The Way Forward: 2025 Market Outlook Podcast

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Stacie Jacobsen: Thanks for joining us today on The Pulse by Bernstein, where we bring you insights on the economy, global markets, and all the complexities of wealth management. I'm your host, Stacie Jacobsen.

We're nearing the end of another year, and 2024 has certainly been a dynamic one for investors. In the beginning of the year, we were using terms like cautiously optimistic and modest increase in stock price. Well, we've certainly been pleased with the strength of the market. It didn't come without some angst.

In the U. S., a presidential election brought its own uncertainties, while the E. U. introduced sweeping fiscal changes, and China took bold steps to stimulate its economy. And in the background of all of this, the rise of artificial intelligence continues, igniting both optimism for advancements, but also an undercurrent of anxiety over potential job displacement and other unintended societal consequences.

As we look to 2025, Alex Chaloff and Maura Pape sat down to deliver Bernstein's twice-yearly outlook. They cover a recap of 2024 and what we can expect to see in 2025. Before we kick it over to Alex and Maura, a quick announcement that the Pulse is going on a hiatus after this episode. Bernstein is always exploring ways to bring our most salient insights to investors, and we have some new media in development for 2025.

To wind up our final episode of the season, after The Outlook, we'll have some clips from our favorite episodes of 2024. Stay with us.

Alex Chaloff: Hi, I'm Alex Chaloff, Chief Investment Officer at Bernstein Private Wealth Management. I'm joined by my colleague, senior investment strategist, Maura Pape, today to cover an outlook of 2025.

Before we start with 2025, Maura, give us a recap of 2024.

Maura Pape: Well, growth in 2024 was better than expected. When we came into the year, we were forecasting U. S. GDP of a bit less than 1%, and now it looks like we're actually going to land a A little over 2%, so positive surprise there. And at the same time, inflation continued to come lower.

And that's why the Fed started to cut rates in September. So all of that added up to a very strong backdrop for markets. And Alex, this year we were really talking more about winners and bigger winners instead of winners and losers.

Alex Chaloff: Yeah, there were so many winners that I actually had to make a list of them so I wouldn't forget.

We have the Magnificent 7, that was a terrific performance, which drove performance for U. S. stocks, especially U. S. large cap stocks, especially U. S. large cap growth stocks. Really, anything AI related was terrific this year. U. S. value did well. Small caps have rallied of late. Even financials have done well.

When you look overseas, the returns there have also been pretty strong, especially in China. And then in the fixed income markets, there have been pretty good returns. So it really is winners and even bigger winners. Okay, so we have a new administration, which means new policies. Tell us how we're thinking about that.

Maura Pape: Well, we're really focused on Three main areas, and that's taxes, regulation, and tariffs. Taxes is probably the most obvious one. It's almost taken as a given at this point that the Tax Cuts and Job Act will be extended, but there's also been some proposals to go further than that. We think much of this is probably already priced into the market, but we could see an additional surprise that could be a tailwind.

In terms of regulations, looser regulations could help certain sectors like financials, traditional energy, healthcare is a little bit more of a question mark. But similar to taxes, we think a lot of that has probably been price judging from how the market has been trading. And then of course tariffs, that has certainly been in the headlines a lot.

We heard a lot on the campaign trail about plans and even sanctions. Since then, but at this point, we really don't know what we're going to get. Some of this rhetoric is clearly a negotiating position. What we do know is that from an economic standpoint. Tariffs raise the price level. It really matters, though, what are the details of these policies.

Are they going to be blanket tariffs or will they be more targeted? Is there going to be any retaliation or will it just be a one off? And what are the levels we are going to see? So our bottom line here is really beware of the headlines. There's going to be a lot more noise before we get any actionable information.

Alex Chaloff: Right. So we take all of that and from that we can start to form our 2025 economic outlook. Our view for U. S. GDP is that we'll have a good year, not a great year. Probably a little bit slower than what you described for 2024 and 2025. We think overseas and around the world about the same story. Good growth, not great.

