modestly up at 48.75.

Data-dependent was my phrase of the year, and through all of the emotions and the ups and downs throughout the year, if we fast forward through all that to today, we’re sitting with inflation at, it ticked down slowly, about 2.6%. We’ve only had about 75 basis points of rate cuts thus far. And while equity valuations very much remain in focus, the S&P hit 55 new market highs and is hovering around 60.75 today.

So looking ahead, how can we pull ourselves out of this near-term data dependency and position our portfolios for that long-duration trend? To figure this out, I’m thrilled to be here with the experts at Janus Henderson, Adam Hetts, Global Head of Multi-Asset; Portfolio Manager Marc Pinto, Head of Americas Equities; and Jim Cielinski, Global Head of Fixed Income. Gentlemen, thank you for being here.

Jim Cielinski: Thank you.

Adam Hetts: Thank you.

Castleton: Adam, as Global Head of Multi-Asset, focusing on everything within equities, fixed, alternatives, etc., can you just give us the 30,000-foot view of the economy?

Hetts: Yes, sure. Thanks, Laura. Well, the 30,000-foot view, I think, is that a lot of market participants still think that we’re flying at 30,000 feet and we haven’t really landed yet. We’re a little more cautious in the late-cycle economy. Maybe it’s a little more of a soft-landing kind of environment rather than no landing. But we’re grateful that’s the debate now. Over a year ago, it was hard landing versus soft landing. Now it’s soft landing versus no landing. So whichever side you fall on, there’s a lot of reason to be optimistic.

You’ve got U.S. GDP still on the 2%, even 3% range that it’s tracking. You’ve got a labor market that has, for the most part, successfully rebalanced. You mentioned the nonfarm payrolls this morning. We had a relatively strong print. Part of that was rebound from a soft print last month, with some distortions, but then offsetting those stronger numbers as unemployment ticked up a little bit, from 4.1% to the 4.2%-and-change kind of range.

So that is the right kind of print to, I think, ensure most likely a Fed rate cut on December 18, but it’s not so soft that it creates broader economic concerns. And so that’s a good print overall this morning on labor. That was an important print leading to the December 18 rate cut meeting from the Fed. And then, as an output of labor market, you’ve got a strong consumer still. And then broadly, you’ve got a deregulatory policy regime coming up and, of course, the broader rate-cutting cycle.

So, a lot of good reasons for optimism. Some headwinds out there. The inflation reacceleration, stubborn inflation is a risk out there, also stubbornly high longer-term rates, and the U.S. 10-year being a bit of a braking mechanism on markets and of valuations. So it’s an overly demanding, expensive market, but this is a market that’s been able to thrive in the face of some of those headwinds. So it leaves us risk on and pretty optimistic. I’m not sure that we can expect another 20%, even 30% year next year, but that’s what we’ve seen so far. And so, so far, so good, and we think the upside can continue to grind higher.

Castleton: Great. So, nothing seems to be derailing the markets at the moment. But you mentioned reacceleration of inflation is of some concern. So, Jim, if I turn to you, how is the backdrop for rates and inflations affecting your outlook on the bond market?

Cielinski: Yes, and I’d start just by saying that was the theme of last year. The policymakers pulled it off, the elusive soft landing. And given the wild swings in both policy and the economy, to end up in this place, I think, is remarkable. But it’s what we’ve done. And they have successfully engineered something that’s not too hot now, not too cold. And we should cheer that, and markets have cheered that. You can only cheer that so many times in so many years in a row, so I think that’s the big test.

But for bonds, we’re constructive on bonds. I think rates fall. And I look at history, and you can see quite clearly when central banks are easing. And we’re really going down a path of global central bank easing. It’s not just the U.S. – it’s really a global phenomenon. Rates are going to fall, I think, in all key developed regions. The only time that rates don’t keep falling when you get easing of this magnitude is when inflation reignites. So that is the worry. So, I give credit to the panelists for pointing at the right concern.

We thought inflation would move down close to target. It’s 2%, by the way, in most of the developed world. It’s close to that, but not quite. And it’s stalling out. And so I think that is something to keep an eye on. I don’t think you want to go below 2%, however. So I think something that has a floor at 2%, with the results being just above that, is a pretty good outcome.

I don’t think we keep falling. I think we’re seeing some stickiness in services, things like that. But it’s not going to reignite, in my view. That would be what really upsets our forecast for lower rates in the year ahead. But so far, so good.

Now, the intricacies of how fast do they ease, what are the various prints, that’s the kind of volatility that we see month by month. I think the key to that is to be an active manager. But the big picture, I think, is fairly constructive for rates.

