Amerant Investments 2025 Outlook: Mo’ Money, Mo’ Problems?

• In this report, we provide our thoughts on the year ahead in markets after 2024 brought another strong year in equities, lackluster fixed income returns
• The incoming administration is likely to focus on pro-growth, pro-domestic economic policies, higher tariffs, lower taxes, and less regulation
• Trump policies risk inflation skewed to the upside; the Fed is likely to pause its rate-cutting cycle and the importance of its inflation target may once again take pre-eminence
• For 2025, we encourage clients to rebalance portfolios away from momentum equities such as tech; in equities, look for lower P/E sectors; in fixed income, focus on income
• Clients can look to alternatives for diversification benefits; we think private equity, real estate are most attractive
• Emerging markets may struggle in a higher-for-longer rates, higher tariff world; however, long term demographic and growth trends favor these markets

Last year we released our first ever market outlook report, in the form of 10 condensed bullet point themes for our clients. This year, we reprise our easy-to-digest format and update our thoughts after 2024’s positive returns for most asset classes.

The theme for this year’s outlook is that while global equities rose strongly last year, we believe that this performance is unlikely to be sustained, as concentration in the Mag 7 equities means that the major indices are the most top-heavy they have been decades. The Mag 7 drove more than half of last year’s 25% S&P 500 index-level gains, so even a small slowdown in momentum for these equities can translate into a disappointing 2025. Meanwhile, it was another disappointing year for fixed income in 2024, with only a 1% positive return for the aggregate index, and losses for long Treasuries, while for 2025, we see additional risks to the upside for inflation and rates.

So before we dive into the specifics, our overall sense is that the positive returns from 2024 (“Mo’ Money”) can contribute to more headwinds for the year ahead (“Mo’ Problems”).

With this brief intro, let’s dive into our key themes for 2025, starting with tariffs. 

1. Tariffs Coming Soon:

Tariffs are likely, but depending on the ultimate amount of tariffs, the impact could range from “major economic headwind” to “not a big deal.” Our baseline case is that President Trump will ultimately reduce tariffs from his initial proposal. Along with substitution effects, supply chain revisions, and a largely service-based U.S. economy, we estimate that tariffs will reduce growth, but ultimately be absorbed into the economy. Second order effects—such as “higher for longer” interest rates– are harder to estimate and dimension.

Even before taking office, President Elect Trump has tweeted his intentions to escalate tariffs on U.S. imports. His initial proposals call for 60% tariffs on good from China and 25% on imports from Canada and Mexico. While these are certainly headline-grabbing figures, we think it helps to level-set the potential impacts.

Firstly, we note that the U.S. economy is more domestic than it might seem. For 2023, the U.S. imported items less than 14% of GDP, compared to nearly 20% in China and over 30% for Mexico, Canada, and Europe. Similarly, exports for the U.S. are the smallest among our peers.

As well, we note that even before the next Trump administration has taken office, the shift in imports country of origin has been well underway. Since 2015, the percentage of total imports sourced from China has fallen by half, to 14% from 21%. Imports from Mexico have risen, while Canada and the Eurozone have been steady.

We expect that any attempt to levy onerous tariffs on a handful of particular countries will simply be met by further adjustments to global supply chains. 

We also expect that tariff policy could be implemented on specific subsectors of goods, be phased in over time, or significantly reduced based on demonstration of “good behavior” to buy U.S. goods from foreign countries. We took a look at the case of steel and aluminum tariffs in President Trump’s first administration. In March 2018, he announced blanket 25% tariffs and 10% on aluminum imports. The amount of potential tariffs under this act was $10.8 bn. However, Trump agreed to exclude certain countries and to impose quotas on others, and ultimately the Biden administration rolled back most of the tariffs on other countries. Currently, the U.S. generates tariffs of less than $3 bn from steel imports.

Meanwhile, the administration went through a similar exercise with goods from China. As of now, the U.S. generates nearly all current tariff revenue from China ($77 of $79 bn). We do see China tariffs as likely to be raised on certain goods, but we also expect that more production will move away from China as a result.