There's also some vulnerability related to a potential trade war, especially in China, especially in Europe. So we'll watch that play out. We think inflation continues to slow, but it probably stays right around the same level that it's been at for a while. So no silver bullet in inflation next year. But inflation is low enough that the Fed continues to cut rates, probably slower than what many expected a few months ago.

But still some modest cutting, and all of that translates into a market return, which we think for the S& P is mid to high single digits, mostly coming from earnings growth. We don't think you get much multiple expansion from here, and so our expectation is to have the return of the market really match earnings growth.

But that's our base case.

Maura Pape: So our base case is, say, mid single digit return. We've also sketched out a bull case and a bear case, uh, but really what investors are asking me right now is about valuations. Investors with capital to deploy are wondering whether now is a good time. What's your take on that?

Alex Chaloff: Yeah, I think valuations, you have to acknowledge as an investor that the U. S. market is a premium priced market. Now, it starts with the Magnificent Seven. And the valuation of just the Magnificent Seven on a forward earnings basis is Expensive. There's no and if or buts about it. It's expensive. Where you do get some relief is when you look at the equal weighted index, where you take 1 500th of every company inside the index.

That's much more around the long term average. If you really want to find relief in valuation, though, you have to look overseas. The developed foreign markets are reasonably priced. The emerging markets are reasonably priced. So saying valuations are rich is a little bit of a misnomer. There's a portion of the U.

S. market, the U. S. large cap growth market, that is a premium valuation. But the rest of the space looks much more attractively valued. Now, that's stocks. What about when we flip to the bond market?

Maura Pape: Well, our forecast for the U. S. 10 year Treasury for the end of 75%, so that's almost 50 basis points lower than where we are today.

So that implies, in our base case, some potential for price appreciation in bonds over the course of the next year. When yields go down, bond prices go up. However, we wouldn't be surprised if we saw some choppiness and yields even touch So that's the bad news. The good news is yields are higher than they have been in many years, so long term investors can be happy to just clip that coupon for longer.

Alex Chaloff: Okay, so we're optimistic on equities, think that valuations are a little bit rich in a pocket of the market, but there are some opportunities. In bonds, you can clip the coupon even if rates move higher from here, which we don't think is our base case. Tell me where we could be wrong. What are the risks that we're watching?

Maura Pape: Well, something that's been coming up a lot in my conversations with investors is the U. S. debt. The debt level in the U. S. has really increased a lot, especially post COVID, and now it's about 100 percent of GDP. And now with interest rates higher, when that debt turns over, we're paying more for it. So it's not a surprise that we're hearing these questions.

Alex Chaloff: Yeah, we wrote a white paper on it earlier this year.

Maura Pape: We did, and I would say our conclusion with that is, We're not pressing the panic button just yet, but something does need to be done. Maybe it's a little more growth coming from AI giving a boost to productivity. But even with that, we do think we'll need to see a little bit more fiscal discipline to get the debt ratios under control.

So, Alex, we talked about these risks, tariffs, and the U. S. deficit, and we also talked about the opportunities coming from pretty solid growth in the economy. How are you advising investors to position their portfolio now?

Alex Chaloff: Well, we talked a lot about the public markets. We really haven't talked about the private markets, and that's a big part of our allocation recommendations for 2025, is to take advantage of some of the disruptions that have occurred in the real estate market, in the private equity market.

In the venture capital market, there's a lot of interesting opportunities outside of stocks and bonds that go up and down every single minute of every single day. Private markets, in our view, over the next few years will offer probably a better return than what you'll see in the markets. We'll see. But they'll also do so with a lower level of volatility.

And so our expectations is that alternative investments will be a key component of an allocation recommendation. So we talked about public stocks, public bonds. We talked about the macro backdrop and what our outlook looks like. For 2025 is and where things could go wrong and what risks exist and talked a little bit about what's going on and alternative investments.