I even think, in the case of tariffs, some of those things that might generate a higher inflation print, markets probably can look through that, because those tend to be one-off price adjustments. That’s a change in the price level. Markets care, and the ten-year note will care about a sustained increase in inflation year after year. So I think a lot of cross-currents going on. But in general, I think it’s quite constructive for bonds.

Castleton: A lot of optimism. Rates are coming down. Inflation higher than 2%, probably a good thing, but we don’t see it massively reigniting to cause some tremendous concern.

Cielinski: Yes.

Castleton: Sounds like. So, Marc, if I turn to you then, do you agree with these outlooks? And then just how does that affect the overall strength of this equity market we’re seeing, particularly in the U.S.?

Marc Pinto: Well, I agree with these outlooks, and I think they’ve covered every single point. Not sure there’s much for me to add. But look, I agree that we seem to be heading towards the elusive soft landing. We’re seeing signs of economic growth globally and in the U.S. In the third quarter, the U.S. economy grew 2.8%, and inflation was in that 2% range that Jim highlighted. So I think the environment is good for equities. And as Adam noted, equities have been resilient, notwithstanding rising bond yields, geopolitical tensions and a lot of other things that cause people to worry. So that tells me that the underlying market structure is pretty strong. Of course, if we can get additional catalysts such as a favorable economic and interest rate backdrop, then that’s all the better.

The other thing we’re seeing that creates opportunities, we think, as active managers, is the fact that the market continues to broaden. This really started in July over the summer, where the MAG7 took a pause, and we really started to see, like we call them, the other 493 stocks start to perform. And we’ve seen the equal-weighted indices be more competitive against the weighted indices, showing that the market has broadening. So, valuations are attractive. Potential further easing of rates is good. And strong earnings growth, we think, could be a very good setup for 2025.

Castleton: Thank you all. That’s the very high-level overview. It sounds very constructive and optimistic. One of the reasons for recent acceleration in all markets have come from the election here in the U.S. I would like to just do a quick lightning round from all of you in terms of your highest takeaways as it pertains to how you invest on your election views. Just biggest takeaways. Let’s start with you, Adam, if you don’t mind.

Hetts: Biggest takeaways for us, to pack it all into one sentence…

Castleton: Yes.

Hetts: I think it’s going to be a pro-market, pro-business administration, on the upside. On the downside, it’s the tariff risk. And for better or worse, this red sweep means there’s probably a lot of change that’s going to get pushed through in the next two years. So, it will keep us on our toes, that’s for sure.

Castleton: Yes. Okay. Marc?

Pinto: So I definitely would agree with regulation and lower taxes being a catalyst for an improving economy, improving consumer spending. And the risks are, as Adam noted, trade risks, but also the unknown risk, which is always a possibility with the incoming administration.

Castleton: Yes. It was nice to remove the uncertainty of the election, but now we have this whole new basket. What about you, Jim?

Pinto: Exactly.

Cielinski: I’d point to the uncertainty. I don’t think any of these key factors, whether it’s deregulation, tax cuts on the stimulative side… But also, you’ve got lower government spending likely coming. Immigration will probably hurt the labor supply. There’s a lot of crosscurrents. And I think most of those things in those four buckets are probably going to be a little bit more tempered and I think what markets are thinking now.

So, beyond the initial sugar rush, I think we have to really focus on what’s actually getting done at what speed and how the pluses and minuses play out. Because right now, everything is just viewed as a positive, and I don’t think that’s an accurate perception.

Castleton: Yes, I like that word, sugar rush. It does seem, every new data point, let’s react to the immediate news, but let’s take a step back. That’s where active management can come in, and cooler heads may prevail.

So, we know there’s still tremendous amounts of cash sitting on the sidelines. My team, we consult with clients on their portfolios. We talk about cash quite a bit. It seems like those are pretty big five buckets that we’re having conversations on where to deploy that cash towards. The overwhelming response is U.S. small-cap equities for cash on the sidelines. And that is shortly followed by large cap equities and then short [duration] fixed income.

So that’s a perfect transition to you, Marc, because you mentioned in your first answer, the market has broadened out, especially since that July soft CPI print. So, what do you think are the biggest opportunities for equity broadening in 2025?

Pinto: So, the two areas where we see a lot of opportunities is definitely in small-cap equities, both growth and value. That asset class has been left behind, in part, as we’ve experienced the rush of the mega caps. And it’s also an asset class that we think lends itself very well to active management. The other point on small caps is that they tend to do really well when we’re in an easing cycle, and they tend to do not so well when we’re in a tightening cycle. And so, we feel that the tailwinds are at your back here in terms of getting into small caps.

