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Investment Strategy

2025 Macro Outlook: Policymakers Have the Pen

January 9, 2025

By Joe Zidle

It was a year ago that we retired the Ten Surprises, the annual tradition started by my late colleague and friend, Byron Wien in 1985. After 38 years and 473 Surprises and Also Rans, one thing that is clear to me is that they were all distinctly Byron. His was a voice that resonated, and collaborating with him for six years’ worth of Ten Surprises was an honor and an education. In so many of my meetings last year, I was flattered by warm comments from clients who remembered the Ten Surprises so fondly. And in some sense, the tradition lived on through the many thoughtful tributes that came from across the industry.

As we start 2025, I continue to think about what surprises we may face. President Trump’s return to the White House will bring both surprises and a familiar set of considerations. His perspectives on trade, regulation and geopolitics are well-documented, but the economic backdrop has transformed dramatically since his first administration—from the nature of inflation and the magnitude of interest rates to the scale of debts and deficits.

No matter the surprises that may affect these conditions, we expect the megatrends shaping our future to forge ahead. Following our 2025 outlook, we bring in Ken Caplan, Global Co-Chief Investment Officer, to discuss the opportunities that these megatrends bring and how Blackstone is investing in—and leading—them.

US Uncertainties: Meet the New Boss, the Same as the Old Boss?

The United States is at a fascinating inflection point. The retirement of the hard landing scenario, rather than providing clarity, introduces a more pronounced set of uncertainties around the interest rate trajectory.

The evolution of the policy debate illustrates this complexity. In 2024, the argument centered on a binary choice between a hard or soft landing. Essentially, it was a question of Federal Reserve cuts: 200 basis points on average in non-recessionary scenarios versus 400 basis points on average in recessionary ones. [ 1 ] Today’s narrative encompasses a broader spectrum of outcomes—soft landing (with or without a gradual loosening of the labor market), no landing, or growth reacceleration. And each one carries distinct implications for the depth and duration of the cutting cycle, the timing of potential pauses, and the prospect of renewed tightening.

Fiscal policy adds another layer of complexity to the Fed’s calculus. The first Trump administration executed a distinctive economic vision, blending supply-side economics, protectionism and deregulation, with a focus on American businesses. While these themes likely remain priorities, there is a markedly different economic landscape.

Gone is the slack that characterized the economy in January 2016, when unemployment was at 5%, inflation measured a modest 1.2% and 10-year Treasury yields hovered at 2.25%. [ 2 ] The deficit was merely $442 billion and debt as a % of GDP was just 104%—fiscal policy and the economy had a lot of room to run. [ 3 ] Although pressures in shelter and wages continue to moderate, emerging price pressures in the goods side of the economy suggest the pace of decline in price levels will be bumpy and less certain than markets originally believed. Today’s inflation dynamics and concerns over spending present a more challenging environment for implementing pro-growth policies centered on deregulation, tax reduction, and America-first trade negotiations.

These concerns may be valid, but they arguably miss the bigger picture: that instead of being mired in the vicious cycle of weak demand, low interest rates and hibernating animal spirits, the second Trump administration comes to power at a time when the full strength of the US economy is becoming clear for all the world to see.

Productivity growth is the long-run driver of higher living standards and budget sustainability, and the United States is a clear leader in productivity growth across the developed world right now. The recent bounce may have been driven by a period of rapid business investment and epic churn in the labor market, but we anticipate a handoff to artificial intelligence (AI) over the horizon and believe the US economy will continue to grow faster than its developed market counterparts.

US Outpaces Other Developed Countries in Productivity Growth
Average Annualized Productivity Growth
(%, Q2 2020-Q2 2024)

2025 outlook

Source: OECD and Macrobond, as of 6/30/2024. Data for UK as of 3/31/2024. Data are annualized quarterly labor productivity measured as GDP, or output, per hours worked, and seasonally adjusted.

Global Growth: China’s Stimulus Reverberates

Perhaps the greatest change in the global economy from 2016 to today is the downshift in China’s economic momentum. Despite impressive gains in manufacturing productivity and leadership in many new economy sectors like the electric vehicle battery supply chain, China continues to navigate three significant headwinds: a peak in its demographic profile, the hangover from a huge boom in the real estate sector and the challenge of maintaining its export growth in a world of rising protectionism.

