Markets anticipate an ideal scenario and recent performances leave little margin for error. However, this scenario could be called into question by several factors.
In 2024, risky assets continued their upward trend, driven by:
- Disinflation continues on both sides of the Atlantic, fueling the current cycle of falling interest rates.
- A macroeconomic environment which has generally proven to be resilient, particularly in the United States.
- Fundamentals which have remained positive, although in the process of normalization.
- Monetary and fiscal stimulus measures deployed around the world.
The markets therefore anticipate an ideal scenario and recent performances leave little margin for error. However, this scenario could be called into question by several factors.
Key factors to watch in 2025
Although the main performance drivers remain in place (monetary and fiscal stimulus, continued disinflation, macroeconomic resilience and profit growth deemed attractive), some uncertainties persist in markets with high valuations.
Economic growth in the face of gradual normalization
Economic data points to a gradual deceleration, although recent releases have been generally better than expected. While manufacturing activity continues to face challenges across the globe, the services sector remains robust overall. At the same time, faced with persistent inflation and a gradually slowing labor market, consumers are increasingly turning to less expensive products (“trading down” phenomenon). As such, many consumer companies have mostly revised their sales forecasts in the United States downwards.
In China, growth in structural decline
The recovery measures recently adopted by the Chinese authorities aim to get China out of its economic and deflationary slump and to avoid the “Japanization” of the economy. However, long-term uncertainties remain:
- Structural problems, such as a deep crisis of confidence, economic imbalances, excessive leverage and an unsolved housing bubble, still pose significant challenges.
- It is not certain that monetary measures focused on liquidity injections or fiscal measures, which are not sufficiently detailed at present, will fully remedy this.
Impact of change in interest rate regime
Rising interest rates could continue to lead to greater asset dispersion. On the business side, excessive leverage means stress. For example, a CCC issuer is financing today at levels almost three times the current coupon level, or 14% instead of 5%. An increase of almost 10 points, likely to have significant repercussions on the capital structure of issuers. On the side of governments, and due to the high levels of budget deficits, the economic policies adopted to respond to the excessive debt of States will play a crucial role in determining the cost of public debt.
Trump 2.0: “pro business” but full of contradictions
The Trump administration’s tax measures remain the most economically disruptive, including, among other things, the maintenance of tax exemptions enacted in 2017 beyond 2025 and further potential reductions in corporate tax rates aimed at promoting growth. Although this new tax regime seems particularly promising for American companies in cyclical sectors, it is also perceived by investors as a factor that could further increase the already massive budget deficit of the United States. In addition, customs duties pose a potential threat to household purchasing power, with consumers having to face price increases. We can also reasonably imagine that, in the event that the announced customs duties were applied, significant repercussions for certain companies, particularly Chinese and, to a lesser extent, European, would be expected.
However, and given the time required to implement such a policy, market visibility in this regard still remains limited.
Market fundamentals remain positive overall: the macroeconomic environment remains resilient, particularly in the United States, the cycle of disinflation appears to be continuing, monetary and fiscal stimulus measures are being deployed around the world and fiscal measures to the Trump administration accompanied by deregulation could further support risky assets. However, valuations of risky assets remain high, which contributes to market volatility and the lack of support during periods of stress, which can create “air gaps”. At the same time, the economy and consumption are normalizing and customs duties as well as colossal budget deficits could weigh on the markets and create new peaks of volatility.
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