In terms of international, people keep waiting for the year when international is actually going to outperform the U.S. And maybe that day never comes. But we do see opportunities in developed and emerging markets overseas. Valuation differences are pretty extreme. And we see plenty examples of non-U.S.-domiciled companies that are playing all the big themes that we’re looking for, whether it be AI, whether it be healthcare discovery. So we think, again, the broadening of the market not only applies to U.S. equities that aren’t in the very top of their concentrated indices, but also applies to geographies and sectors that have been somewhat ignored.

Castleton: I’m glad you mentioned that, actually, because there have been two questions that have come in on international. Broadly, are we looking for another four years of underperformance from an international allocation within equities? It sounds like U.S. still looking very strong, but it does not mean you can avoid what’s abroad because of the valuation gap there, and that there are some fundamental opportunities.

Pinto: Yes, I think it’s hard to make a blanket statement about international. It covers developed markets, emerging markets. It covers multinational companies that are domiciled and very beholden to the vagaries of their economy. I think if I can be a little bit broad, we typically look for multinationals domiciled abroad that sometimes do a lot of their business in the U.S. but have a competitive advantage and valuation disparity.

Certainly, our style is to look at the individual companies as opposed to make country bets. And sometimes, in emerging markets, you have to … obviously, you need to have an assessment of the country you’re dealing with. But in general, we like to focus on individual security analysis and look for companies outside the U.S. that we think fit the criteria that we look for.

Castleton: Great. Active management. Once again, there it is. So, Jim, if we turn to you then again, the third option for cash to work is short-duration fixed income. But just where do you think investors in the fixed income market can find the best risk-adjusted yields in 2025?

Cielinski: Like I said, we think bonds are attractive. We do feel that there’s a hedging component to owning longer-duration bonds. Not everyone needs that. So, if you don’t, I would argue risk-adjusted returns look good in the shorter to intermediate space. And that’s because the curve is relatively flat. We’re above 4%. That’s true on two-years and 10-years. So, I would think that risk-adjusted, a good place to hide out if you’re more risk averse. Or if you want to take profits in other risky assets and take the risk down in a portfolio, that’s a good place to be.

So I think international though in bonds is an area where the slower growth, I think, better inflation picture and higher certainty of central bank easing probably gives the edge to international. There’s also fewer crosscurrents, so fewer things that can probably go wrong on that front. So, I think other G7 markets look quite attractive. But also emerging markets, I think, which have kind of been left behind, look attractive.

Corporate spreads are going to be okay, just because of what we were talking about. I think with the earnings picture, the credit quality picture, defaults, they’re all really well behaved. So I don’t worry too much, but markets don’t tend to give you a lot of free lunches, and corporate spreads are tight. So, I think you have to look at areas of the market that, let’s say we’re wrong, what am I compensated for? And I think those instruments are tied to underlying asset values, things like mortgages, asset-backeds, CLOs, probably a little bit less tight historically than things like credit. So they appear quite attractive on a risk-adjusted basis, partly because there’s a bit more upside, but partly because I think they can do better across the full range of scenarios.

I’m thinking in that frame of mind now. We have a risk-on picture. What happens if we get things wrong? So, I’d like to be fairly compensated for all those different scenarios. So, I think securitized in general, be diversified internationally, lean to shorter duration if you’re worried at all about the reignition of inflation. I think that’s a safer risk-adjusted place to probably hang out. But for many investors, we find that they don’t own much duration at all. And so, as rates have gone up, also don’t be afraid, I think, as you move through this cycle, of putting a little bit more into bonds and into some longer duration.

Castleton: Yes, great. And Adam, if we turn to you, how do you pull all of these views together in your multi-asset approach? Just, most multi-asset portfolios should’ve been Mag 7 and money markets for a very long time. How are we incorporating these going forward?

Hetts: Yes, besides hindsight being 20/20.

Castleton: Right, exactly.

Hetts: Being a multi-asset team at Janus Henderson, we’ve got the luxury of working with Marc and Jim and their teams, the other 340 investment professionals here globally. But we’ve got the challenge of stack ranking all these views and putting them together in a portfolio. So, in this environment, what that looks like to us in a multi-asset model is roughly still risk on. We talked about cautiously risk on. So, take a 60-40, something more like 63%-64% equity as opposed to 60%, that’s what slightly cautiously risk on means to us right now.

Within the equities, Marc’s comments, the U.S. exceptionalism, overweight U.S., and we’ve added a lot to small and mid-cap throughout this year. Part of that reason is we were underweight small and mid-cap. Back in the hard landing, it was a bigger part of the conversation, but throughout this year, we’ve been adding to small and mid-cap.

