From Forecasts to Facts: Revisiting 2025’s Investment Themes

From Forecasts to Facts: Revisiting 2025’s Investment Themes

Anu Rajakumar: In November 2024, Neuberger Berman's senior investment leaders met to consider the upcoming year and to prepare for the challenges and opportunities of 2025, identifying the key themes they expected to see play out in the markets and the economy. This was published in our annual Solving for series. Now, as we reach the midpoint of 2025, it's time to reflect on those themes: in a year that has been characterized by significant uncertainty surrounding US trade and fiscal policy and dramatic market drawdowns and recoveries.

We're going to take an honest look at what we got right, where we were surprised, and how these insights inform our thinking for the remainder of the year. My name is Anu Rajakumar, and joining me to discuss our outlook today are Shannon Saccocia, chief investment officer, Wealth, and Jeff Blazek, co-chief investment officer of Multi-Asset.

Together, we will review our original themes, assess how they played out, and discuss what investors should watch for in the second half of 2025. Shannon, Jeff, welcome to Disruptive Forces.

Jeff Blazek: Thank you, Anu.

Shannon Saccocia: It's great to be back.

Anu: Great. It's good to have you back, Shannon and Jeff. Welcome to your first podcast with Disruptive Forces.

Jeff: My first time. Very excited.

Anu: We're excited to have you. Jeff, let's start with you. At the start of the year, we forecasted above-trend US economic growth supported by ongoing industrial policy, contained inflation, and moderating rates. As you look back over the last six months, did you find that the themes played out as expected? And, were there any surprises that really stood out to you?

Jeff: I think it's fair to say that it was a bit different than we expected.

Anu: A bit surprising. All right, go on.

Jeff: It was quite a start to the year, as we all know. Just to reiterate, the thesis coming in, we had expected a sustaining above-trend economic growth. Really, that dates back to 2021 after the emergence from COVID. In 2021, the economy grew 6% plus. Every year after that, even in 2022, we saw real GDP growing in excess of 2.5%. We kicked the tires in the thesis and said, "What drove that?" It's two things: strong consumer spending and healthy balance sheet liquidity. We saw that as well as the fact that the Trump administration, to us, was going to have quite a pro-growth set of parameters around their policies.

Now, we did know that trade was going to be on the front burner, and we knew that that might be the choppy part. I think where we got this a little wrong was the fact that the trade ended up being a lot more disruptive and all-out chaotic when we got to liberation day. What that caused, first of all, is a re-rating downward of economic forecast this year. Our initial forecast of 2.4 to 2.5, we have taken down call it more like 1.4%. That's still solid growth, but no, it's not above trend.

The other thing is we saw a technical contraction of the GDP growth rate in the first quarter, and that was because we actually had five percentage points of adversity from imports, a lot of front loading, a lot of uncertainty. We did not get this right. If we had to grade ourselves, we're probably getting ourselves a B minus or a C. The consensus has also come down to this view. The good news is that while there still will be a lot of volatility to come, we think the pro-growth elements of the new administration, the bill was just passed in terms of legislation, we're going to talk a lot about that as well as deregulation. A possible pickup in M&A, we think, will be conducive to growth in the second half of the year.

Anu: I was going to say, everyone, I think probably got the initial forecast wrong coming into 2025 as well, so you're not alone. Shannon, another theme in Solving for 2025 was this idea of an expanding soft landing that was really focusing on broadening real income growth. Did we see those benefits materialize across the economy?

Shannon: It's a great question. I think one of the things that we really focused on when we were thinking about this theme is it was against the backdrop of a flurry of global elections. We kept hearing surprising results coming out of all of these elections. It really had to do with the fact that many consumers and small businesses, despite the significant recovery experience coming out of COVID, they didn't participate to the same extent as certain parts of the population.

One of the things that I think was really driving a lot of the incumbent losses in those elections was just this desire for change, and based on truly economic change coming to these populations. One of the things we were looking at was what could be the driver of perhaps improved consumer confidence, perhaps reinvigoration of investment, not only on the consumer level, but on the business level. One of the things we kept coming back to was this spreading out of income growth. We experienced this pretty market acceleration and wage growth post-COVID, but also it was coupled with a pretty rapid acceleration in prices, and then met with much higher interest rates.

As our expectations for lower interest rates, against that backdrop, add to that a disinflationary force, and no real catalyst for wages to deflate. We felt that that could really be the foundation, if you will, or the chassis for this broader real income growth. We've seen it. If you look at May, for instance, here in the US, on a year-over-year basis, wages were growing almost 4%, whereas inflation is under 3%. That differential, that delta, provides that feeling of real income growth that we were looking for. We're seeing evidence of it in Europe as well.

