Why this stock-market strategist expects no recession and zero rate cuts in 2025

Hedgeye Risk Management CEO Keith McCullough forecasts no U.S. recession and no Federal Reserve rate cuts through 2025, citing rising growth and inflation rates. Consequently, McCullough has reduced his Treasury and gold positions, expressing comfort without exposure to U.S. government debt and favoring high-yield corporate debt, as high-yield spreads do not suggest an imminent recession. While still recommending long positions in the euro, Australian dollar, and European stocks, McCullough is less bearish on the U.S. dollar, anticipating support under these economic conditions.

Analysis

Keith McCullough, CEO of Hedgeye Risk Management, articulates a clear macroeconomic outlook diverging from widespread recessionary fears, projecting no U.S. recession and an absence of Federal Reserve rate cuts through 2025. This forecast is predicated on his observation that the rates of change for both U.S. growth and inflation are trending upwards. Consequently, McCullough has strategically reduced his firm's exposure to U.S. Treasurys, stating he does not foresee the 10-year U.S. Treasury yield dropping significantly below 4.43%, and has also minimized gold holdings. In contrast, he is actively holding and increasing positions in high-yield corporate debt, interpreting the stability of high-yield spreads as a strong signal against an impending recession or a downturn in corporate profits, and viewing this asset class as appropriate for an economy shifting from deceleration to reacceleration. McCullough anticipates an improvement in the U.S. growth outlook commencing in the fourth quarter and extending into the first quarter of the subsequent year. This perspective also informs his view on monetary policy, having largely dismissed rate cut expectations for the current year, and he anticipates the U.S. dollar will find renewed support, leading to a less bearish stance on the currency. Despite this, he maintains recommendations for long positions in the euro, Australian dollar, and specific European equities, notably in Germany, Spain, and Belgium.

Key Decisions for Investors

• Investors might consider re-evaluating fixed income allocations, potentially reducing exposure to U.S. Treasurys and exploring increased allocation to high-yield corporate debt if their outlook aligns with a non-recessionary, rising growth scenario.
• Closely monitor U.S. growth and inflation data releases, as these are pivotal to the 'no recession, no rate cuts' thesis and any significant deviation could materially alter market dynamics and asset pricing.
• Holders of significant gold positions may wish to review their allocation, considering the potential headwinds from rising real interest rates and a firmer U.S. dollar implied by McCullough's forecast.
• Assess the potential impact of a strengthening U.S. dollar on unhedged international equity and currency exposures, even while acknowledging specific recommendations for long positions in assets such as the euro, Australian dollar, and select European stocks.