It’s a higher beta area of the U.S. equity market. It’s the part that would lose the most during a recession or an abrupt market drawdown. But we don’t feel like we’re picking up the pennies in front of the steamroller there. We think that we’ve got a good horizon here in terms of time for these rate cuts to transmit into a stable economy and then pass through into more of these interest rate-sensitive sectors, like Marc explained, and boost small and mid-cap.

And we’ve seen those asset classes rejoice over the last six months as we got more rate-cut optimism, and that sensitivity has played out a little bit. But the rate cuts can play out a good bit more into earnings over the next year or so, we think. So we’re holding that exposure on the equity side, but erring on the side of more growth and quality, going back to late-cycle environment, erring on the side of caution a little bit there.

And then within fixed income, as Jim put it, a wide range of outcomes, or what if we’re a bit wrong, like margin of safety, that’s what fixed income is for. There’s been a lot of rate volatility this year, of course. But in Core Plus fixed income, you’ve got mid-single-digit yields. It’s a great cushion for that rate volatility. So, bonds are back, definitely, compared to five years ago. So, we’ve got that robust core fixed income allocation.

When we’re going outside the core into that plus component, also securitized is what you’d see in our multi-asset models, where spreads are more average historical levels compared to near all-time tights on corporates. So, with spreads near average historical levels there, whether spreads expand or contract from here, there’s probably a better return profile in the securitized space.

Castleton: Nice cushion of safety. Thanks for bringing that together. we are conservative, or constructive on the year ahead. Lots of things to be positive on. But let’s just also be aware of what some of the risk could be out there. And if we think about the top portfolio issue for you all here, there’s three things that I wanted to put that we tend to hear the most often when we do portfolio consultations, which are equity or AI tech concentration, fixed income duration, and then just overall risk posture.

So, you three all touched on that. But as we’re really focusing in on what you, the audience, cares about and is most concerned on next year, one of the biggest concentration issues is in the equity AI part of the market.

So, let’s go to you, Marc, There’s increased questions on AI, its ability to generate revenues. Just what’s your overall outlook for AI, that theme in general? And then what other diversification options do you see in other sectors?

Pinto: So I think what the nervousness may be coming from is that there’s been a huge amount of money put into AI-driven technology. I’ve seen estimates that this year, over $200 billion will get put into the sector. And so those are big numbers. And we’ve seen it in the prices of the stocks that are in the AI supply chain, and we all know who those companies are, and we’ve seen the tremendous growth that they’ve experienced.

I don’t think the market is doubting that AI will be transformative to our lives, the way the internet was 30 years ago, but it’s more a question of, where’s the revenue opportunity? And the revenues that are being gotten from AI, will they start to be in conjunction with the amount of money that’s being invested? Investors are only willing to put in so much money without seeing some type of return, and companies as well, companies that are essentially buying all the technology to deliver AI solutions.

So we very much believe that the AI trend is alive and real. From personal experience, AI has been a huge productivity enhancer for me. Don’t know how we monetize that or how we measure that, but I think the proof is there. So the market’s really more asking, have we gotten ahead of ourselves? Do we need a little bit of catch-up breathing room before we continue to see continued growth in AI-deployed investments?

Castleton: Well, and for clients looking to take advantage of that, there are other ways, outside of just pure technology, that AI comes into play, maybe healthcare or just in… There’s a lot of other trends to take advantage of, correct?

Pinto: Yes, for sure. So, there are AI applications within the technology sector. We’ve seen a big resurgence in software stocks of late, and that’s certainly driven by AI-driven applications. But you’re right, just the way the internet was, of course, it was beneficial to the technology companies that had the IP. It really was beneficial to all of corporate America and the global world in terms of the efficiencies and improvements, that it allowed companies to effectively transform their business. And we see that happening with AI, and we’re actually seeing examples of it now.

Our healthcare team will tell you that this is really a golden age for medical discovery and for having new compounds approved at an accelerating rate. And these are compounds that are life changing. And the reason, we think, is because pharmaceutical and biotech companies are deploying AI to help figure out which of those compounds in the clinic are going to work, and which ones have a less than likely chance of working. And if you follow the healthcare sector, the earlier you can separate your winners from your losers, the more successful you’ll be. So there are many more examples like that, but we’re starting to see it, and probably the biggest ones are things we haven’t even thought about yet.

Castleton: Thanks. And Jim, if we turn to you, I think the biggest risk, you already said, it is, namely, higher deficits, but inflation reacceleration, and longer-end rates may be going up. That is a risk, a question came in too on just how you balance duration. How does that affect the more traditional parts of the bond curve, longer-end rates that you’re seeing out there?

