2025 Outlook: Glass Still Half Full
Without question, we are living in extraordinary times, where perspectives on the world vary dramatically. On the one hand, rising GDP-per-capita in many countries, significant advancements in healthcare, and incredible technological discoveries all represent meaningful positive momentum. In addition, soaring asset prices have materially boosted net worth, especially for those heavily invested in the S&P 500 and housing. At the same time, however, a contrasting narrative emerges for many global citizens, especially those adversely impacted by inflation and/or military conflicts. Governments across the globe are grappling with ballooning deficits amidst the need for huge investments in infrastructure, security, workforce development, and supply chain needs. Many nations face increasingly complex demographic shifts as well as political discontent with the ‘establishment’, driven by a ‘revolt of the public’ against established institutions by digitally empowered citizens. Moreover, for those not invested in the equity or housing markets, a stark divide between the ‘haves’ and ‘have-nots’ has contributed to record levels of inequality. At the same time, the traditional distinction between economic and national security has become increasingly blurred as we transition from a period of benign globalization to one of heightened geopolitical tensions. Yet, despite all these cross currents, our investment outlook for 2025 still tilts positive. So, leveraging a refrain from our 2024 Outlook, our 2025 mantra remains that the Glass is Half Full. To be sure, investors should expect lower returns and more volatility along the way than in 2024. Still, stronger U.S. productivity, easy financial conditions, robust nominal earnings growth, and lack of net issuance, give us confidence that not only is the cycle not over but more gains for investors could lie ahead in 2025. Equally as important, we still see several mega investment themes that we believe will require trillions of dollars of private capital over the next 10 years to fulfill their destiny. Against this backdrop, we think the potential for investors who ascribe to our top-down Regime Change macro thesis to generate above-average returns is still compelling.
It was the best of times; it was the worst of times."
I don’t recall much from my high school English class at St. Christopher’s School in Richmond, Virginia, but I do remember reading A Tale of Two Cities by Charles Dickens. It certainly made an impression on me. The contrasts between ‘light’ versus ‘darkness’ and ‘hope’ versus ‘despair’ ultimately reveal that things are often not as they seem.
Fast forward a few decades, and today’s world dovetails with that backdrop. On the positive side of the ledger, we live in a time of extraordinary societal advancements. Healthcare has improved drastically around the globe; we now clearly see more tangible evidence that AI will lead to another positive inflection point in the technology/productivity cycle, and both life expectancy and GDP-per-capita are rising rapidly in many emerging economies.
EXHIBIT 1: The World Is Still Urbanizing, Supporting GDP-per-Capita Growth
Change in GDP Per Capita, 2019 - 2024 %
EXHIBIT 2: Beyond Surging Productivity, Heavy Fiscal Impulses and Low Unemployment Are the Two Key Attributes, We Believe, That Are Defining This Cycle
Difference Between Federal Budget Deficit, as a % of GDP and Unemployment Rate, PPT
It has also been a time of rising asset prices for many investors, especially those who have overweighted the S&P 500 in their portfolios. All told, by the end of 2023, the Federal Reserve estimated aggregate household net worth in the United States had ballooned to a record $160+ trillion, driven primarily by robust housing and stock markets. By most headline metrics, things have never been better.
Most Important Things to Know
Asynchrynous Recovery
We now live in a world where the ECB is cutting earlier and faster than the Fed this cycle, a sequencing that has never occurred before. Meanwhile, in Asia, the Bank of Japan is raising rates. At the same time, China needs to create internal demand to offset deflationary trends and a major deleveraging cycle reminiscent of 2008 in the United States. Japan’s 30-year bonds now yield more than China’s, while in Europe, once maligned Greece now has bond yields that are essentially on par with those of France.
A Higher Bar
Unlike the past two years, the more aggressive GDP and EPS growth estimates for the U.S. to start the year will challenge and set a higher bar for an ‘upside surprise’ in 2025. Additionally, this Fed cycle will likely be less dovish than previous ones. So, look for large domestic-oriented economies, such as the U.S. and India, services-based economies like Spain, and corporate reform-minded economies, such as Japan, to outperform. In this context, we think earnings growth now matters more than multiple expansion.
Currency Markets Are an Achilles’ Heel
Most investors are now focused on a surging 10-year yield. By comparison, we are more focused on currency volatility. Tariff wars and big fiscal imbalances can create volatility shocks that differ from recent cycles.