Overall, we expect that tariffs are a starting point for boosting American industry, but eventually will be negotiated downwards from the onerous “opening bid” by President Trump. Tariffs function as a tax on consumers, and we believe that the imposition of broad-based tariffs, even a relatively small increase, will lead to slower growth. The Tax Foundation estimated the impact of Trump’s proposed tariffs at -0.4% to GDP and raise $1.2 trillion in tax revenue from 2025-34. The impact on inflation is less straightforward, because there is a chance that the tariff revenue leads the Fed to keep rates higher for longer, leading to a stronger dollar, which to some extent will offset the inflationary impact of the tariffs. As well, we expect more goods to migrate to lower tariff regimes. In conclusion, we believe the direct impact of tariffs will prove manageable, but second order impacts such as lower earnings from U.S. multi-nationals, the risk of an all-out trade war impacting consumer sentiment, and higher interest rates may have more meaningful impacts.

2. Good Luck to DOGE, The Deficit Is Structural:

As noted above, we believe tariffs will likely improve government revenue somewhat. However, we caution that the amounts generated are highly speculative and subject to being negotiated lower.Now we take a look at the other side of the government equation: spending.

We have heard a lot of fanfare about the new Department of Government Efficiency (DOGE). Elon Musk and Vivek Ramaswamy have been tasked by incoming President Trump with reducing government waste. The pair have targeted as much as $2 trillion in spending cuts, according to reports. Looking at the reality, however, shows that there is no possible way to reach this level of government spending reduction, without cutting Social Security, Medicare, or Defense, which Trump has said he will not do.

Let’s use 2023 as a baseline. Total government revenue was $4.4 trillion, and spending was $6.1 trillion leading to a deficit of $1.7 trillion. Of that, mandatory spending, including entitlement programs, was $3.7 trillion. Another $659 bn went to interest costs. Discretionary spending of $1.7 trillion was largely allocated to defense, with all other spending at $917 billion.

Some of the items included in non-defense discretionary programs are veterans’ health benefits, the IRS, the FBI, TSA, the Coast Guard, FEMA, NASA, and Pell Grants, to name a few. While we are confident there is room to cut some discretionary items, we find it implausible that all of these programs will be eliminated.

Further we note that Congress, not the President, has the “power of the purse” in the U.S. We believe that Congress is unlikely to approve such drastic cuts to popular programs, and there are restrictions on the ability of the President to not spend money which has been appropriated. In our view, U.S. fiscal deficits are structural, and unlikely to be eliminated by tariffs or discretionary spending cuts.

3. Inflation Sticky:

One of the macro issues that has yet to be fully tamed is inflation. We believe that unless and until inflation returns to the Fed’s 2% goal, markets may struggle to achieve further gains. In particular, the long end of the Treasury yield curve has been punished by the perception that inflation remains sticky. All else equal, this lead to “higher for longer” interest rates, as the Fed attempts to bring down inflation to its 2% goal.

In 2024, inflation did not decline as much as expected. Still, it is important to note that it has declined substantially from post-pandemic peaks. The chart below shows multiple ways that the Fed tracks inflation, with core PCE (left most bars) being the primary target. All of the dark blue bars are targets, the orange bars are the most recent reading, and the light blue is June 2022:

As we look into 2025, we note that the Fed has been consistent in its outlook for inflation to come back down to its 2% core PCE goal in the near term. However, this view has proved too optimistic time and again. The chart shows the Fed’s forecasts since 2021, compared to actual core PCE as of December 2024 (heavy dark blue line):

We remain concerned that the “last mile” back to the Fed’s inflation target is elusive. As of December 2024, even the Fed does not forecast getting back to 2% goal until 2027. The Fed had emphasized the employment half of its “dual mandate” for 2024, but we believe that it may be forced to refocus on inflation given the “animal spirits” likely to drive the U.S. economy in 2025.  . Although the economy has so far coped well with higher rates, we are cautious that at some point the impact from higher interest rates may not be so benign. We see sticky inflation as one of the toughest problems facing the economy for the year ahead.