Cielinski: Well, I think like we said, the difference this year in bonds was the starting point. We got used to, or not… We didn’t ever love 1.5% yields, but if they come in at say 4% or higher, it gives you a big cushion, as you were saying, Adam. So, you can see, I think, a lot more potential for that diversification benefit to kick in.

Inflation is the big worry. I think the other big worry that we hear a lot about is, surely deficits are unsustainable. And the answer is yes, they are, but in this world, unsustainable can mean ten years, or it could mean ten months. So, there’s nothing that would suggest, historically, that as long as you have growth that comfortably exceeds your cost of interest, your borrowing costs, that this has to be a year… 2025, for example, probably is not the year where deficits really become a huge issue.

And the other reason that is true, and this is important, I think deficits, whether they’re fiscal or trade, they can actually be good things, because one person’s deficit is another person’s surplus. And in the U.S., if you’re running 7% of GDP deficits, someone else is in surplus that has to fund that. And surpluses actually show up in areas like corporate profits. So, if you’re wondering why earnings growth can be as strong as it is and why, again, the reserve currency in the U.S. allows the U.S. to bring in dollars from abroad, the deficit is actually not a bad, I think, economic policy to be running. So again, this is not probably the year where it reaches a crisis point, because there’s just none of those drivers for that to be the case.

Equally, on trade deficits, those are offset by a capital account surplus. Again, those, if someone has dollars abroad, you spend those in the U.S., and you can spend those on bonds or equities or risk assets. And this is why markets don’t often run parallel to the economy. You’ve got to really understand capital flows.

So I don’t think this is a year to worry a lot about deficits, unless you embark on just completely unsustainable paths. This is a year to worry a little bit about inflation. But again, I think tariff-induced inflation will be viewed a little bit friendlier. It’s really whether or not services or wages and those more fundamental drivers of inflation kick off.

Castleton: Yes.

Cielinski: And so far, I don’t see a lot of reason to really worry extensively about that. But we should keep an eye on things like services and those areas, just to make sure it doesn’t come back to bite us.

Castleton: And as you mentioned, that longer, traditional type of fixed income, it does serve a purpose…

Cielinski: Yes.

Castleton: …in a portfolio. So, Adam, how do you balance risk on/risk off posture as clients are thinking how to position the multi-asset portfolio next year, or what are you thinking of?

Hetts: It is a really important environment for that multi-asset overlay. Within the individual sleeves, it’s important to let the active managers do their work, let the equity managers manage that market concentration at all-time highs, let the fixed income managers manage the sectors, like Jim’s talking about, securitized versus corporates and short- and long-term government sectors, a very important differentiation right now within fixed income too.

Then at the higher level, zooming out, why it’s so important right now in this kind of backdrop, no landing or soft landing, how we started out talking about the debate, inevitably, it will turn into a hard landing someday somehow.

So, we’re obsessing over the data for our clients. We’re looking at how to manage that risk posture as time goes on. But for now, you’ve got a steady economy, you’ve got rate cuts, you’ve got deregulation, and that’s been pressured a little bit by maybe stubborn inflation, somewhat higher rates and then geopolitical and policy uncertainty.

So, all systems go for now, but it gets back into that positioning, which is not taking too much risk and not getting too excited, with Jim’s sugar rush, for now, and being a little bit cautious. And for us, that means leaving some ammo on the side, so that when we do get that big drawdown, and markets finally do get substantially cheaper and not as expensive as they are right now, whether that’s recession or just a brief drawdown for other reasons, that’s where we can take that ammo, then we can reload from a multi-asset perspective and actually take a lot more risk and make a lot of excess returns at that point in the cycle.

Castleton: So there’s a lot that we’re going to be watching. I think if we had to summarize everything, broadly constructive. This is what we do within equities. It will be hopefully a continuation of the market broadening out, but we have to be particular in the fundamental stories within sectors and AI and cap diversification, international and fixed income. You need that traditional spot.

You also can lean in on securitized shorter duration, even look global, because it is a different environment within bonds, and it has been. And in multi-asset, we’re going to obsess over the data as we see this come in, and really manage that risk from the top down for everybody there.

So, really useful insights. I appreciate that.

Thank you all for being here today. We hope you found the conversation insightful and came away with some takeaways for how to position your portfolio for the long trend ahead. If you do have any questions, want to get in touch with my team or any of our investment professionals, please reach out to your Janus Henderson representative.

For more insights from Janus Henderson, you can download other episodes of Global Perspectives wherever you get your podcasts or visit janushenderson.com.

I’ve been your host for the day, Lara Castleton. Thanks, see you next time.