What can we expect for the capital market year 2025?
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Global economic development and central policy
The consensus estimate for global economic growth initially remains unchanged (good) with an increase of more than three per cent. Growth in the US is currently expected to be slightly lower than in 2024, while growth in Europe will remain low but will be more positive than in 2024. Slightly higher growth is expected in the global
As far as inflation is concerned, a further decline is expected in almost all regions of the world, as are further interest rate cuts by the central banks. However, the outcome of the election in the US and the economic policy measures announced could have an inflationary effect, which would have a particular impact on the Fed's interest rate path over the course of the year.
We expect significantly more interest rate hikes in the eurozone than in the USA due to the different economic conditions.
Government bonds: more opportunities than risks
For the European bond market, market participants are pricing in interest rate cuts by the ECB to a neutral interest rate level by the middle of the year. In view of the further slowdown in growth in the eurozone (particularly in countries such as Germany and France) coupled with noticeably more moderate inflation, there is a possibility that the need for a looser monetary policy will also be discussed over the course of the year. In this respect, we see more opportunities than risks for the eurozone bond market and favour bonds with longer maturities at the start of the year.
Only moderate interest rate cuts are priced into USD bond prices. Higher tariffs generate more inflation, but also more uncertainty with regard to growth. Overall, this should balance out for Treasuries (US government bonds) over the course of the year. Moderately lower yields are possible towards the end of the year due to the weaker expected economy in 2026.
Corporate bonds: macroeconomic situation supports attractiveness
While credit risk premiums show little potential for narrowing, the achievable yields continue to support the attractiveness of corporate bonds in an environment of more expansive central bank policy and a solid macroeconomic picture. In this environment, we consider coupon income to be the primary source of income and additional price gains through spread tightening to be unlikely. A stable economic trend would be helpful for the outperformance of high-yield bonds.
Emerging market bonds: Markets with good growth potential in some cases
For emerging markets, new US administration coming into office at the beginning of 2025 will increase uncertainty in various areas, particularly in trade policy, which is likely to hinder a further decline in risk premiums. Nevertheless, we expect emerging market hard currency bonds to perform well due to selectively attractive spreads and an expected (moderate) decline in US yields. On the local currency side, the rising global uncertainties that limit the room for manoeuvre of emerging market central banks are partly reflected, but we expect even better entry opportunities in the coming months. We favour countries with good growth potential, such as India and Indonesia, as well as those that should improve structurally, such as South Africa and Turkey. Brazil could also offer opportunities, provided a credible fiscal plan can be presented.
Developed equity markets: environment remains positive
The equity markets continue to face a generally favourable environment: weak but positive economic growth, low inflation, falling key interest rates. An important pillar for a positive outlook on the stock market is the continued expansion of corporate profits. These are expected to be in the high single-digit range in 2025. This applies in particular to US equities, although the sectoral distribution of earnings contributions should be much more balanced than in the last two years, when there was a very high dependence on the largest US growth companies.
Trends towards
Corporate profits are also expected to rise again in Europe in 2025. The strongest growth is expected in the industrial, basic materials and technology sectors. Overall, a mid-single-digit increase in profits is expected here. In terms of valuation, Europe is much more favourable than the USA, which creates a certain catch-up potential.
Emerging equity markets: resilient to trade conflict with the USA
2025 will be another exciting year for the emerging markets. The focus will be on the higher US tariffs on imports announced by future US President Trump, particularly for Chinese products, and the question of how the US dollar will react to this development. A strong US dollar tends to be a headwind for equity market performance in the emerging markets, while a weak US dollar is a tailwind. In general, we see the emerging markets as very resilient to an intensified trade conflict with the US, as the downside risks are known and should therefore be priced in. In addition, there is scope for countermeasures, particularly on the fiscal side, and the growth momentum in the emerging markets continues to look favourable compared to the developed markets.
Do not lose sight of proven risk factors
Overall, we expect 2025 to be a constructive year on the capital markets, offering opportunities for attractive returns in both the bond and equity sectors. Nevertheless, the following evident risk factors should not be lost sight of!
Donald Trump's fiscal policy could lead to an overheating of the US economy. Although the announced tax cuts and increased government spending are boosting economic growth, there is also a risk that these measures could cause the already strong US economy to overheat. The result would be an increase in inflation. This would in turn force the US Federal Reserve to tighten its monetary policy in order to keep inflation under control. Such a development would be problematic for the capital markets. Equity markets often react negatively to rising interest rates, as higher financing costs weigh on corporate profits and reduce the attractiveness of equities compared to fixed-interest investments. Bond markets could also come under pressure, as rising interest rates lead to falling bond prices.
Another risk factor for the capital markets in 2025 could be a global trade war triggered by Donald Trump's policies. Trump's protectionist measures, such as the introduction of high tariffs and trade barriers, could lead to retaliatory measures by other countries and thus have a significant impact on international trade. An escalating trade war would significantly weaken global economic growth. Trade conflicts generally lead to higher costs for imports and exports, which increases prices for consumers and companies. This can reduce demand for goods and services. Weaker global growth could have a negative impact on equity markets, while government bonds should tend to benefit.
Monetary policy in the USA remains restrictive. This means that a recession in the USA cannot be ruled out as a further risk factor. A recession in the USA would have far-reaching negative effects on the stock markets. These often react to this with a bear market. Risk premiums in spread asset classes also tend to react very negatively in a recession. Government bond yields, on the other hand, would fall sharply, which would lead to a positive performance of government bonds.
Finally, there is also the risk of further geopolitical escalation. Developments in Ukraine are difficult to predict and a possible attack by China on Taiwan has been discussed for some time. There are conflicts in the Middle East in particular that could have a global impact, such as the conflict between Israel and Iran. An escalation would have considerable implications for the global energy markets and would lead to a sharp rise in the price of oil. In addition to a general wave of risk aversion, a spike in the oil price could have negative feedback effects on global risk assets.
Even if none of these risk factors necessarily materialise, it is still important to be vigilant and adjust your capital market assessment and positioning accordingly depending on the situation.
Karin Kunrath, Chief Investment Officer of Raiffeisen KAG
*The term "bear market" refers to a prolonged period of declining prices, while the term "bull market" describes a prolonged period of rising equity prices. A complete market cycle includes both a bull and a bear market.