Mid-Year Outlook for 2025: Make Your Own Luck

We remain cautious on oil prices, as the diminishing geopolitical risk premium brings the bearish fundamental backdrop back into focus. Specifically, we expect the oil market to move into larger surpluses over the next six to 12 months, driving WTI oil prices back down to $60 per barrel on average in the second half of 2025 and 2026. 

When consumer and corporate debt are declining at the same time, our observation is that investor discomfort with wide deficits tends to be expressed through currency weakness, rather than a big surge in government bond yields. As such, we are more inclined to hedge the USD than the back-end of the curve.

Our strong belief is that we are in a productivity cycle similar to the 1990s. As such, market selloffs are to be bought, not sold, as the cycle goes on longer. Meanwhile, on the fixed income side, we think higher starting rates mean that credit spreads remain tighter than the consensus now thinks.

Valuation differentials between U.S. and European Equities are near historic extremes at a time when the European story may be changing for the better. From our vantage point, we think defense stocks and banks run further, and we think a stronger euro, continued interest in renewables (given such high energy costs), deeper capital markets, and less onerous cross-border restrictions may all work together to make something more structural for investors to get behind than the consensus now thinks.

Contrary to a popular recent narrative, we do not see secondary PE sales by universities as a harbinger of doom, but rather as a rational response to potential future liquidity needs related to endowment taxation. Private Equity continues to benefit from dispersion and control, allowing investors to lean into operational improvement and accretive M&A activity. Maybe even more importantly, we think PE increasingly offers the most direct route for tapping into a broad universe of high-quality small and midsize companies measured in terms of their margins, stability, and future growth prospects.

We think governments across the globe are being challenged simultaneously by historic fiscal constraints, energy transition needs, and geopolitical competition. Private investments have emerged as a critical source of capital across a variety of industries. Just consider the post-pandemic increase in the need for infrastructure, for example, where demand for capital far exceeds what governments can provide to stand up transmission lines, connect data, build supply chain resiliency, and update existing infrastructure.

We are projecting monthly job growth of only 100-110k over the next 18 months, with gains increasingly narrowly concentrated in just a few sectors, including health care and leisure. Importantly, however, this modest payroll backdrop does not imply a significant increase in unemployment rates. In fact, we believe the U.S. may need just 50-100k jobs per month to keep unemployment stable over the long term, as labor force growth slows due to lower immigration and aging demographics.

Lower taxes (higher free cash flow), higher margins, and higher quality earnings all suggest the S&P 500 is not at extreme valuations. Even within the Magnificent Seven, companies have negative net debt and high free cash flow conversion.

Net issuance of IPOs, Levered Loans, and High Yield remains at levels not seen since 2009. Meanwhile, the Fed’s balance sheet still has holdings that are equal to 24% of GDP. To be sure, today’s level is below the record of 34% of U.S. GDP reached immediately after COVID, but it remains a far cry from the six percent that defined the pre-GFC era.