Now, what we haven't seen is the improved consumer confidence that we were anticipating. We've continued to see consumer spend pretty meaningfully. I think that especially middle-income and high-income cohorts of the economy are participating in terms of spending. That confidence is only starting to show some signs of life. I'd say we're a little bit of a wait-and-see in that aspect in the second half of the year, but certainly moving towards that trend and seeing that real income growth that we were seeking coming into 2025.

Anu: Absolutely. Do you think that the bill will help improve consumer confidence for the rest of the year?

Shannon: It's interesting. If we think about that K-shaped recovery coming out of COVID, and you think about, again, that divergence between higher-income and lower-income cohorts, I think the bill does a little bit to support lower-income cohorts. It's probably more meaningful for higher-income cohorts coming out of this bill. However, I think on the confidence level, just having some certainty around that particular aspect of policy should certainly be, I think, foundational in terms of improving confidence versus the uncertainty of both tariffs and taxes that we were facing over the last couple of months.

Anu: I think that idea of the uncertainty is just such a big component of just where the people or companies can spend on CapEx or R&D, where they need the clarity. I think we've at least seen some of that so far. Jeff, looking at equities in particular in the Solving for publication, we had expected leadership in equities to broaden beyond the so-called magnificent seven stocks. As you reflect on the first six months of the year, has the market breadth improved as anticipated?

Jeff: Yes. In calling for expanding leadership in the equity market, and we, as we said very bluntly, there are more than seven stocks, I think we've been validated on this one. We can just look simply at the performance of the year-to-date period, and look, first of all, at the magnificent seven themselves. These are great companies, to reiterate. Out of the gate in the first quarter, they were down as much as 26%. There was the DeepSeek phenomenon that feels like an eternity ago in January, but that put a little bit of blood in the water on some of those names.

They did recover in the second quarter, but year-to-date, the magnificent seven are still only up about 1% to 2% through June. In fact, Apple and Tesla are still down about 20% as they have their own challenges. Compare that to the broader S&P 500, which was up over 6%. Compare that to the MSCI ACWI ex US. That'll include both developed and emerging market stocks outside the US. Those are actually up substantially, 18%.

Now, a lot of that, to be fair, is the weak dollar, so the translation effect added a fair amount. Even in local terms, those stocks were up about 7% or 8%. The broadening out worked. We thought it made sense to lean away from the US, to lean away from the mega cap tech names, and that thesis has played out. By the way, we think there's more for this to run. The attractive evaluations that they have. We like Japan, Europe, and China specifically. We can go into detail on that, but we like this part of the thesis.

To be fair, there is one element of this that we didn't quite get right, or we've been early, which is small and mid-cap stocks. So, our asset allocation committee has been overweight small and mid-cap for two or three quarters. We liked the valuations. We thought the pro-business aspect was going to be helpful to them, and the uncertainty that we've been discussing was unfortunately a problem. As Shannon will discuss as well, the interest rate environment is quite complicated. Higher rates in general are bad for smaller businesses that have more debt, they have more floating-rate debt. Both of these were significant headwinds. In fact, we look mid-caps were up marginally, and small caps are actually still negative on the year.

After a lot of debate, Shannon can attest to this. We're both members of the committee. Believe me, we talk a lot about small caps, but we think we are going to stick with this overweight. The valuations are favorable. Now, the pro-business impulse will hopefully start to work for small caps in the second half of the year.

Anu: Shannon, do you still agree with the small cap? That it's going to work out at some point in 2025?

Shannon: Yes. If you look just at positioning, if you take the fundamentals and the macro environment out of it, there's a lot of positioning aspects potentially moving from some of this overweight to large cap, not only here in the US but outside of the US to small caps, not only here in the US but outside of the US as well. That cap shift, I think, there's an impulse there that probably is likely to be captured in our view in the second half of the year.

Anu: Yes, sure thing. Again, back to that bill. I do think that the big, beautiful bill will also likely benefit those small and mid-cap companies with their domestic bias. I think that's what the administration is really hoping for as well. [00:26:07] Anu: You mentioned non-US stocks. We'd love just to dig into that a little bit further. What's driving the view where you are favoring non-US equities at the moment?

Jeff: A lot of our conversations so far has been focused on the economy in the US, and it is the largest, but we think that the stimulative effects in Europe and in China and other parts of the world are going to be a positive tailwind for economic growth. Not only that, when we look at the European Union and their inflation rate, it is more under control than it is in the US, which gives the ECB leeway to be cutting rates. They're doing that. That's going to be stimulative. We look at the weak dollar, and the strength of their currencies is going to help them on the inflation front.