I think that's a really good wrap up for 2024 and outlook for 2025. So thank you.

Stacie Jacobsen: Thank you. Of all the topics we covered this year, a few conversations stood out to us for different reasons. Some were especially useful, like the estate planning episode with Jennifer Good. Some took us into fascinating territory, like our chat with Inigo Fraser Jenkins, who shared five must read books about the new machine age.

And others underscored that the heart of what we do here at Bernstein is help families live their best lives, like our fan favorite episode on the true meaning of wealth with Jay Hughes. We compiled a few clips from each of these episodes to remind you that while we're on hiatus, there's still plenty of good listening in the archive.

Early in the year, we spoke with Jay Hughes, an author and leading expert on family governance, who began his career as an estate planning attorney, but found that he could have a greater impact by advising families on how to find well being in their wealth. He wanted to truly help. Jay's humanistic and sometimes humorous approach to life, along with his sage wisdom, made him an instant favorite of listeners.

Here's a short clip from that episode. Where I'd really like to start is to have you walk us through the true meaning of wealth. You know, so often we focus on the asset side and just the money, but your definition, it extends far beyond that financial capital.

Jay Hughes: Well, life. It seems to fall into quantitative and qualitative categories.

Qualitative things start with the spirit. They're aspirational. They speak to the human condition. So the first thing I ask people to do when they begin to think about the qualitative questions and the word wealth is if they can reprogram their brains so that whenever they hear the word wealth, they hear well being.

Okay. And when they hear money, they hear financial capital.

Stacie Jacobsen: You started the first part of your career as a very successful estate planning attorney, started your own practice in New York, but you made that switch from, you know, how to we actually build a structure to the, why are we doing it this way?

What made you realize that you wanted to focus on the why in the latter part of your career?

Jay Hughes: Well, Stacie, Dante in his great poem starts by saying that in midlife, he found himself in a dark wood with nowhere to go. This is perhaps the greatest clear description of a midlife crisis. I found myself in Dante's dark wood at the age of 49, right on time with no way out.

Crisis had personal aspects and it had professional aspects. On the professional aspect, I came to the conclusion I was not helping. These families aren't flourishing. They've got great structures, great quantitative help, but the qualitative aspect. So as I sat there and began to think about, did I want to do this work anymore?

Yes, I did. Could I do it in some way that I would perceive I was making a difference in whether the family was flourishing or not? And that took quite a lot of thinking. Finding the right view of a question, a very wise person called the Buddha said many years ago is the key to getting a better outcome.

It sounds simple. It's not simple to find the right view of the question. But finally, what I realized was that I had been asking families, what do you need? So, I thought as I came out of the midlife crisis, I'm going to do something I haven't done before. I'm never going to ask a family again, what do you need?

I'm only going to ask them, can I help?

Stacie Jacobsen: That led you to some pioneering work, especially in the family governance space, and you're very well known for the structure that you started to think through, which is the five capitals of wealth. Can you walk us through that?

Jay Hughes: I'm going to ask our listeners to put up your right hand.

Turn it so that your thumb is sticking up and put your five fingers out. And now I want you to close your five fingers. And now you just have your thumb sticking up on your right hand. That thumb that's sticking up is financial capital. What I can say with absolute certainty is if a family sees itself only as its financial capital, it's toast.

That quantity itself without the qualities is meaningless. Now, if you turn your hand upside down, so your right thumb is now sticking down and your five fingers are sticking out to the left, now imagine that your pinky is spiritual capital, your ring finger is social capital, your middle finger is intellectual capital, and your first finger is human capital.

All of a sudden, you see what your family actually is. It's the four qualities. Wiggle those four upper fingers. supported by financial capital, and now the financial capital has a job to do. Grow those. If you're growing those four fingers, spiritual, social, intellectual, and human capital, supported by the financial capital, I can assure everyone who's listening today that they will have an entirely different experience together, because they will actually be growing that which is most important to them.

