Economic insights: 2024 reflections and 2025 projections

Is US inflation on a path back to the Fed’s 2% target or have we stalled out above target with the next move likely to be a higher inflation? In December’s edition of Tactical Take, Jack Janasiewicz and Brian Hess discuss market predictions for 2025 and reflect on key themes and surprises from 2024.

Key takeaways

• The economy has been more resilient than expected, which is reflected in the lack of a significant equity market correction and the strong performance of the US consumer.
• Bond market volatility has been higher than equity market volatility. This is unusual and reflects the uncertainties in the market, including concerns about inflation, recession risks, and fiscal deficits.
• The US economy is expected to continue outperforming due to productivity growth, technological investments, and a supportive policy environment.
• Natixis model portfolios are overweight in US equities due to their strong performance and potential for continued growth. There is also a tactical position in European equities and a neutral stance on emerging markets, with a focus on potential Chinese stimulus.

Inflation and CPI Trends

There have been rumblings of inflation accelerating with the most recent Consumer Price Index (CPI) report showing stronger prices in some areas. Plus there are potential tariffs next year, which could put some upward pressure on imported prices.

Recent core CPI prints have shown a consistent month-on-month increase of 0.3%, leading to concerns about inflation. In the last core CPI print, however, at least rent and owners’ equivalent rent edged downward.

“Rent and owners' equivalent rent was inside of 10 basis points in terms of its contribution to that core CPI print,” says Janasiewicz. “That's basically the lowest we've seen since April of 2021, so moving in the right direction.”

Also, there have been some quirky, idiosyncratic inflation trends observed in recent data. For instance, household furnishings spiked by 0.7% after being in deflation for 15 of the last 19 months. Similarly, lodging away from home jumped by 3.7% for the month, and club fees (such as golf course fees and gym memberships) increased tenfold compared to the average over the last three years.

“When you look at CPI, PPI (Producer Price Index), and you put all those things together, you can back into what PCE (Personal Consumption Expenditures Price Index) should look like,” says Janasiewicz. “We're expecting a 0.13% increase on a month-on-month basis for the upcoming print. That translates into a 1.57% annualized rate.”

In Natixis’ view, the overall trend is still towards disinflation, particularly due to the declining shelter component. The expectation is that inflation will continue to head towards the Fed's 2% target.

The year in review

Despite slowing job creation and wage growth, the US consumer remained resilient. Consumption's contribution to GDP accelerated throughout the year, which was surprising given the economic conditions.

Major themes throughout 2024 include:

• Resilient growth: Growth did not decelerate precipitously as anticipated. In fact, it was more resilient than expected, surpassing even optimistic outlooks.
• Federal Reserve's rate cuts: The timing of the Federal Reserve's rate cuts was less significant than the fact that there was no longer a risk of further rate hikes pushing the economy into a recession. 
• Earnings growth: Earnings drifted higher due to sustained growth and the absence of further rate hikes. Margins reached all-time highs, contributing significantly to the bottom line.

Outlook for 2025

US exceptionalism is expected to persist, driven by several key factors. One of the main reasons is the productivity growth that originated from how the US addressed the pandemic. The stimulus checks provided during the pandemic allowed people to pay off debt, save, or start new businesses, fostering productivity gains. Additionally, job hopping during the pandemic led to higher incomes and better job matches, further boosting productivity.

The MAG-7 companies have consistently outperformed other sectors, and their influence on the market is expected to continue into 2025. This dominance has led to a concentration of market power, with these companies playing a crucial role in shaping market trends and investor sentiment.

The potential for an aggressive stimulus from China could impact global trade dynamics. If China implements significant fiscal stimulus, it could benefit core Europe, particularly the manufacturing base.

Natixis model positioning and recent trades

Overall, the team remains comfortable with its current positioning, maintaining a 4% to 5% overweight in stocks across models. We believe the supportive backdrop for risk assets will continue into the beginning of 2025.

Natixis has moved to a neutral position on emerging market equities, anticipating potential Chinese stimulus and avoiding being underweight in undervalued assets. Emerging market (EM) equities are inexpensive, and despite disappointing earnings growth over the past decade, it can be dangerous to be underweight or effectively short something so undervalued.

Natixis is fairly neutral on fixed income. The fixed income market is expected to be largely driven by carry, with limited movement in yields. There is potential opportunity in global fixed income though if the US dollar weakens.