4. Bond Investing: Convexity and Carry Partially Offset Price Risk:

Bonds remain hard to love, and perhaps with reason.As we have detailed above, we view risks to the yield curve as skewed to the upside given the potential impacts from a higher growth, U.S.-centric boom, coupled with sticky inflation and stubborn deficits. We also note that the transition from an ultra-low rate environment to a more normalized one has handed fixed income investors a third straight year of lackluster total return, even though the Fed started an easing cycle in 2024.

Now, however, we would like to point out the beauty of bond math: as rates rise, the positive carry from higher rates cushions the potential mark-to-market losses from higher rates. Given today’s higher starting point in interest rates, we would have to see a significant further rise in rates in order for bonds to post another losing year, as shown in the table below.

While we can’t say with certainty where rates will go in the short term, what we can say is that the starting point of yields is significantly higher today than it has been in the recent past. We believe this higher starting point in yields offers investors an attractive entry point for clients that are looking for income.

For example, we are currently able to construct 8-12 Y corporate bond portfolios with a low-BBB average rating, that are yielding over 6%. Over the long term, we think this is an attractive return for investors looking for income, even if rates rise from here.

5. U.S. Equities are Expensive, Part 1:

2024 was another year in which equities outpaced bonds.However,when comparing the earnings yield on the S&P to the yield on corporate bonds, we note that equities look very expensive. The chart below tracs the earnings yield on equities versus BBB-bonds since 2000. Investors should expect the earnings yield on equities to be higher than bonds, given their higher volatility and claim on residual cash flows.

However, bond yields are now higher than equity yields by one of the widest margins since the financial crisis in 2008. The average since 2000 is for bond yields to be nearly 1 percentage point (86 bps) below equities. Now the gap is positive 147 bps.

6. U.S. Equities are Expensive, Part 2:

We acknowledge that we were cautious on equities in last year’s Outlook, and yet, equities had another great year. All of the major U.S. equity indices hit new all-time highs, with total returns in the double-digits. The outperformance of equity indexes was largely based on the Magnificent Seven, with concentration of the top 10 S&P 500 stocks now representing 35% of the S&P 500 (the other 493 are 65%).

Looking closer, one driver of the strong performance of the S&P was Nvidia. The chart below tells the story:

Nvidia has climbed by nearly 4x in the past two years, pulling up the S&P index by multiple percentage points on its own. Even though the equal-weight S&P has put in a good showing, it’s been trounced by the market-cap based index.  Or, let’s look at it another way. Warren Buffet’s rule of thumb for whether equities are expensive is to compare the total market cap of equities to U.S. GDP. While this may be an outdated metric in an age of global technology leaders, we still think it’s worth noting.

As of December 2024, U.S. equities are 212% of estimated U.S. GDP, compared to the average since 2000 of 137%.

Based on this simple metric, equities are signaling over-valuation relative to the size of the economy. We caution that we do not try to time the market, and, in our view, U.S. economy remains on solid footing overall. Rather, we encourage clients to rebalance portfolios that may be over-exposed to tech and focus on sectors with more realistic earnings multiples, as we discuss in more detail below.

7. Tech is Pricey, Look Elsewhere for 2025:

We see reasons to be optimistic about equities for 2025, especially in non-tech sectors such as financials and utilities. A look at the chart below shows why. The forward multiple of the S&P 500 is 22x, which is expensive by historical standards. However, most of this is driven by the information technology sector, which is by far the biggest sector within the S&P as well as one of the most expensive.

While the megacap tech giants posted exceptional earnings growth in 2024, that is set to narrow in the year ahead. For 2025, we think it’s time to fade tech and focus on other sectors.

We are most constructive on financials, which should continue to thrive given stable-to-lower interest rates and a more industry-friendly regulatory stance. Trading activity should remain strong on market optimism, with M&A activity to pick up significantly. With cheap valuations, we see improved profitability and revenue trends which seems favorable for the sector. We also expect Utilities to continue to do well in current environment. Yield from dividend payouts will look increasingly attractive on lower rates scenario, combined with improved re-financing and leveraged ROE from lower financing cost and significant bump in most cases from AI-data center demand leading to volume demand rate increases not seen in decades for the sector.