Oil
For the first time in years, we are below consensus on our near-term outlook. Specifically, our 2025-26 forecasts of $65 per barrel are now modestly below futures pricing. However, our longer-term 2027-28 estimates of $70-75 per barrel remain comfortably above futures at around $64 per barrel. In the bigger picture, as AI scales, we believe energy security will become even more entwined with national security.
Productivity Holds the Key
U.S. productivity is surging, elevating both earnings and growth. Until this slows, we think the cycle will continue. When it does slow, however, the downturn will be faster and more significant than the consensus believes.
Regime Change Thesis Intact
Recent election outcomes around the world put an exclamation point on our Regime Change thesis, which is driven by bigger deficits, heightened geopolitics, a messy energy transition, and stickier U.S. inflation. Our top-down framework suggests flatter returns, which will likely require a different playbook for capital deployment.
New Growth Drivers Amidst Heightened Global Competition
We envision a blurring of economics and national security across all regions, likely encouraging political leaders to develop ways to expand investment, including increased savings, more private sector involvement, and a focus on driving down the cost of capital. As part of this transition, we see key growth markets emerging in India, the Middle East, and other parts of Southeast Asia. As a result, we think Intra-Asia trade will continue to accelerate.
Yet, under the surface, things are not quite as good as they seem, as significant imbalances exist. For starters, consider that the aforementioned surge in net worth has largely been concentrated in the hands of a few, with adults aged 55+ now controlling 69% of total household assets in the U.S., up sharply from about 50% in 2001. One can see this in Exhibits 8 and 39, which underscore the benefits of long-tail QE on asset price appreciation for those asset owners who were fortunate enough to own stocks and houses during the past two decades. All told, through 2023, this 55+ age group in the U.S. has enjoyed an $88 trillion, or 335% increase in household assets, since 2001. This figure also captures 77% of the total overall increase in household assets during this period by all cohorts. By comparison, the under-40 population’s share actually fell from 12% to nine percent of total assets during the same time period, while the 40-54-year-old cohort saw its market share fall to 22% from 37% during the same period.
There is also a clear ‘have’ versus ‘have not’ bifurcation in equity markets, with the significant outperformance of the S&P 500 relative to its international peers being more pronounced of late than during either the Nifty Fifty or Dot-com periods. One can see the extremity of this delta in Exhibit 3. So, beyond the outperformance of the S&P 500, there is also the reality that only a small percentage of people actually own stocks that delivered that outperformance. In fact, in the U.S., for example, the most recent Federal Reserve consumer survey suggests that only 21% of U.S. households owned stocks directly in 2022.
EXHIBIT 3: The U.S. Equity Story Has Been a Dominant Global Story, Driven by Productivity, a Trend We Expect to Persist in 2025
Relative Performance of U.S. Equities vs. Global Equities
EXHIBIT 4: Unlike in the Past, Consumers and Corporations Are Not Overleveraged This Cycle. Rather, It Is the Government That Has Excess Leverage
Debt-to-Income Ratio
In a similar vein, consumer cash balances at Bank of America, which we find to be a good proxy for the U.S. consumer, also tell a worrisome story. Exhibit 5 shows consumers with the lowest cash balances have experienced a seven percent decline in their savings since 2019. In contrast, the average cash balances of the bank’s entire customer base have increased by fully 32% during the same period, with the wealthiest banking clients seeing even greater gains at 37%. Importantly, this is not just a U.S. phenomenon. As illustrated in Exhibits 6 and 7, the age cohort indeed plays a role. Still, the reality is that an increasingly smaller number of people are holding a greater share of total global financial assets. One can see the disparity starkly in Exhibit 7, as it reveals that only 58 million people, or just 1.5% of the world’s total population, control $192 trillion, nearly 48% of global wealth.
EXHIBIT 5: Cash Balances Are Not Uniformly Up, as the Lowest Income Americans Have Felt the Pinch of Inflation
Deposit and Money Market Balances by Quitile: % Change Since 2019
EXHIBIT 6: We Are Seeing Different Spending Patterns Amidst an Asynchronous Recovery
Discretionary Card Spending per Household by Generation,
YTD, %
EXHIBIT 7: Inequality Is a Global Phenomenon. Consider That Just 1.5% of the Population Has Accumulated 47.5% of Global Wealth
World Inequality: Comparison of Population Share by Income Cohort and by Asset Ownership
EXHIBIT 8: The Lion’s Share of Net Worth Is Now Owned by Investors Who Are Aged 55+
Major Assets on Household Balance Sheets by Age, US$ Trillion
So, to many individuals around the world, ‘darkness’ and ‘despair’ are more appropriate adjectives to describe their current reality. This perspective is certainly true in the U.S., where in the Presidential election, cost of living concerns, mainly linked to inflation, reinforced voters’ desire for change. This helped elect President Trump, the first time a previously elected President, who lost re-election, has made a comeback in more than a century (Exhibits 9 and 10.)
