Banque Syz has identified ten possible surprises that could affect markets in 2025. One of them concerns the US economy.
• Banque Syz overall confident for investment year 2025
• Continued stubborn inflation and high US interest rates in 2025?
• Possible surprise: US economy facing “slugflation”
Banque Syz is confident about the investment year 2025 and sees a positive environment for risk investments. According to the bank, this assessment is based on a robust global economy, strong double-digit profit growth among S&P 500 companies and a decline in real interest rates in industrialized countries. Nevertheless, uncertainties and challenges could ensure that the path for global equities is not without hurdles. In a report, the bank identified ten potential surprises that could impact markets in 2025.
Possible surprise: “Slugflation”
According to Banque Syz, one of these potential surprises is a so-called “slugflation” of the US economy, i.e. sluggish economic growth while inflation remains stubborn.
In the bank’s scenario, the immigration policies of the new Trump administration are helping to keep unemployment below 4.5 percent while wages continue to rise. Meanwhile, an upswing in the Chinese economy is becoming noticeable. This drives up raw material prices, which leads to a recovery in oil prices. Inflation remains stubbornly high and remains well above the US Federal Reserve’s 2 percent target.
These circumstances would cause headline inflation to rise again and, according to Banque Syz, complicate the Fed’s plan to cut interest rates. The high US interest rates would in turn begin to weigh on domestic growth in the second half of the year. The resulting “slugflation” would then “send the S&P 500 into a deep correction” as it begins to “hit US corporate profit margins.”
60-40 portfolio faces challenges
In this surprise scenario, the US economy would then face a recession later in the year, which would cause the US budget deficit to rise to over 10 percent of gross domestic product. As a result of the increase in government bond issuance, creditors are likely to demand higher returns. This would push the interest rate on 10-year government bonds to 5.5 percent, according to Banque Syz.
With both stocks and bonds declining in this scenario, the classic 60-40 portfolio would face major challenges in the second half of 2025, the report said.
Against this background, as Banque Syz reports, the US Federal Reserve would briefly begin quantitative easing again in the fourth quarter, thereby breaking its promise to stick to its 2 percent inflation target.
Editorial team finanzen.net
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