Many, many centuries ago, There was a man sitting in Athens whose name was Aristotle, and most of us at some point in our educations heard about this man. Something stuck with me that this man said. He wrote a book called The Politics. It's the greatest book on political philosophy ever written. Aristotle said, do you want to live in a flourishing society?

Anybody you meet would say, of course I do. Then Aristotle said, well then, you must answer my second question. Is your family flourishing? Oh. Because Aristotle said, the mathematics are very simple. The building blocks of a flourishing society are flourishing families. So my question this year, which is not making people happy, I'm, but I'm an old man, I can be a curmudgeon occasionally, is I asked them very blithely, do you want to live in a flourishing society?

Oh yes, of course I do. Okay, then is your family flourishing? I think this is a worthy question. Is your family flourishing? Because if it isn't, then you're not contributing to a flourishing society. You can't kvetch, as they say in New York. You have to go do something, and that's a whole lot more likely to produce a flourishing society than anything else you could do.

Stacie Jacobsen: Jennifer Goode is one of our favorite experts on estate planning, tax planning, and wealth transfer strategies, and probably the most fun estate planner we know. Her video series, Jennifer Goode Explains, demystifies opaque concepts using playful analogies, comparing things like the lifetime exclusion amount to a cupcake, or imagining grantor trusts as milkshakes.

Here's a clip with Jennifer explaining how she approaches estate planning. So I think where we want to start from

Jennifer Goode: is thinking about them and their interests holistically. I am a big fan of not letting the tax tail wag the dog. This change in law is a good excuse to check in with your planner to make sure that your plan fits you and your needs.

After that sort of check in, you may realize that part of that adjustment to your plan is making an irrevocable gift to a trust, a transfer that. You can't take back that under most circumstances, you're not really going to be able to access those assets, at least not in the same way. So it may be that that makes sense for you, that you want to use some of that excess exclusion by funding a trust now, and that's going to further support your goals for your family by eliminating tax exposure, by furthering other financial objectives.

It also may be That you look at your financial goals, and some of these goals require that you retain liquidity on your balance sheet, and that's why I do recommend that you talk to your estate planner, but I think it also is key to involve other advisors in your life. So if you could financial advisor, your accountant, the other folks that can weigh in on.

all the ways in which your balance sheet needs to support the people that you care about, the entities that you care about, and your ultimate goals and values to ensure that we are setting you up for what I like to refer to as a long, happy life rather than a unexpected death. So my message is that a, this whole process should be highly personalized, but also that there's not just one way.

To get ready for 2026 or to just plan for a state tax generally, that there are plenty of tools in your estate planners toolbox. And I think really the crux of the issue is just identifying which ones are going to work the best for you.

Stacie Jacobsen: And as I was listening to you talk, it just sounds more and more like this is certainly something that you want to make sure that you have the right professionals helping you with to achieve your goals, because this isn't one size fits all.

It should be really customized to each family.

Jennifer Goode: Absolutely. And if I can put in a little plug for my estate planning brethren and my financial advisor brethren, I think that's all the more reason to reach out sooner rather than later. Start early, engage your advisors when they have the bandwidth to really work with you and make sure that this decision is one that best suits you and your goals.

And please don't wait until October, November 2025.

Stacie Jacobsen: One of our more recent episodes piqued the interest of a broad range of listeners. Inigo Fraser-Jenkins joined us to talk about five thought provoking books that sit at the crossroads of capitalism, technology, politics, and social order. Some of the most critical issues shaping investment strategies today.

What's notable about these books is their diversity of perspectives, from staunchly capitalist to modern Marxist viewpoints. He's synthesized their insights on the shifting nature of labor. The evolving relationship between capitalism and liberalism, the real implications of AI on productivity and jobs, and what all of this means for investors in the long run.

Can you elaborate on some of the arguments that both supported the euphoria and also challenged the prevailing orthodoxy around, let's say like AI and how it relates to growth and productivity?