EXHIBIT 9: American Voters View President Trump as an Agent of Change
NBC Exit Poll: Who Do I View as the 'Change' Candidate?
EXHIBIT 10: We Link This to Growing Economic Dissatisfaction, Particularly Amongst Working Class Households
NBC Exit Poll: Compared to Four Years Ago, Your Family's Financial Situation, %
EXHIBIT 11: Headline Inflation Has Been 60% Higher Post Pandemic Than in Prior Cycles
U.S. Headline Inflation by Economic Cycle, Annualized, %
EXHIBIT 12: Annual Spending on the U.S. Debt Service Burden Is Now More Than Spending on National Defense or Medicare and More Than U.S. Spending on Veterans, Education, and Transportation Combined
CBO 2024 FY Budget Projections, US$ Billions
Looking at the big picture, as Ken Mehlman and I discussed following the U.S. election , recent events around the world have put an exclamation point on the major secular changes we at KKR have been focused on. These include more government spending, more competitive and volatile geopolitics, a messy energy transition, and sticky, uneven inflationary trends. From our perspective, these four drivers continue to form the foundation of what we have been describing as a Regime Change for investors since the onset of COVID.
As we look ahead, we believe President Trump’s vision for America likely involves promoting faster growth and addressing significant deficits through reduced regulation and tax cuts. This vision also emphasizes more of a focus on economic independence, including resilient supply chains and increased local energy production from traditional sources, particularly in light of the surging energy demands driven by AI—an important focus of President Trump’s new team. Balancing growth, deregulation, and enacting tariffs will all need to be considered against the potential for reaccelerating inflation amid larger interest expense outlays and an expanding economic divide by cohort, we believe.
Meanwhile, in Europe, Germany is experiencing a major slowdown in growth, while bond vigilantes in the U.K. and France are trying to rein in heavy government spending. In fact, battles over fiscal spending to promote growth contributed to the collapse of existing governments and triggered elections in Germany and France. At the same time, the situation in China also warrants investor attention. We believe that China’s shift in its manufacturing approach—moving away from consumer goods, which defined its role as the world’s manufacturer when it joined the WTO in 2001, and instead focusing on industrial automation and the green economy—is creating a challenging environment for corporations invested in these sectors. This situation resembles the difficulties faced by traditional manufacturers at the beginning of the century. In other words, industrial manufacturers today are experiencing a sense of uncertainty akin to what the consumer manufacturing sector in the U.S. and Europe encountered after 2001. If there is any good news on this front, one could argue that this additional excess capacity is more deflationary than recessionary.
Not surprisingly, these types of ‘light’ versus ‘darkness’ debates are also reflected in our macro data, which is why we stick to our thesis on the asynchronous global recovery—characterized by rolling recoveries and rolling recessions within and across economies. This ongoing reality is illustrated in our cycle indicator model in Exhibit 13. Moreover, as detailed in our Global/Regional Economic Forecasts in SECTION II, we are forecasting uneven global growth again in 2025. Specifically, we are raising our U.S. forecast for GDP to 2.5% from 2.3% previously, versus a consensus of 2.1%, while we are lowering our China 2025 GDP forecast to 4.4% from 4.6%, versus a consensus of 4.5%. For Europe, we maintain our forecast of 0.8%, 40 basis points below consensus of 1.2%. Without question, our global economic outlook is undeniably bifurcated between domestic-led economies like the U.S. and India versus traditional export nations.
EXHIBIT 13: The 10 Subcomponents of Our Cycle Indicator Are Unusually Asynchronous and Spread Across All Four Phases of the Business Cycle
KKR GMAA Proprietary Cycle Indicator
Acknowledgements
David McNellis, Aidan Corcoran, Frances Lim, Changchun Hua, Kristopher Novell, Paula Campbell Roberts, Brian Leung, Rebecca Ramsey, Tony Buckley, Bola Okunade, Rachel Li, Thibaud Monmirel, Yifan Zhao, Ezra Max, Miguel Montoya, Asim Ali, Patrick Holt, Patrycja Koszykowska, Coco Qu, Koontze Jang, Allen Liu, Alexandre Caduc
