Investment outlook
2025 Q2 outlook: Wheels down, elevation up: Five themes for a new economic landing
Listen to this insight
~ 6 minutes long
10
10
Key takeaways
- Still-high inflation and interest rates, combined with signs of slowing economic growth, are creating a bumpy, higher-elevation environment.
- This backdrop requires a new approach to portfolio construction, detailed in our five themes for 2025.
- We suggest a focus on credit selectivity; see specific opportunities in municipal bonds, real estate, infrastructure, and U.S. small caps; and also offer our best ideas across asset classes.
Explore the investment outlook by section
- Section 1: Wheels down, elevation up
- Section 2: The economy and markets: key points to know
- Section 3: Asset class heat map
- Section 4: Five themes for 2025
- Section 5: Best ideas across asset classes
Section 1: Wheels down, elevation up: Five themes for a new economic landing
Saira Malik, Chief Investment Officer
Our year-ahead outlook introduced the concept Wheels down, elevation up: Five themes for a new economic landing. The U.S. economy, we wrote, was poised to touch down in a way that didn’t quite fit conventional definitions of a “hard” or “soft” landing, as inflation and policy rates were settling but remained structurally higher than their pre-Covid levels.
While we’ve experienced unanticipated bumps on the final approach to the runway in the form of increased policy uncertainty and market volatility, today’s dynamics still point to the same or similar investment themes we saw at the start of the year.
We see these five key portfolio construction themes on our radar:
1. Relative spreads and credit selection, not risk-free rates, will drive returns in public and private debt markets. This has generally held true and should continue, as only modest U.S. rate cuts and a range bound Treasury market are expected this year. Focusing on relative spreads and credit sector selectivity rather than duration positioning seems like a better strategy for the coming year.
2. Municipals are still the borrower of choice for investors who are in it for the duration. Notwithstanding our broader de-emphasis of duration, it makes sense for some investors to consider a barbell approach, balancing shorter-to-intermediate duration in taxable credit sectors with longer-duration muni exposure. The muni yield curve is steeper than the U.S. Treasury curve, and municipal credit fundamentals remain solid.
3. Real estate reality: it’s at a turning point. Real estate is on the rebound. Demand is rising as prices stabilize, fundamentals recover and liquidity improves. Real estate performance turned positive in the most recent two quarters, a trend historically associated with longer-term upcycles. In particular, we see opportunities in the industrial and alternative property sectors. We also like publicly listed real estate investment trusts (REITs).
4. Energy demand charges ahead of capacity, creating opportunities amid political changes. Artificial intelligence (AI), along with increased capital expenditures on power generation and transmission, is fueling a new energy boom. Power-related infrastructure investments, both public and private, may benefit more than pure AI-related plays. In the U.S., the Trump administration will likely bolster investments in traditional fossil fuel sources and pipelines. That said, we still expect the green energy transition to persist globally, especially in Europe.
5. Small caps are suiting up for the big leagues. Our prior upgrade of U.S. small cap equities now looks premature, as these stocks have underperformed. Nonetheless, we’re optimistic that attractive relative valuations, positive earnings growth revisions, historical performance patterns and changed U.S. political priorities (lower corporate tax rates, less regulation and more protectionist trade policies) will create tailwinds for this asset class.
All told, investors will feel tension between countervailing forces in the coming year: slipstreams that help move the economy and markets forward, and crosswinds making it more difficult to land smoothly. The key is not to let fear of flying prevent you from reaching your destination, but rather to be prepared for risks and alert to opportunities.
All market and economic data from Bloomberg, FactSet and Morningstar.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy. Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.
Nuveen, LLC provides investment solutions through its investment specialists.
This information does not constitute investment research as defined under MiFID.