Inigo Fraser-Jenkins: That's one of the central questions that kind of comes up across these books. I mean, I guess we should see it in an even broader context, which is, in other work that we've done, we show that the effective size of the global labor force is going to shrink because of the twin forces of demographics and de globalization.

So other things equal, one would have thought that might Increase the bargaining power of labor, which has implications for wages and inflation, because AI is a very different kind of force at work here that has the potential to reduce the bargaining power of labor. I guess this is part of a long running argument about the future need for labor and what labor looks like.

The. Optimists on this would point out that we've seen at least 200 years of continuous evolution, automation, and technology improvements. And yet, as far as we can tell, we still have pretty close to full employment. So surely there can be no problem. And I guess, but the pessimists would point out that perhaps AI seems different from this in terms of its scope and the ability to quite rapidly change the nature of labor and the needs of labor.

Now, these are matter for. Two huge themes that run through really all debates about the long run future returns and what kind of returns investors need, because on the one hand, it touches on the level of inflation that people expect. And, you know, is there a greater bargaining power of labor and should we be protecting ourselves against a higher inflationary path?

And the other angle is that if we do have. A future of fewer workers, a fragmented workforce and de globalization. Those are downward forces on growth and we really need to see a growth of productivity as perhaps the only attractive way out of a future where there's a need to generate returns to fund people's retirements and also a need at the macro level to see growth to meet government debt payments far into the future.

Stacie Jacobsen: Do you think that the traditional structure of capitalism is going to be unrecognizable in the, call it relatively near future?

Inigo Fraser-Jenkins: I'm not sure unrecognizable will be right, because calling for a very abrupt paradigm change, um, you know, can be very difficult things to go and do. But I do think there are some norms that people have assumed continue that perhaps it should be questioned.

I think that's particularly relevant for, you know, Investors, when they think about what level of inflation, what level of equity returns, what level of bond returns, but they should be expecting over five years and 10 years forward. But we have lived through a really extraordinary period in the last 30 or 40 years when there have been a series of forces that have come together to drive down the level of inflation and raise the level of growth.

Now, some of these are to do with the issues raised in these books and some are other forces as well, such as the decision of. Uh, China to join the global economy and demographic kind of forces with the unusual size and wealth of the baby boomer kind of cohort, but it does kind of point to a future that implies that this sort of plentiful real growth is really attacked from two sides.

You know, 1 is a lower ability of growth to be generated, and the 2nd would be higher levels of inflation. Now that doesn't mean one should be bearish about the future. I. I don't think that capitalism actually is dead despite the concern that Varoufakis has raised. But I think it actually does raise some profound questions, which actually bizarrely are kind of common across the capitalists and Marxists kind of critiques of contemporary capitalism, which is that if it's a decline in the efficacy of competition, which has really been, responsible for this low period of productivity growth.

And actually AI is not going to be the answer here. And it requires some shifts in a regulatory market structure to bring that about.

Stacie Jacobsen: Was there anything in particular that you read that surprised you so much to the extent that it may have made you change the way that, that you think about the future and the economy?

Inigo Fraser-Jenkins: I guess one of the most surprising inclusions was the one, um, in Varoufakis book. I've got the idea. of this huge irony that from, from his point of view, capitalism has been killed, but not killed by organized labor. It's been killed by the privatization of the internet combined with a lowering of the cost of capital in response to the financial crisis.

But that was certainly a very surprising read, uh, which I hadn't really kind of thought about before as an explanation for the setup that we find ourselves in today. I think though, If I reflect on these books and then link it to all the client conversations I've had with investors over the last six months or so, but the extent those conversations dwell on these more strategic issues, they really do touch on the, on the same kind of problems.

I mean, there is this huge open question around where is growth going to come from?

Stacie Jacobsen: That's a wrap on The Pulse for 2024. You can listen to these episodes and more wherever you get your podcasts. I've been your host, Stacie Jacobsen, wishing you and yours a great rest of the year.