Navigating 2025: Spotlight on economic growth and company earnings

The pace of news seems to have increased in 2025. We've been monitoring economic and political developments closely, as well as how the M&G model portfolios have moved with markets, but we haven’t changed our core views.

We continue to favour equities over bonds in the short term and have therefore not rebalanced the portfolios this year. We expect global economic growth to drive company revenue and profits higher, supporting stock prices. Lingering inflation and government spending should keep the rate of interest paid by bonds at higher levels. 

Talking about tariffs

Over the course of 2025 US President Donald Trump’s favourite word in the dictionary has gripped financial markets: tariffs. Over half of US companies in the S&P 500 Index have discussed tariffs in earnings calls this year¹. We think tariffs will be used selectively by President Trump, with the main purpose being a bargaining tactic to get better trade deals for the US. We monitor tariff news, but it isn’t the only factor that is affecting our decision-making. So, let’s take a step back from the tariff headlines and look at what other factors we think are driving investment markets.  

Economic Growth

Economic growth is important for markets as it drives company revenues and profits. IMF predictions show growth rates remain healthy and are far from recession levels (see figure 1). 

Figure 1: IMF Predicted Real GDP Growth Rates in 2024, 2025 and 2026²

We see several factors that support this momentum. US technology companies are planning $320 billion in artificial intelligence (AI) investment, and Japan has pledged a further $1 trillion investment into the US. These additional investments alone are worth 4.4% of US GDP. US consumers also remain a pillar of strength for the global economy. US unemployment is low at 4% and wages continue to rise at a healthy rate of 4.5³ per year, providing the world’s largest consumers with more money to spend.

The growth story is not just happening in the US. UK and European countries plan to spend more on defence as many are wary of relying on the US for military support. Europe’s spending could amount to $842 billion over the next 4 years or 3.94% of the EU’s total GDP. The UK is planning to spend 2.5% of its GDP on defence by April 2027. Higher government spending provides a boost to growth in an economy. European wages are also rising at 4.1% annually which is above the current inflation rate of 2.4% year-on-year in February. Wage growth in the UK is also 3% above the rate of UK inflation⁴. Higher wages can provide consumers with more spending power.  

In Asia, the potential for China’s government to increase spending could boost Asian economies. China’s President Xi Jinping is planning additional spending in response to tariffs implemented by President Trump. The scale of the spending is currently unknown, but China’s track record has seen the country previously spend 13% of its GDP or $586 billion in 2008 to fuel growth⁵. Given China’s status as an important trading partner for many Asian countries, any large spending measures can also benefit its surrounding neighbours. 

Equities

Global profits are rising, supported by positive economic growth (see figure 2). We expect this trend to continue as companies integrate AI, which can increase the amount workers are able to produce. Currently, it’s estimated that 65% of global companies use AI regularly⁶. Higher growth and better productivity can boost profits and move stock prices higher. 

Figure 2: 12-month forward earnings per share of global equities⁷

The performance of some of the largest seven technology companies in the US is almost more important for equity markets than what President Trump does. These companies are often labelled the Magnificent-7 – Tesla, Apple, Alphabet, Meta Platforms, Nvidia, Microsoft and Amazon. They collectively represent 21% of global equities. While global economic growth has been resilient this year, the performance of the Magnificent-7 hasn’t, with average returns falling -9.3%⁸. Part of the reason has been the release of China’s DeepSeek AI model which has challenged the dominance of US technology companies. We think the Magnificent-7 look expensive on a long-term basis. 

Judging by equity performance this year, the market has so far agreed with us. Other equity markets such as the UK, Europe and China have moved higher while the US has lagged, driven mainly by the Magnificent-7 underperformance. As global growth remains solid, we think these markets can continue to rise. 

Bonds

Economic growth and inflation are key factors in central banks’ interest rate decisions. When the economy is growing, it reduces the need for central banks to cut interest rates to boost demand. Inflation has been moving higher in some developed economies and remains above central banks’ targets of 2% a year (see figure 3). Tariffs could further increase inflation in the short-term by raising the costs of goods. We expect positive economic growth and higher inflation to keep interest rates elevated.  

Figure 3: Year-on-Year Consumer Price Inflation Rates in September 2024 and January 2025⁹

Government spending plans also impact bonds. The US government has announced tax cuts in the US will continue from President Trump’s first term in office, costing $4.6 trillion¹⁰ over the next decade. The money will have to come from somewhere. The most likely source will be more borrowing from the US government. Investors will want to be compensated for the additional government borrowing which will put upwards pressure on US long-term government bond yields. The US is not the only country that will need to borrow more. The UK and European governments’ defence spending plans will also put upwards pressure on long-term government bond yields in these regions too. 

Outlook

Don’t mistake the optimism for ignoring the risks. Higher tariffs could reduce growth. AI investments may fail to deliver returns.  Conflicts in Europe and the Middle East may continue. Inflation may rise further. There will always be risks, so what matters is the resilience to be able to navigate them. At present, we think companies and governments are up to the task. 

¹ FactSet
² IMF World Economic Report
³ Trading economics. Year-on-Year US wage growth in January 2025. 
⁴ Trading Economics
⁵ Chicago Booth Review
⁶ Mckinsey the State of AI in early 2024
⁷ Refinitiv Datastream IBES. Global equities are represented by MSCI AC World. 
⁸ Refinitiv Datastream. Performance from 1st January 2025 to 3rd March 2025. 
⁹ Trading Economics
¹⁰ US Senate Committee on the Budget, CBO

Past performance is not a reliable indicator of future performance. The value of an investment can go down as well as up and your client may get back less than they’ve paid in.