From a policy standpoint and from a fiscal standpoint, they've got a lot of things going right. When we look at the Germany stimulus in particular, whole sectors like defense and infrastructure are going to benefit from direct taxpayer dollars that will be deployed fairly quickly. We are constructive on the economic growth outlook in Europe, especially. It's going to be more competitive than it has been in years relative to the US, and to us, that will be a great tailwind for European assets.

Shannon: The other thing I would mention is Japan. There's been so much change in terms of the Japanese consumer in terms of the return of shareholder value to investors from management teams in Japan. If you harken back to some of the broadening that we talked about, small businesses, there are a lot of small businesses in Japan, which can benefit from these shifts that we're seeing in terms of the Japanese economy. So, you couple that with a commitment to fiscal stimulus, which we've shown here in the US certainly works to help amplify growth. Our view is that it's well beyond just that valuation differential that for so long has been the justification for investing in equities outside of the US.

Anu: Yep, sure thing. Shannon, we also anticipated a shift in focus from Fed watching to fiscal policy in the Fixed Income space. Did you find that that transition occurred, and what does all this mean for fixed-income investors now?

Shannon: I have to commend Ashok Bhatia, our CIO of Fixed Income, and the rest of his team because they nailed this, so that's great.

Anu: Kudos to the fixed income team.

Shannon: Absolutely. Coming off of several years where it felt like we were sitting, standing, walking on eggshells around every Fed meeting to think about that line in a Powell response or that one or two words changed in the statement, it seems like they've really moved on to the back burner. That's because all of us are focused on what's happening in Washington, whether it's coming out of the White House or it's coming out of Congress. That's really what's moved the treasury curve this year.

Coming into this year, the team talked about maybe a wide range around 4¼% for the 10-year. It's been a pretty wide range around that. I think that they admitted that, depending on what was happening in terms of tariff revenue generation, depending on what was competing with the OBBBA, what that looked like, that there would be some volatility in the long end of the curve. I think if you take a step back, what's most important here is that the concept of term premium, which is so important for banks, it's so important for investors, it's so important for the functioning of the fixed income market. Term premium is back.

Really, what it does is it sets up teams such as ours to be able to invest and find opportunities in fixed income by modifying duration, by thinking about credit quality, by thinking about those in parallel. For us, this was an area where looking just at fiscal and thinking about it in terms of where responding to something that's happening, this exogenous shock on the curve actually created a lot of fixed income opportunities in the first half of the year. Now, will it remain such? Does the Fed come back into focus as we look towards the second half of the year? I think so.

If you think about the marginal utility of that next rate cut, we're targeting two rate cuts. Is that really going to change all that much, the yield dynamic? Probably not. Instead, we think that these fiscal forces, not only here in the US but outside of the US, are going to continue to be paramount in terms of the functioning of the market.

Anu: Any comments on long-term rates based on fiscal situation here? How are you thinking about that?

Shannon: I think interestingly, one nuance to this is that coming into this year, I think we thought long-term rates would be moving a bit more on growth expectations. We've seen that in short-term periods where rates have moved significantly on perhaps in lackluster non-farm payrolls report or on negative GDP that we posted in the first quarter based on net exports. I think we're continuing to see that that's really being driven not from the expectation of growth, but again, fiscal sustainability concerns.

So, that could shift going into 2026 once we have a little bit more clarity on tariff revenue offsets, how the OBBBA actually unfolds, and what it does to the deficit. I think for right now, concerns about fiscal sustainability is offsetting some of the growth concerns that could be affecting the long end of the curve.

Anu: All right, great. Thank you very much, Shannon. Jeff, in alternatives at the beginning of the year, we expected conditions might be right for a rebound in private markets and M&A activity. Unfortunately, tariff uncertainty has, I think, held back a lot of that expected deal and exit activity. Tell us a bit more about the landscape and what you've seen over the last few months in private equity.

Jeff: This was another prediction that fell prey to the trade uncertainty, a similar theme, but technically, first of all, there was an uptick in deal value. It's off a low base of last year, not where it needs to be. We want more IPOs, and it was fairly narrow. The broadening out theme we hope will apply to M&A. There'll be more robust activity. The good news is the regulatory backdrop to us is going to help lubricate the engine of this and get it into motion.

