2025 Mid-Year Outlook: Macro, Equities, Retail, Funds, RMBS, CMBS, And CLO Insights

FTSE Russell's 2025 Mid-Year Outlook indicates a divergence in global monetary policy, with European central banks easing while the Federal Reserve remains cautious. The outlook notes persistent macroeconomic concerns, including US and UK debt-to-GDP ratios exceeding 100%, which contributed to a Moody's downgrade of US Treasuries, steepening yield curves, and a weaker dollar. Despite these macro pressures, S&P 500 earnings remain resilient with global earnings revisions bottoming, while Agency RMBS also shows stability due to steady issuance and improving market sentiment.

Analysis

The mid-year outlook presents a bifurcated global economic landscape, characterized by a significant divergence in monetary policy and asset class performance. While European central banks have initiated an easing cycle, the Federal Reserve remains cautious, creating cross-currents for international capital flows. This is compounded by severe fiscal pressures in the US and UK, where debt-to-GDP ratios now exceed 100%. This strain was explicitly recognized by Moody's downgrade of US Treasuries, which is contributing to a steepening yield curve and a weaker US dollar. Despite these macroeconomic headwinds, corporate fundamentals exhibit notable strength, with S&P 500 earnings proving resilient and global earnings revisions showing signs of bottoming out. In the fixed income space, the Agency Residential Mortgage-Backed Securities (RMBS) market has also demonstrated resilience, supported by steady new issuance, a modest acceleration in prepayments, and improving market sentiment, suggesting pockets of stability within a complex macro environment.

Key Decisions for Investors

• Given the divergence in central bank policy and pressure on the US dollar, investors should evaluate portfolio exposure to non-US assets and consider strategies that benefit from a weaker dollar.
• The contrast between resilient S&P 500 earnings and fiscal pressure on US Treasuries suggests maintaining a constructive view on US equities while exercising caution with long-duration sovereign debt sensitive to yield curve steepening.
• For fixed-income allocations, the noted stability in Agency RMBS presents a potentially attractive alternative, offering resilience backed by steady issuance and improving sentiment amid broader sovereign debt concerns.
• Closely monitor the trajectory of global earnings revisions, as their confirmed bottoming is a critical factor supporting the positive equity outlook against the challenging macroeconomic backdrop.