We also highlight the materials sector. For this sector, the worst seems to be behind, with possible EPS positive-revision upside combined with favorable risk/reward metrics. More protectionist political policies led by the new U.S. administration should provide support on a demand/pricing basis. Additionally, this is a leveraged sector that should benefit from lower financing costs on both balance sheet and economic viability of capacity expansion.

We are cautious on megacap tech, given that its multiple is among the highest of all sectors, and well above average at 30x 2025 earnings. Away from the Magnificent Seven, however, we note the industry has many favorable underlying themes and ample opportunities for stock picking. Attractive sub-sectors include FinTech, Cloud-based Services, and SaaS providers, many of which have much more reasonable valuations and compelling risk/return levels.

8. There’s Something for Everyone in Alternatives:

“Alternatives” is a catch-all word that encompasses many varied asset classes that are outside of public stocks and bonds. Most clients have a relatively low allocation to alternatives, but this is changing.

We see the evolution of alternatives as gaining greater acceptance among clients. Alternatives provide diversification benefits as well as stronger returns. We acknowledge that more entrants allocate to Alternatives, some of these advantages may erode. However, we see the shift to Alts as a secular change, with a long runway before we reach this point. Within Alternatives, there are many asset classes, and we are able to tailor portfolios based on client’s goals and risk appetite.

Our favorite opportunity for 2025 is private equity. We expect to see expect increasing primary deal flow from lower financing costs in LBOs along with a more permissive regulatory backdrop, significant dry powder, and lower private company valuations compared to public peers. We also an ongoing opportunity in Secondaries, albeit but with discounts narrowing. 

Real estate is another attractive entry point. Real estate has been under stress from the higher rate environment, with specific subsectors struggling under post-pandemic occupancy trends. However, we sense that the worst is over, with interest rates now stabilizing, higher return-to-office mandates. and positive business sentiment. Multifamily has relatively low inventory and high demand, as renting is economically advantageous versus ownership, which should support performance of this segment. Industrial properties and infrastructure are reliable from strong optimism in the economy and increasing expansionary plans.

To round out Alts, we are constructive on private credit, although slightly less so than in 2024. As rates come down, this is a slightly less attractive asset class given its floating-rate structure. That said, many supportive themes continue to play out, especially an increase private equity activity providing new credit supply, and a significant amount of maturing debt. These financing needs will not be fully serviced by the traditional broadly syndicated bank loan market, giving private credit room to grow.

9. Look Beyond the U.S.: Short-Term headwinds, Long Term Positives:

Our next stop is to discuss markets outside of the U.S., with a particular focus on Europe and LatAm. We note that the relative performance of European vs. U.S. equities continues to widen. Since 2012, the MSCI Europe has doubled while S&P has risen nearly 5-fold.

A comparison of P/E ratios shows that Europe is consistently cheaper than the U.S. The average discount in P/E terms for Europe since 2020 has been a multiple of 7x, with the S&P usually over 20x and MSCI Europe in the mid-to-low teens. Although these lower multiples are also a function of lower structural growth in Europe, we believe that the size of discount should narrow.

Another area we like is emerging market debt. The premium for emerging markets bonds remains relatively high, and we believe that these economies can show long-term growth trends that are superior to the developed world.

Although spreads in Emerging Markets debt are below the long-term average, the yield is above the long-term average.

For clients that are income-oriented, we believe the pick-up in yield for Emerging markets debt is attractive. In the short run, a domestic-oriented U.S. economy and a stronger dollar could be headwinds for emerging markets. However, we over the longer term, fiscal discipline from these countries and better long-term growth prospects make EM debt attractive.

10. Expect the Unexpected: Risks Abound:

Our first nine bullets highlighted some of the macro and market trends we expect for the year ahead. For our last point, we acknowledge that we do not know the future.

Despite our overall constructive stance, we see many potential risks. We are particularly concerned about exogenous events in the geopolitics, such as the potential for a global trade war. Although President Trump has pledged to end hot wars in Russia/Ukraine and the Middle East, we caution that these issues are not easily solved, or they would have been settled already.

