The Fed: Q4 2024
As we kick off 2025, the U.S. economy continues to defy widespread expectations of weakness, showcasing remarkable resilience, despite a backdrop of higher interest rates, geopolitical challenges, and policy uncertainty. While the mood of the markets reflects heightened volatility and overextended narratives, we believe that the underlying data tells a story of stability and cautious optimism.
Economic Growth: Defying the Odds
The U.S. economy grew at an impressive 2.5% in 2024, outpacing its potential growth rate by nearly a full percentage point . This momentum has carried over into 2025, supported by robust consumer spending, a positive business outlook, and stabilizing labor markets. December’s labor report underscored this strength, with payrolls exceeding expectations, and the unemployment rate declining to 4.1%. Notably, wage growth is moderating, contributing to easing inflationary pressures without having derailed consumer confidence.
Inflation and Federal Reserve Policy
Inflation has shown consistent signs of moderation. December’s core CPI rose by just 0.23% month-over-month (3.24% year-over-year), with core services inflation at its lowest level since early 2022. Yet, the Federal Reserve’s stance remains cautious. Having moved away from its aggressive rate-cut outlook last September, we expect the Fed to reduce rates twice at most, contingent on continued labor market stability and inflation trending toward its 2% target.
While short-term risks to inflation remain, such as potential tariff increases and seasonal pressures, the broader trajectory is encouraging. The interplay between moderating inflation and higher real rates suggests the current expansion in real rates may be unsustainable, amplifying the sensitivity of markets to any deviation from expectations. For this reason, our target for the 10-year treasury has not chased the market higher. We expect rates to fall back toward 4% by the end of the year.
Corporate Earnings and Market Performance
Corporate earnings have consistently been strong, buoyed by resilient consumer demand and operational efficiencies. AI-driven productivity gains and cost optimization have been key contributors, with sectors like technology and healthcare leading the charge. Equity markets have reflected this optimism, with U.S. equities attracting significant capital inflows amid global geopolitical uncertainties.
However, elevated valuations—with P/E ratios exceeding 22x for mega-cap tech stocks—necessitate caution. Market participants remain focused on whether earnings growth can sustain current valuation levels, particularly in an environment where geopolitical risks and fiscal policy debates could introduce new headwinds.
Fixed Income and Credit Markets
In the bond market, the interplay of strong demand and constrained supply has kept spreads tight, particularly in the investment-grade (IG) space. With over $105 billion issued in the USD IG primary market in the first two weeks of January, investor appetite remains robust. Notably, dealer inventories remain net negative, signaling continued demand strength, despite expensive valuations.
High-yield (HY) bonds and leveraged loans have also performed well, with January inflows surpassing historical averages. Yet, the premium for moving down the credit spectrum remains thin, raising questions about the risk-reward balance in crossover investments.
Real Estate and Private Credit
Rising rates have stalled activity in residential and commercial real estate markets, creating pockets of risk for low-income households and highly leveraged sectors. Despite these challenges, private credit markets have shown resilience, supported by strong investor demand and improved refinancing conditions.
International Outlook
Globally, economic conditions remain varied, with Europe and Asia navigating distinct challenges and opportunities. Europe has seen core inflation decelerate to 3.21% as of December 2024, driven by a decline in services inflation. This has prompted expectations for policy easing, particularly in the UK, where gilt yields have risen sharply. However, economic growth in the region remains subdued, with GDP growth forecasted at just 0.9% for 2025.
Asia’s outlook is more mixed. While some economies benefit from robust domestic demand and export performance, China’s efforts to stabilize its economy through fiscal and monetary support face significant hurdles. The long-standing issues in China’s property market and the fragility of private sector confidence cast doubt on the sustainability of stimulus-driven growth. While initial signs of recovery have emerged, the structural challenges of high debt levels and demographic pressures suggest that these measures may yield only short-term relief. Other emerging markets in Asia are leveraging favorable trade dynamics, but remain exposed to geopolitical tensions and supply chain disruptions.
Notably, brisk inflows into U.S. ETFs appear to highlight a global preference for U.S. assets amidst these uncertainties.
Policy Uncertainty and Geopolitical Risks
The Trump administration’s pro-business policies may provide a tailwind for growth, but also have raised concerns about debt sustainability and inflationary pressures. Deregulation efforts and proposed fiscal stimulus measures—including potential tax cuts—add to the complexity of the policy landscape. Geopolitical tensions, particularly U.S.-China relations, further complicate the global investment outlook, making U.S. assets increasingly attractive as a relative safe haven.
Outlook for 2025: Measured Optimism
The outlook for 2025 remains broadly positive, underpinned by what we believe will be strong consumer spending, stable corporate earnings, and a moderating inflation environment. However, heightened volatility and the potential for policy missteps warrant a measured approach to investment strategy. Key areas to watch include:
1. Labor Market Dynamics: No longer climbing, unemployment fell from 4.3% to 4.1%, cyclical employment sectors like construction and manufacturing remain vulnerable to downside risks.
2. Real Estate: Prolonged stagnation in housing activity could ripple through related industries, amplifying employment risks.
3. Geopolitical Events: Persistent conflicts and trade disputes could disrupt global supply chains and investor sentiment.
