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Monthly Economic and Investment Outlook

January 2025 Economic and Investment Outlook

United States

stock market bull statue
  • The estimates of U.S. real GDP in 4Q provided by the Atlanta Fed GDPNow remain at roughly +3% q/q for the third consecutive quarter. This is a very healthy clip and above trend growth though growth is likely to slow in 1Q 2025. 1Q 2025 is tracking 2.4% q/q which is still above trend U.S. growth of about 2.0%.
  • Much about the policy landscape is unknown and the details will start to emerge once President Trump is sworn in at the end of January. The expectation is that the new US administration is going to act on four pillars – lower taxes, more restrictive trade, deregulation, and less immigration. Changes in trade and regulation are likely to be implemented sooner than tax or immigration policies which require congressional approval.
  • Initial jobless claims ended the year (week ended Dec 28th) down by 9,000 to 211,000 vs. the 220,000 expected by consensus. This 8-month low is consistent with a cooling but still-healthy U.S. labor market that caused the Fed to revise down the number of rate cuts it expects to deliver in 2025.

    US Initial and continued job claims 
    Source: Oxford Economics     
     

  • According to StoneX Market Intelligence, Healthcare’s share of personal consumption expenditure has risen from 4% in 1960 t0 17% today. The consumer price index for healthcare services has risen by 5.5% annually over the period.


    Distribution of personal consumption expenditure
    Source: StoneX Markey Intelligence
     

  • U.S. productivity has climbed back to over 2% and strong momentum may help provide a disinflationary impulse.


    US Productivity
         
    PIPER SANDLER

Global

  • In Europe earnings growth remains muted and earnings revisions are negative. Germany’s sluggish economy and France’s political uncertainty have further clouded the economic outlook. European equities are clearly cheap relative to earnings, but they lack a compelling catalyst particularly in light of potential U.S. tariffs.

    Germany IFO Business Confidence Index
    Source: Yardeni Research     
          

  • Japan faces uncertainty about U.S. tariffs and earnings expectations are falling. At the same time, the Japanese election this past fall created an unstable coalition and exchange rate volatility has increased something to particularly be wary of one when it comes to the exporters. Structurally, Japan continues to make improvements in corporate governance and buybacks.

    US Japan goods trade in 2023     
                   

  • Chinese bond investors are not yet ready to bet on a sustained improvement in their economic data. China’s 10-year yield recently fell below 2% for the first time on record.

    30 year government bond yield
    Source: ASR Research

                   

  • Private domestic demand is being propped up by policy such as the consumer trade-in program. The main hurdle to sustainable recovery in private consumption remains how to support employment and improve the income outlook.

    retail sales breakdown

                   

Fixed Income

  • The Fed delivered a quarter point rate cut at the December FOMC meeting but revised its expectation for further rate cuts down taking a more cautious approach to its easing cycle.
  • Fed officials now estimate that they will cut the Fed Funds rate twice in 2025 for a total of half a percent reduction in borrowing costs. This is half as many times as they previously estimated in September. The market is expecting that the Fed will pause in January and then resume its cutting cycle again in March.
  • Those estimates signal that the Fed plans to keep interest rates “higher for longer” as economic growth continues to be strong, and inflation stays stubbornly above 2.0%.

     
    Fed Chair Powell
           

  • The Trump administration could alter the Fed’s intended interest rate path in both direct and indirect ways. It is policies with regards to tariffs and immigration will affect the economy though it is not yet clear what the net effect of this will be.
  • There is much uncertainty regarding the policy landscape. We will monitor the situation and make tactical portfolio adjustments accordingly.
  • Federal spending as a percent of GDP continues to be elevated vs. pre-Covid levels. The initial progress to bring it down has stalled and spending as a percent of GDP has increased.
  • President Trump has announced the creation of a Department of Government Efficiency (DOGE) headed by Elon Musk and Vivek Ramaswamy. Targeting government spending could devour tax collections and record corporate profits due to the public sector spending binge. DOGE has no real power and will advise Congress and the president.

     
    Federal Spending
           

Tactical Fixed Income Allocation

  • Neutral duration to the fixed income strategy’s respective benchmark as the Fed remains on an easing path, even if rate cuts might be shallower than expected a few months ago. At the same time, U.S. fiscal deficits and debt concern us.
  • Slight overweight to short-term investment grade corporates versus the respective benchmark to capture additional income with minimal incremental risk.

Equity Market

  • American exceptionalism is expected to continue in 2025 driven by macro momentum, superior earnings delivery, and higher profitability. The Rest of the World has failed to deliver any earnings growth since pre-GFC peak in 2008.

          
    SP 500 MSCI
    Source: ASR Research
              

  • Consensus expects S&P500 earnings to growth by a robust 13% in 2025 with a little over a third of the growth from the Mag 7.



    SP 500 EPS by Quarter
    Source: Strategas


  • The rally in small caps has been primarily driven by expectations of rates cuts given that smaller U.S. companies need to borrow at higher rates. Small caps also suffer from a lack of pricing power. These companies have been particularly hurt by high regulatory burdens which the Trump administration plans to ease.



    Small Cap to Large Cap

    Source: Piper Sandler

Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, cyclical, and strong cash flow characteristics.
  • Underweight to International Developed with no exposure to Emerging Markets. Although valuations remain attractive relative to U.S. equities, these asset classes may be pressured by a stronger U.S. Dollar and slower economic growth.
  • Slight exposure to gold to serve as a hedge, in a geopolitically tense global environment, and supported by strong central bank buying.
Notices & Disclosures

Products and services offered through F.N.B. Investment Advisors, Inc. are not FDIC insured; and are not insured by any Federal Government Agency, are not deposits or obligations of or guaranteed by First National Bank of Pennsylvania or its affiliates and may go down in value.

This material has been extracted from various sources that F.N.B. Wealth Management believes reliable, but we cannot guarantee the accuracy or integrity of the material. This material is for your private information, and we are not soliciting any action based upon it. Any projections, market outlooks or estimates contained herein are forward-looking statements and are based upon certain assumptions. Other events that were not considered may occur and may significantly affect the returns or performance of these investments.

Past performance is no guarantee of future results. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice, and you are encouraged to consult with their investment professional regarding the applicability of this information to your specific situation.

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