We think that the outlook for M&A in the second half of the year is quite bullish. Now, in privates, in particular, it's been fascinating to see how this has played out. First of all, we are in a bit of a lull when it comes to distributions, depending on where you're involved, but that has caused a bit of a up in liquidity for private investors, and the lack of M&A is highly correlated to that. In terms of our outlook, when we did the Solving for piece, again, we got this one a little bit wrong, or perhaps it's just going to be more lacked. The good news is, we see incredibly compelling valuations in privates, and that is both in private equity and private real estate.

Now, private debt, we are neutral. We should be clear, though, that we still like the relative advantage you get in yield in private debt for those investors that can take on the illiquidity. Just to give you some comparatives, we think you can get unlevered returns of 9% to 10% in yield on private debt, and that's still a healthy premium over high yield, which is more like 7%. Our overweight [rating]s are expressed in private equity, which trades about three times cheaper as a multiple EBITDA compared to public market equivalents.

Then private real estate, the cap rates have gotten quite interesting, and there are still areas where there is undersupply in the market, so we think there could be great ways to play real estate. Across the board, regardless of what you're getting involved in, and independent of M&A, let's say M&A doesn't come back, we think that investors are rewarded if they can provide liquidity in terms of private investments. What that might mean is doing things like secondaries, LP-led or the growing GP-led, these continuation vehicles where prized assets can be put into an extension vehicle, and you have great transparency, I think your last podcast covered that well.

Anu: I was going to do a shameless plug, but I'm glad you did it for me.

[laughs]

Jeff: Yes, I did it for you. But, in addition to that, we think co-investments, getting more directly involved in that area, and capital solutions where you can be more in the mezzanine part of the capital structure, getting equity-like levels of return, but with protections that are more commensurate with fixed income. All of these to us are great ways to capitalize on the great valuation, but not be as tied to the liquidity or lack of it, if indeed M&A doesn't come back. So we think privates are well primed to perform quite well for investors in the next few years.

Anu: Terrific. Now, I do want to commend both of you. Through the last six months, you have both been very active in communicating to clients during the periods of immense volatility. Shannon, how important is it to you to be transparent, even in moments like this, where we have put out forecasts, where we've missed the mark? Why does that, honestly, that transparency matter for clients and for listeners?

Shannon: I think the transparency is important because it signifies the conviction behind our views. So, it would be very easy for us to come into the beginning of the year and say, "This could happen, but also this could happen," and hedge all of the things that we talk about. We may not be doing that in our portfolios. We may be taking significant positions or exposures on because we believe that, but we may not want to go out there into the ecosystem, into the media, and provide those views for the risk of potentially being wrong.

However, you learn from your mistakes. I think one of the things that we found is even where Jeff was talking about earlier, how perhaps our views on growth this year were upset to a meaningful extent by what was happening with tariffs, we were iterating, we were discussing, we were thinking about all the different scenarios. I think what that pushed us to do was it really pushed us to look beyond just that GDP expectation, just that CPI expectation, to the second, the third, the fourth layer. Look down at the fundamentals of our companies.

Hear what company management was saying to us. Was that corroborating what we were seeing from a macro perspective? Was it corroborating what we were hearing from the political narrative? I think one of the things that this transparency provides is it provides us an opportunity to take a step back and do our job even better, because did we have the rationale for that view? What were the things that upset that projection? What are we going to do next time in order to incorporate this into our decision-making process? If you don't ever have to answer for your decisions, there's no impetus or catalyst for you to think about your decision-making process and try to improve it.

Jeff: I would build on that and say the accountability of owning what worked and what didn't work is imperative, and we're quite transparent and visible about that. It should also be clarified that the asset allocation committee these are 6 to 18-month horizons by which we want to be measured on those type of calls. We have been highly active across our entire firm. You mentioned Ashok already, his team has done such good work on rates.

In the multi-asset group we have had two fairly successful trades, which is short the dollar and long gold. Just under the premise that there were going to be some significant pain points for the dollar. These are the things that you have to be dynamic and on top of. We try to be visible on those two, but it's quite different than our longer form asset allocation views. All of this requires a multi-asset and team approach across all of Neuberger Berman.

Anu: Absolutely. No, I think the asset allocation construct, at least it is designed for discussion and at times, hotly debated topics, where you really do have to hash out the views across sometimes very high convictions that might be completely opposite end of the spectrum. Final question from me today is, as we look ahead to the second half of the year, I'd love to hear what your top two or three market drivers or risks are that you're watching and being mindful of as we look to close out 2025. Shannon?

