We’re charged up for 2025. This week, we examine what’s powering BofA Global Research analyst expectations for higher margins and productivity, how U.S. inflation and EU reforms could jolt currency markets and which factors are fueling U.S. bank optimism.
Soon after the U.S. election, the Global Economics team surveyed our fundamental analysts on their 2025 expectations.
The survey suggests a fairly sanguine big picture view. A key finding is that 3x as many U.S. analysts expect company margins to be higher in 2025, even in the face of tariffs. Consistent with this, most U.S. analysts expect growth rates for prices to decelerate without additional U.S. tariffs while around 50% see scope for accelerating prices if tariffs are implemented. Our European analysts think disinflation is likely in either scenario. Similarly, analysts expect more deflationary pressures in China with tariffs while prices could rise in APAC-ex China. Almost half of U.S. respondents expect productivity growth to increase in 2025, even on top of 2024’s improvement.
U.S. inflation and EU reform are two major themes for foreign exchange (FX) markets this year.
G10 FX is already at historical extremes with the U.S. dollar at 55-year highs in real effective terms, and the euro near parity. Our FX strategists forecast EUR/USD to rise to 1.10 by year-end, well above 1.04 for consensus. Our strategists assume that the U.S. policy mix will not be inflationary, consistent with a U.S. dollar peak in 1Q. But dollar strength could be limited even if tariffs, taxes, and less migration stoke inflation. In this case, either the Fed would have to trigger a hard landing to bring inflation down or markets would get concerned about deteriorating debt dynamics. Alternatively, markets look too negative on Europe. Our strategists think risks for the euro are asymmetrically positive with a low bar for potential surprises e.g., looser German fiscal policy, more defense spending, progress on Draghi reforms, and peace.
The outlook is bright for U.S. bank stocks as discounted valuations, positive EPS revisions, and increasing buyside ownership should drive outperformance.
Customer activity is expected to rebound with M&A/IPO activity leading the way. Deal counts in 2024 were depressed relative to history with just 131 U.S. IPOs (vs. 158 5yr pre-pandemic average) and 9,946 U.S. M&A deals (vs. 12,733 5yr pre-pandemic average). Private equity and venture capital investors are sitting on about $9 trillion in unrealized value and monetization events should support a cyclical rebound in capital markets activity. Regulations are also likely to shift and competition with non-banks should heat up. U.S. Bank analyst Ebrahim Poonawala thinks commercial real estate stress is unlikely to worsen unless the job market slows. Risks are a spike in Treasury yields, Fed hikes, a sharp sell-off in stocks, and heightened policy uncertainty.
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