Policymakers in Beijing are well aware of the challenges they face. In the final quarter of 2024, Beijing unveiled stimulus initiatives amounting to approximately 10% of GDP, which is a significant commitment, yet one that may prove to be just the opening salvo. For perspective, China’s stimulus during the Global Financial Crisis exceeded 25% of GDP—deployed to combat economic headwinds that originated beyond its borders. Today’s challenges may demand an even more forceful response. The depth of China’s property market difficulties is a particular concern. Combined with the direct impact on household wealth and consumption, it suggests that additional waves of stimulus may be necessary to establish a durable economic floor.

So Far, China’s Stimulus Measures Fall Short Compared to GFC Response

2025 outlook

Source: Blackstone Investment Strategy calculations, OECD, the State Council of the People’s Republic of China, and WSJ. Percent of GDP calculations for stimulus measures undertaken during the GFC are based on China’s 2009 GDP. Percent of GDP calculations for current stimulus measures are based on China’s 2023 GDP.

If further significant fiscal measures from China are forthcoming in 2025, the global economy stands to benefit. If the United States keeps its own fiscal taps open, then the global economy will benefit from twin stimulus engines on either side of the Pacific. Also uncertain is the European fiscal stance, with major countries such as France being forced into austerity budgets by their deficit position. Meanwhile, the continent grasps for ways to ramp up military spending.

Where stimulus shakes out is hard to tell, but it seems more likely that we receive stimulus from China than the developed world next year.

Balancing Act: Global Stimulus Gains Amid Trade Uncertainty

Chinese fiscal expansion dovetails with a coordinated global monetary easing cycle, creating a potent combination of fiscal and monetary stimulus. In our experience analyzing markets through multiple cycles, the combination of synchronized global rate cuts and substantial fiscal stimulus has proven consistently effective at reinvigorating economic growth. The transmission mechanisms are well-established: lower borrowing costs facilitate investment while fiscal spending provides direct economic support, creating a multiplier effect that ripples through the global economy.

Liquidity conditions could improve further if European policy rates decline as much as the market expects. As of January 7, the market is expecting a 2.0% deposit rate by December 2025. With Japanese policy rates rising, the euro may become a global funding currency in 2025, an outcome that could boost markets with strong underlying fundamentals and higher yields relative to the single currency, such as the United States.

Yet this optimistic outlook must be tempered by acknowledging potential headwinds, particularly the specter of renewed trade tensions. The return of America-first trade policies introduces uncertainty into global supply chains and trade relationships that have only recently stabilized. History suggests that trading partners are likely to respond in kind to new tariffs. When the US imposed tariffs in 2018, for example, China, Europe, and others quickly retaliated with their own measures, creating a cascading effect that extended well beyond bilateral relationships.

As countries calibrate their responses to protect domestic industries, there is potential for trade tensions to broaden beyond their initial scope, pulling more countries and sectors into the fray. The delicate balance between stimulative policies and widening protectionist measures will likely define the trajectory of global growth in 2025.

Strategic Investment Implications

The macroeconomic environment has always determined optimal asset allocation, but we believe that today’s landscape, which is vastly different than prior cycles, demands a fundamental reassessment of the traditional allocation framework. With an unreliable stock-bond correlation, higher interest rates and stretched public equity valuations, portfolios require a distinct set of alpha drivers to achieve outperformance while also controlling for risks. In our view, private market assets can be a potential solution.

Nowhere is the need for new thinking more apparent than in fixed income allocations. For 40 years, investors benefited from a fixed income bull market as yields fell from elevated levels in the early 1980s to their bottom during the pandemic in 2020—a period nicknamed the Great Moderation for its dormant inflation. Today, that long decline in yields has given way to a range-bound market, with yields higher than the post-Global Financial Crisis era but still low compared to post-war history. This market will likely provide lower fixed income returns, both in the absolute sense and when adjusted for risk, than investors enjoyed in the Great Moderation.

Government bonds have also lost attractiveness as a method for hedging equity drawdown risk. In only a few quarters over the last two and a half years have government bond returns moved in the opposite direction to equity returns. [ 4 ] While the negative correlation may reassert itself during periods when inflation is close to central bank targets, the occasional flare-up in inflationary pressures—inevitable in a rapidly growing world—will cause the correlation to flip positive again. Also, for investors concerned about the federal debt position, long duration core fixed income is not the place to be.