Shannon: Sure. One of the things that we're watching very closely is the immigration situation here in the US. As I mentioned earlier, wage growth is continuing to move higher, but at a slower rate. We anticipate that we could see continued noise in employment numbers as some of the immigration really pulls back, and we start to see things like the participation rate continuing to go lower in the US economy. The housing market is also very interesting here in the US. We're starting to see an incremental tick up in supply.

If we are truly on the precipice of even a couple of additional interest rate cuts, that could be the catalyst to drive the housing market forward and be once again an additive force in the US economy from a growth standpoint going into 2026. Those are two very specific US things that I'm looking at. Then finally, I think one of the things we didn't spend a lot of time on, but the expensing of software that's in the OBBBA, that could actually provide another lift to the AI enablers and the tech trade that we perhaps are thinking that we were moving into the second phase of agentic AI and the integration of AI into businesses. That could actually be something that helps those enablers once again, and they've certainly had plenty of tailwinds over the last couple of years.

Anu: Sounds like potentially a good reason to invite you back to the podcast with some more thoughts on that topic. [laughs] Jeff, anything from you?

Jeff: Those are excellent drivers. A couple I would add to the list would be the way that inflation progresses the rest of this year. And if we had a time machine and could see core PCE in October or November, that would tell us so much. We'll end up accelerating to 3%, 3.5%, 4% 4.5%. We don't really know in part because we still don't know what the tariffs will be, but that is going to drive so much of rates and equities, and so that, I think, is going to be one of the elements to watch. The other thing I think a lot about, you mentioned immigration, but the employment picture, where it has been amazing how resilient non-farm payrolls have been, even unemployment claims have been quite stable.

That is a critical engine of consumer spending that drives this solid economic growth we've had for so many years. If there is a pullback in the employment market, then that will test all these assumptions. Right now, no evidence, and we look at the hard data, the soft data. We look everywhere we can, but that'll be one that we just continue to watch every week and every month.

Anu: All right. We have wage growth, employment, housing, and the expensing of software, which was one that I didn't have on my bingo card. I like that a lot. I think with all this, there's so much noise out there as well that it really is so important to separate the news from the noise and really focus on what the signals are. Those are excellent comments. Thank you very much. Can't let you both go without a quick bonus question.

Today, we've been reflecting on the investment themes that were set at the beginning of 2025. I'd love for you to tell us about a personal goal or resolution that maybe you had coming into 2025, and if you did have a scorecard for how that particular goal or resolution is going, we'd love to hear it.

Shannon: I'll go first.

Anu: Yes.

Shannon: I had promised myself that I would spend a little bit more time outside and walking, and making an effort to walk at least five days a week. I am achieving and actually overachieving-

Anu: Crushing it. Okay. [laughs]

Shannon: -that goal at this point. I think the stress, particularly in this role and right around tariff time, I started to feel like maybe I couldn't. But I think just being able to take some mind space and get away from this. So, I'm quite pleased with myself.

Anu: Good. That's excellent. No, it's really--

Shannon: I would give myself four to five stars on that one. [crosstalk]

Jeff: You're right about that. How many Sundays in April did we see each other's faces on Zooms-

Shannon: A lot.

Jeff: -in these emergency meetings?

[laughter]

Jeff: My own ambition this year and a goal is to get back in the saddle of running marathons

Shannon: We're right on the same page.

[laughter]

Shannon: The same level of physical activity.

Anu: Basically the same thing, yes.

[laughter]

Jeff: Well, I joined Neuberger about a year ago, and that didn't seem like the ideal time to be taking something on like a marathon training. Now that I'm a bit settled, and hopefully the tariff news and such will cooperate, I am eager to run the New York Marathon this year, so that's my goal and we'll see how it goes.

Anu: That is terrific. Which charity are you running for this year?

Jeff: I absolutely will plug this publicly. You Gotta Believe, which is a New York-based nonprofit that helps place foster kids, that are older foster kids, so teenagers or pre-teens, so an amazing cause of what they do.

Anu: That is fantastic, and I appreciate that both of your goals for 2025 included health and wellness, and I'm glad to hear that they're both going very well. Thank you very much for those. Today, we've been reflecting on the investment theme set at the beginning of 2025, and again, our publication is called Solving for 2025, if you wanted to go back and take a look at it. Thank you both for sharing those perspectives with us today, and we're looking forward to seeing how 2025 plays out. Shannon, Jeff, thank you very much for joining us today.

Shannon: Thank you.

Jeff: Thank you.

Anu: To our listeners, if you've enjoyed what you've heard today on Disruptive Forces, you can subscribe to the show from wherever you listen to your podcast, or you can visit our website at nb.com/disruptiveforces where you can find previous episodes as well as more information about our firm and offerings.

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