Cautious optimism in a shifting landscape

Amid heightened geopolitical tensions, policy divergence and persistent questions around the strength of global demand, investors continue to navigate a complex and often contradictory macroeconomic environment. While volatility remains elevated, and downside risks cannot be ignored, a closer look beneath the surface reveals several reasons for cautious optimism.

Inflation retreat opens door to rate cuts 

A broad disinflation trend continues to take hold across advanced economies, offering central banks room to begin easing policy. According to the IMF’s April 2025 World Economic Outlook, headline inflation in advanced economies is forecast to fall to 2.4% in 2025 and 2.1% in 2026, down from a peak of 7.3% in 2022. Core inflation is also expected to decline steadily, with Europe and North America benefiting from falling goods prices and more stable wage growth. This moderation has already prompted the ECB and BoE to begin rate cuts, with markets now pricing in similar moves by the Fed later in 2025. While policymakers remain cautious, the window for monetary easing is clearly open. As rate cuts proceed, expect improved credit conditions, stronger consumer demand, and a rebound in capital investment - particularly in rate-sensitive sectors such as housing and infrastructure. Against this backdrop, markets are increasingly pricing a soft-landing scenario, where inflation normalises without triggering a sharp slowdown - a dynamic that could favour both risk assets and longer-duration bonds*.

*Source: IMF – May 2025

Growth resilience offers foundation for recovery 

Despite prolonged monetary tightening, global growth remains surprisingly resilient. The IMF forecasts global GDP growth of 3.2% in 2025, with the US (2.1%), UK (1.0%), and Eurozone (0.8%) all avoiding recession. The stabilisation owes much to robust labour markets, disinflation, and easing supply chain constraints. In the US, real disposable incomes are rising, fuelling consumer spending and services-led growth. Even in the UK, where output has been under pressure, GDP forecasts reflect gradual recovery, supported by rate cuts and fiscal flexibility. Crucially, the downside risks that dominated much of 2023 and 2024 - energy shocks, banking stress, and supply chain dislocations - have either faded or been absorbed. In this context, the IMF expects a modest pickup in advanced economy growth in 2026, helped by real wage gains and less restrictive policy. For financial markets, a period of sub-trend but stable growth could be ideal: strong enough to support earnings, but weak enough to keep central banks accommodative. With recession fears retreating and volatility subsiding, investors may find a more constructive backdrop for both equities and bonds*.

*Source: IMF – May 2025

Earnings momentum returning across key sectors 

Corporate earnings continue to show strength, especially in the US and parts of Europe. In Q1 2025, S&P 500 companies delivered 12.8% year-on-year earnings growth, marking the second straight quarter of double-digit gains. Approximately 76% of firms beat consensus estimates, led by tech, communications, and healthcare. Forward guidance remains cautious but generally constructive, with many firms highlighting margin resilience and pricing power. While sectors such as energy remain under pressure due to weak commodity pricing, others are benefiting from easing input costs and steady end demand. The IMF projects global corporate profits to grow modestly in 2025, supported by improving productivity and stabilising wage dynamics. While valuations remain slightly elevated, earnings momentum appears sufficient to sustain positive equity sentiment. For investors, the return of profit growth could mark a turning point in the cycle*.

*Source: FactSet & IMF – May 2025