News

• The global economy is set to grow by 3% in 2025, 0.1pp less than expected. Although this is half a point less than the average of the last 50 years, it is nonetheless sustained growth.
• The cycle remains resilient thanks to the combined effects of a slowly decelerating labour market that will allow wages to continue rising in real terms and a more robust private sector than in the past.
• The eurozone will see a slight recovery to 1.4% (from 0.8% this year), driven by the most service-heavy economies, including the Spanish economy. Lower energy prices will also contribute to a modest recovery for some of the most industrialised, export-driven economies.
• According to Banca March, the market exaggerates the cuts in official rates and anticipates that the pace of reduction will be more moderate and will be limited to a third interest rate cut by the ECB for this year and two more in the US. By 2025, Banca March expects rates to come down by 100 bps in both regions, i.e. 50 bps less than is currently priced into the US rate curve.
• Banca March expects moderate increases for equities, with a preference for sectors such as health or technology and, in Europe, for small companies.
• Lower rates will work in favour of fixed income, which, in an environment of subdued inflation, will allow for positive real returns and reposition itself as a viable option for diversification. The bank continues to like European IG credit and infrastructure as an illiquid investment.

The bank also believes that the current cycle is benefiting from the extraordinary resilience of labour markets at a global level, which is allowing real wage growth to be maintained. In the US, purchasing power is already 1.3% higher than pre-pandemic levels, whilst in Europe there is still some way to go, with purchasing power still down -2.3% versus pre-Covid.

The private sector is better positioned to weather the economic slowdown. It is less leveraged than in the past, and US household wealth has increased by up to 40% since the pandemic, thanks to a strong stock market and real estate sector. Despite the slowdown, consumption remains robust and the latest data show how in the US the purchase of durable goods contributes even more to GDP than before the pandemic (37% compared to 29%).

Services to lead Eurozone growth

The Eurozone, which is starting from anemic growth, is heading towards an expected moderate recovery of 1.4%. Banca March does not envisage a particularly spectacular recovery, although the region will be buoyed by service-driven economies like Spain and Germany, which will now begin to benefit from the recovery of its industrial sector as energy prices normalise. For the automotive sector, the strategic threats of Chinese-made vehicles remain, while some countries, such as Spain, seem to be inclined to dismantle the tariffs proposed by the EU. European economies will have to undertake a process of further fiscal restraint despite an ultra-expanded public sector, which will be partly mitigated by the roll-out of the Next Generation plan.

The US economy will be impacted by the presidential elections, which are set to take place at a very different point in the cycle than the 2016 elections. Even if one party wins control of both houses, the ability to implement economic measures will be constrained by weak public finances and the maturity of the cycle. While the Republican programme promises further cuts to corporation tax, which would be good news for US companies, the Democrats would be looking to raise it from the current 21% to 28%. However, the international trade policy of a potential Trump administration would be very belligerent and would have significant adverse consequences, both for China and for the EU, as they are regions that are highly dependent on the outside.

Inflation, close to the comfort zone, but not meeting expectations

Banca March believes that the service sector continues to be the main obstacle to hitting inflation targets, particularly due to US rental prices. Despite the fact that inflation is entering comfort levels for central banks, Banca March expects that in 2025 it will stand at 2.5% in the United States and 2.2% in Europe, still above the ECB's target figure of 2%. The bank considers that the interest rate cuts anticipated by the market are somewhat inflated and do not align with a soft landing scenario for the economy. Six rate cuts are expected in the US over the next 15 months, versus the eight currently priced in by the curve; for the ECB the estimate is somewhat more moderate, with five cuts slated up until December 2025.

Financial assets: Highly concentrated equity gains in the Magnificent 7

As for equities, Banca March envisages a moderately positive scenario and only expects to increase risk in market dips. In addition, it warns that, from a historical point of view, phases of official rate cuts, such as the one we have been experiencing since last Wednesday, tend to offer fewer returns than those of pause in official rates (the period we have navigated over the last 14 months). The positive average returns that occur with cuts in official rates are largely conditioned by the results obtained when there is a soft landing.

Banca March considers that the returns accumulated since the beginning of the year are excessively concentrated in a very limited number of companies. It is worth noting, for example, that the S&P 500 has gained 6.5 pp more this year than the average company in the index; in the case of the Nasdaq 100, this discrepancy is even wider at 11%. This situation is heavily impacting index valuations. According to Banca March's estimates, the S&P 500's P/E ratio, stripping out the seven largest companies, is not particularly expensive, as it is currently trading at 15 times earnings, in line with its historical average and a long way off the 22 times earnings for the full S&P 500. However, in the current cycle, the ability of generative AI to increase economic productivity should not be underestimated.

By region, Banca March prefers the United States to Europe, with an overweight in health and technology and software. It also believes that mid- and small-cap companies have lagged far behind and are trading at attractive valuations. Within this segment, the opportunity in Europe is greater.

Positive returns for fixed income

Interest rate cuts have given rise to an environment which is conducive to investing in fixed income, as it will offer investors the opportunity to enjoy high coupon payments for longer. In any case, strictly in the short term, Banca Mach recommends a more cautious stance on duration. The bank also shows a preference for credit, especially European credit.

According to Banca March analysts, once the spectre of inflation has subsided, fixed income and equities will return to their usual dynamic of inverse correlation, so balanced portfolios will now provide more stable, diversified returns.