2025 Global Insights with Goldman Sachs

Martin Lefebvre

Hi everyone, my name is Martin Lefebvre, CIO at National Bank Investments. Thank you for tuning into our NBI podcast series. Today, the subject could not be better chosen as we're turning our backs on 2024 and opening the door to 2025. So, we're going to be talking about the outlook for investors, what the incoming U.S. administration might have in store, what it means for markets, and more particularly what's behind the just announced 25 % tariffs on Canadian and Mexican goods. To do so, I'm joined by our good friend, John Tousley of Goldman Sachs Client Solutions Group. Hello John, thank you for being with us.

John Tousley

Martín, thank you for having me. I appreciate it.

Martin Lefebvre

John, as we're turning the page on 2024, in your mind, what was the biggest surprise last year and how would you describe the macroeconomic environment as we're about to enter 2025?

John Tousley

Thank you for the question. I think it's a really good opportunity to look back. And I would say there's a couple of surprises. First and foremost, the ongoing performance of global markets, but particularly the United States and within the United States, the outperformance of what we have called the Mag Seven stocks. So, the stock market in 2023 was up 26% in the U.S. It looks like it's going to do another 26% plus this year. And we expect ongoing performance. And while we are clearly priced for perfection, that would be the first market observation would be how strong the equity markets have been on the back of a pretty good macro backdrop. 

Leaning into 2025, what do we expect? We expect ongoing, I'll call it Goldilocks growth, you know, not too hot, not too cold. We expect global growth around 2.7%, U.S. growth around 2.5%, Canadian GDP to come in at about 1.9%. And those are all very close to what we call potential, that kind of equilibrium rate for growth. Our odds of recession in the U.S. are quite low at 15 % over the next 12 months. So, we think this is a market that will continue to maybe slow down a little bit in terms of global growth and U.S. growth, but still be really constructive for capital markets, for earnings, margins. And so, it's going to feel, honestly, Martin, 2025, from a macro standpoint, it's going to feel a lot like 2024.

Martin Lefebvre

So, you said that inflation was on everybody's lips in 2024. So, do you see like the labor market being the thing to watch in 2025 or do you see it already like topping around the current levels?

John Tousley

I think that is exactly the right question. In the U.S., and again, I think mostly globally, we have been myopically focused on inflation containment since coming out of COVID. And probably in mid-summer, call it July of this year, I think the market and many central banks basically said, I think we've defeated inflation structurally. And so now, we seek evidence of ongoing economic sustainability. And I think the market views the best measure of economic sustainability as the labour market. So, in terms of importance whenever I'm working with clients and investors and they say, what is the most important thing to watch over the next couple of quarters? I would say it's no longer inflation. It’s now clearly the health of the labour market because that's the barometer with which the Fed will look at the state of the economy.

Martin Lefebvre

So, what does it mean? What does that all mean for markets? You mentioned earlier that it's been the second spectacular year in a row. So, and it seems everything's priced for perfection. Equities are pricey at that level. So, are we in a good run again or the least little impact will have equities correct this time around?

John Tousley

I think it's complicated. When we think about 2025, I think we're just fine. At the end of the day, the inputs, when you think about building one-year and two-year forecasts, overwhelmingly the inputs that really dictate the outcome of a short-term horizon, like a one- or two-year horizon, it’s earnings, earnings momentum, and economic growth. And all of those are fine. So, in the near term, our target for the S&P 500 is 6,500 for the end of next year. So, call that a kind of high single digit return. So, we really like the prospects of the next couple of years. If your portfolio design worked in 2024 and in 2023, that same plan is probably going to do relatively well. We would argue for a little more broadening. We do see some more risks in the system than the prior years. There's more risk of a potential correction. So, all of those risks are a little bit greater in 2025. And so, we want to pay attention to a good portfolio design. But I think largely what you're doing right now is probably going to work just fine in 2025. 

Longer term, what are the inputs that you build your longer-term forecasts on? When we start thinking about what are we going to make over the next 10 years? Well, in our view, those numbers are significantly lower. And the inputs for longer term returns are valuation, concentration, and a few other factors that suggest longer term returns are coming down. The debate, even internally, be that number 6%, 7 % annualized? Is it as low as 3 %? There's quite a range of discussion. And so one of our longer term messages is we're entering a period where broader cross asset diversification is going to be very important. Risk management is going to be very important. The level of risk is less certain, not more certain going forward. And so, we're really embracing the tenants of good portfolio design right now because we like the near-term market, but we recognize that we're running into some headwinds for the longer term. We think other asset classes can really be helpful longer term.

Martin Lefebvre

What about small caps? I mean, leadership has been through those mega cap stocks and your valuation kind of suggests that maybe it's top-ish at these levels, but how do you navigate that? Cheaper, smaller caps, but leadership in big caps and the U.S. exceptionalism and innovation and R &D and the AI environment that we're in right now. So how do you navigate that? Where do you see value?

John Tousley

Yeah, I think at the end of the day, if I had to do a list of pros and cons on small cap, they'd be relatively even. So, you know, small caps enjoy lower interest rates. And the mixture of Trump policies might really reinforce a domestic focus on your investment strategy. So, U.S.-centric revenues, that's going to favour small caps may lag. We actually think the next couple of waves of AI investment is going to be in the small cap arena as well. So, we like the opportunities, the valuation, the composition of returns that come from small cap. But it would be disingenuous to not suggest that if we were to have any macro uncertainty, small caps may lag, as they hate recession risk. Collectively, risks are relatively balanced, but here's what we've seen: The Mag Seven, those super tech companies that are dominating returns. Every time in 2024 we've seen any pause or any shift of capital out of those names, it hasn't gone global, it's gone down in cap. And so, there's clearly a willingness for capital that still wants to stay equity invested to move from the big tech names into the smaller cap names. The positioning and the flows we think are going to be relatively attractive. So, the bottom line is as I weigh my list of pros and cons, I really fundamentally favour small caps going forward. I think the mixture of policy, interest rates, earnings, AI is going to on margin favour small caps. But we don't think it's going to be this nice, smooth, stair step outperformance. They will underperform for three weeks out of a month. And then you'll get a flash of outperformance for one week. So, the risk is, I don't think we can time it, but I want to be positioned there for those short bursts that you will get in small caps. And I think we're going to get enough of them so that they should outperform large caps over the next couple of years.

Martin Lefebvre

So, let's embrace volatility once more and let's be ready for 2025. John, it was a pleasure talking to you. This is all the time that we had for this podcast. So, thank you everyone for tuning into our podcast series and we'll talk again next month.

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