A Changed Environment for Bond Investors
US 10Yr Treasury Yield (%)

2025 outlook

Source: Strategas Research Partners, Federal Reserve and Standard & Poor’s, as of 11/30/2024. S&P 500 returns are price returns. S&P 500 CAGR calculated from April 1953 to September 1981 (~28 years) and October 1981 to December 2021 (~39 years). Earnings figures are based on the average annual percent change in earnings estimates from NYU Stern (1960 to 2021) and estimated EPS based on the S&P 500’s PE ratio (average or period) and price return (1953 to 1959). Dividend figures are based on the average annual dividend yield for the S&P 500 from 1953 to 1981 and 1982 to 2021.

An allocation to private credit can help mitigate some of these challenges, as it offers an attractive high-yielding, shorter-duration option for portfolios. This diverse asset class includes corporate direct lending and asset backed finance (ABF), which is usually investment grade in quality, with amortizing loans secured on physical assets or a stream of cash flows. Already popular with institutional investors, some common examples of ABF include aircraft financing, pools of credit card loans and consumer debt secured on solar panels.

In terms of the equity bucket, the relative positioning of public and private equity markets currently offers an excellent entry point into the private space, particularly for investors with no exposure. Historically, private equity outperforms public markets over the long term and designating an allocation within an equity mandate improves a portfolio’s Sharpe and Information Ratio.

Today, the case for allocating to private equity is particularly strong, given current valuations of public markets and projected long-term returns. As of January 7, the S&P 500 Index traded at 27 times its trailing 12-month earnings. Looking back at history, an investor entering the market at these multiples can expect a forward 10-year annualized return in the mid-to-low single digits, less than the 13% average annual return investors have become accustomed to over the past decade. [ 5 ] These numbers line up with many sell-side firms’ long-term return assumptions, which point to a 7% annualized return upper bound for US large-cap equities over the next decade. [ 6 ]

Investors could move to small- and mid-cap stocks, where current valuations are lower both in absolute terms and relative to their own history. However, swapping some of the large-cap exposure into a private equity allocation could be more impactful. Historically, private equity offers an attractive spread of 750–800 basis points above large-cap public equities in these types of environments. [ 7 ]

Beyond private equity and private credit, the combination of moderating inflation and persistent capital scarcity in certain sectors creates attractive entry points in infrastructure and real estate, particularly in areas benefiting from structural changes in global supply chains and energy transition initiatives.

Whether looking at public or private markets, high-quality companies with strong cash flow generation and robust balance sheets should command investors’ attention in this environment. In our view, those companies with prudent capital allocation strategies, strong operating margins and sustainable free cash flow yield are positioned to outperform.

At Blackstone, we have identified several high-conviction themes within private markets for 2025 and beyond. In the following section, Global Co-CIO Ken Caplan explores how Blackstone is leveraging its scale and expertise to capitalize on these generational investment opportunities and create value for our investors.

Read “Building the Future: Megatrends and Investment Themes”

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Blackstone Investment Strategy Calculations, US Federal Reserve, and Bloomberg. The non recessionary figure reflects the average monthly change in the effective Federal Funds Rate during interest rate cutting cycles in 1966, 1984, and 1995. The recessionary figure reflects the average monthly change in the effective Federal Funds Rate during interest rate cutting cycles in 1981, 1990, 2001 and 2007.
US Bureau of Labor Statistics and Bloomberg, as of 1/31/2016.
US Office of Management and Budget and Federal Reserve Bank of St. Louis, as of 12/31/2016. Based on total public debt to gross domestic product.
Bloomberg, as of 9/30/2024. Equities reflect total quarterly returns for the S&P 500 Index. Bonds reflect total quarterly returns for the Bloomberg US Treasury Index.
Blackstone Investment Strategy Calculations, Bloomberg, and S&P as of 1/7/2025. Based on the trailing 12-month P/E ratio and subsequent forward 10-year annualized returns of the S&P 500 Index.
Goldman Sachs, as of 10/18/2024. Based on Goldman Sachs long-term return assumptions of public equities represented by the S&P 500 Index.
Blackstone Investment Strategy Calculations, Cambridge Associates as of 3/31/2024. Analysis covers period from June 30, 1989, to March 31, 2024. Comparing average 3-year annualized excess return of Cambridge Associates Private Equity Index versus S&P 500 Index. S&P 500 Index returns are modified public market equivalent (mPME) which is a public market equivalent methodology developed in house by Cambridge Associates. The methodology provides a consistent means to effect a performance comparison between a private investment and public alternative. Excess returns are measured over a 3-year rolling period at a quarterly frequency by the annualized total return on the S&P 500 mPME over the same rolling 3-year windows.

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