US equities, high yield bonds could be a winning combination in 2025

With 2025 fast approaching, experts from Northern Trust Asset Management have given their outlook for how investments may perform.

The $1.3 trillion AUM firm is positive on the near-term performance for US equities with strong earnings and healthy sales growth expected to be supportive of the market despite softer economic growth.

However, Trump administration policies present potential risks of reflation and supply restraint with the net effect of restrictive immigration, higher tariffs, income tax cuts and deregulation potentially creating economic conditions that disrupt the current soft landing path.

Small cap equities are expected to benefit from lower interest rates as these firms typically carry debt with floating rates.

“In multi-asset portfolios, we maintain a preference for equities over fixed income,” said Anwiti Bahuguna, Ph.D, chief investment officer of Global Asset Allocation. “We expect US equities to benefit from an economic soft landing and healthier corporate profits than most other regions. In 2025, we expect more modest gains for 60/40 portfolios with US equities leading the charge again.”

Within fixed income, high yield bonds are in focus as attractive for investors with income potential combining with generally high quality credit.

“We continue to favor high yield bonds because of elevated yields, strong fundamentals and a supportive market backdrop,” said Income Christian Roth, chief investment officer of Global Fixed Credit ratings upgrades are outpacing downgrades, and the overall credit quality of the high yield market remains historically high.”

Money markets are also still favored, despite the Fed cutting interest rates. NTAM sees little chance of money market rates returning to near zero. And with the path of 2% inflation looking bumpy, TIPS remain an important defensive portfolio component for unanticipated inflation.

Finally, the firm sees growth for private credit amid a continued shift from traditional lenders, and lower interest rates could spark M&A activity in 2025.