We believe that investors should maintain diversified portfolios, balancing exposure to equities with defensive assets like high-quality bonds. The rise of AI and digital currencies presents exciting opportunities, but disciplined evaluation of valuation levels and sector-specific risks remains critical.
In summary, while the U.S. economy continues to demonstrate resilience, navigating 2025 will require balancing optimism with vigilance. The slightest deviations in data or policy could provoke outsized market reactions, underscoring the need for a thoughtful and adaptive investment approach.
Important Information
The views expressed represent the opinions of City National Rochdale, LLC (CNR) which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be perceived as personalized investment, financial, legal or tax advice or a recommendation for any security. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While CNR believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations,estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Diversification may not protect against market risk or loss. Past performance is no guarantee of future performance.
There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junkbond. When interest rates rise, bond prices fall.
Bloomberg risk is the weighted average risk of total volatilities for all portfolio holdings. Total Volatility per holding in Bloomberg is ex-ante (predicted) volatility that is based on the Bloomberg factor model.
Municipal securities. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in the municipal securities of a particular state or territory may be subject to the risk that changes in the economic conditions of that state or territory will negatively impact performance. These events may include severe financial difficulties and continued budget deficits, economic or political policy changes, tax base erosion, state constitutional limits on tax increases and changes in the credit ratings.
City National Rochdale, LLC is an SEC-registered investment adviser and wholly-owned subsidiary of City National Bank. Registration as an investment adviser does not imply any level of skill or expertise. City National Bank is a subsidiary of the Royal Bank of Canada.
© 2025 City National Bank. All rights reserved.
Index Definitions
S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the US It is not an exact list of the top 500 US companies by market cap because there are other criteria that the index includes.
Bloomberg Municipal Bond Index: The Bloomberg US Municipal Bond Index measures the performance of investment grade, US dollar-denominated, long-term tax-exempt bonds.
Bloomberg Municipal High Yield Bond Index: The Bloomberg Municipal High Yield Bond Index measures the performance of non-investment grade, US dollar-denominated, and non-rated, tax-exempt bonds.
Bloomberg Investment Grade Index: The Bloomberg US Investment Grade Corporate Bond Index measures the performance of investment grade, corporate, fixed-rate bonds with maturities of one year or more.
The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.
Bloomberg Municipal Bond Muni Short (1-5) Index 1-5 year maturities of the US Municipal bond index.
The Bloomberg Muni Intermediate Index is an unmanaged index that tracks the performance of intermediate US government securities.
The Bloomberg US Government/Credit 1-5 Year Index tracks USD-denominated, investment grade, fixed-rate bonds, including treasuries, government-related and corporate issues. The Index includes securities with at least one, and up to, but not including, five years until final maturity.
The taxable Intermediate Government/Credit Credit Index measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government-related bond markets with a maturity greater than 1 year and less than 10 years.
The Morningstar LSTA US Leveraged Loan 100 Index is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans. It represents the 100 largest and most liquid issues in the institutional loan universe and is a cornerstone for measuring the pulse of the leveraged loan market.
The Bloomberg US High Corporate Bond Yield to Worst Index represents the semi-annual yield to worst of the ICE BofA US High Yield Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market.
The ICE BofA High Yield Emerging Markets Corporate Plus Index is a subset of the ICE BofA Emerging Markets Corporate Plus Index, which includes only securities rated BB1 or lower.
The Palmer Square CLO Debt Index is a rules-based observable pricing and total return index for collateralized loan obligation (CLO) debt for sale in the United States.
Yield to worst (YTW) is the lowest yield that can be realized by either calling or putting on one of the available call/put dates, or holding a bond to maturity.
Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index.
Definitions
Yield to Worst (YTW) is the lower of the yield to maturity or the yield to call. It is essentially the lowest potential rate of return for a bond, excluding delinquency or default.
P/E Ratio: The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS).
The 4P analysis is a proprietary framework for global equity allocation. Country rankings are derived from a subjective metrics system that combines the economic data for such countries with other factors including fiscal policies, demographics, innovative growth and corporate growth. These rankings are subjective and may be derived from data that contain inherent limitations. MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets.
The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
City National Rochdale Proprietary Quality Ranking formula: 40% Dupont Quality (return on equity adjusted by debt levels), 15% Earnings Stability (volatility of earnings), 15% Revenue Stability (volatility of revenue), 15% Cash Earnings Quality (cash flow vs. net income of company) 15% Balance Sheet Quality (fundamental strength of balance sheet).
*Source: City National Rochdale proprietary ranking system utilizing MSCI and FactSet data. **Rank is a percentile
ranking approach whereby 100 is the highest possible score and 1 is the lowest. The City National Rochdale Core compares the weighted average holdings of the strategy to the companies in the S&P 500 on a sector basis. As of September 30, 2022. City National Rochdale proprietary ranking system utilizing MSCI and FactSet data.
BPS: A basis point (BPS) is used to indicate changes in the interest rates of a financial instrument. Basis points are typically expressed with the abbreviations “bp,” “bps,” or “bips.”
A consensus estimate is a forecast of a public company’s projected earnings based on the combined estimates of all equity analysts that cover the stock.
Bureau of Labor Statistics(BLS): The BLS is a federal agency that collects and disseminates important information about labor, wages, prices, and productivity.
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
© 2025 City National Bank. All rights reserved.
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