Below we partially reproduce a list from Apollo, articulating various market risks in the year ahead, which we consider to be instructive, but not exhaustive:

We also note that incoming President Trump’s own management style seems to value surprise and unpredictability.  For example, one headline crossing the tape as we are writing this outlook is that the U.S. is interested in acquiring both Greenland and the Panama Canal. While we don’t assign any material likelihood to these musings, the fact that they are even being articulated by our President-elect probably meansthat we are in for higher market volatility in 2025. We note that the VIX has been unusually benign recently, currently at 17.9.

Meanwhile, interest rate volatility has already been in a higher volatility regime since 2022, which we expect to persist.

So, we anticipate volatility to be elevated, especially as the new Presidential administration takes office and attempts to address its policy priorities.

Happy New Year from Amerant

We conclude this outlook by wishing a happy new year to our clients and readers. Markets are always changing, and often challenging. Our goal with this outlook is to provide our thoughts on likely market drivers for the year ahead. We do not forecast index-level returns or interest rates, mainly because we do not pretend to know with any confidence where these things will be in twelve months time. Rather, we are focused on providing thoughtful discussion points for clients as we work with them to achieve their financial goals. As always, we recommend maintaining a diverse portfolio across asset classes over a period of many years to generate long-term returns without excessive volatility. 

We take our responsibility seriously and look forward to serving you in the year ahead.

Definitions, sources, and disclaimers

Definitions:

• Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
• GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
• The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
• Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
• The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
• The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
• The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
• Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
• Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
• The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
• The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).

Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).

Financial Markets – Monthly and YTD returns (Table): Asset class performance is in USD and refers to the following indices: Equities: US Large Caps (S&P 500), Emerging Markets (MSCI EM), Europe (MSCI Europe), Japan (MSCI Japan). Fixed Income: 10-Yr. US Treasuries (BofAML US Treasury Current 10-Yr.), Emerging Markets Sovereign (USD) (JPM EMBI Global), US High Yield (BofAML US HY Master II), US Investment Grade (BarCap US Aggregate Bond), and Developed Markets Sovereign (excl. US) (JPM GBI Global Ex US). Source: Morningstar.

Important Disclosures:

The information provided here is for general informational purposes only and should not be considered a customized recommendation, personalized investment advice offer, or solicitation for the purchase or sale of any security or investment strategy. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own situation before making any investment decision.

This information is obtained by AMTI from third-party providers from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.  All expressions of opinion are subject to change without notice in reaction to changes in market conditions. By using such information, you release and exonerate AMTI from any responsibility for damages, direct or indirect, that may result from such use. Consult the issuer of any investment for the most up-to-date and accurate information.

All references to performance refer to historical data. There could be benchmarks used that do not reflect the performance of funds or other products with similar objectives

Presentation does not apply in jurisdictions where its use has not been approved. Some products or strategies may be complex or unusual. Make sure you have a clear understanding of the products before investing. Investments may have different tax consequences in different jurisdictions and will depend on the circumstances. AMTI does not offer legal or tax advice, please consult your legal, CPA, or other tax professional regarding your situation.

Before investing you must consider carefully the investment objectives, risks, charges and expenses of the underlying funds of your selected portfolio. Please contact AMTI to request the prospectus, private placement memorandum or other offering materials containing this and other important information. Please read these materials carefully before investing.

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Additional Risks:

• Past performance is no guarantee of future returns.
• There is no assurance the Fund will pay distributions in any particular amount, if at all. Any distributions the Fund makes will be at the discretion of the Fund’s Board of Trustees
• There can be no assurance that any Fund or investment will achieve it objectives or avoid substantial losses. Actual results may vary
• The value of the investments varies and therefore the amount received at the time of sale might be higher or lower than was originally invested. Actual returns might be better or worse than the ones shown in this informative material.
• Limited liquidity: Investors should not expect to be able to sell shares regardless of how the Fund performs. Investors should consider that they may not have access to the money they invest for an extended period of time.
• Volatile markets: Because an investor may be unable to sell its shares, an investor will be unable to reduce its exposure in any market downturn
• Funds may invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. They may also be illiquid and difficult to value

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