Investing.com -- 2025 holds the potential to be another strong year for markets, building on the positive momentum of the past two years, a Deutsche Bank (ETR:DBKGn) strategist said.
In a report released Monday, the bank highlights that despite high starting valuations and geopolitical uncertainties, favorable macroeconomic conditions and accommodative monetary policies could continue to support risk assets.
Macro (BCBA:BMAm) strategist Henry Allen notes that while comparisons to the dot-com bubble have been frequent, there are key differences today.
For instance, starting valuations are elevated, leading to comparisons to the dot-com bubble. However, the strategists highlight that “the dot-com bubble burst alongside an economic downturn, of which there’s no sign today,"
What’s more, growth expectations for 2025 have been revised upward consistently through the fourth quarter of 2024, reflecting a resilient economic backdrop.
“Even if we do get a downturn, central banks now have plenty of scope to cut rates. And whilst there are plenty of geopolitical risks right now, that hasn’t been a factor that markets have traditionally reacted much to,” Allen added.
Among the indicators that point to a no-recession scenario is the 2s10s yield curve. The curve, which had been inverted for over two years, has steepened to its highest level in approximately two and a half years.
Furthermore, the Sahm Rule, which had previously signaled a potential recession, has dipped below the critical 0.5 mark. "Collectively, the fact that multiple leading indicators are now pointing away from a recession again should add to confidence about the outlook," Allen said.
Turning to potential tailwinds, the strategists primarily highlighted the ongoing cycle of rate cuts.
"The current backdrop of rate cuts taking place in a soft landing (rather than a recession) has been incredibly favorable for risk assets historically," he explained. The Fed has already cut rates by 100 basis points, with policymakers signaling their readiness to act further if necessary.
Also, the potential for inflation to surprise on the downside could provide an additional boost. The report points out that in the past 18 months, risk assets experienced significant rallies during two key periods—late 2023 and mid-2024—driven by softer inflation. Deutsche Bank suggests that if inflation eases again, markets could see another widespread surge in both equities and bonds.
Lastly, Allen notes that many downside risks are already priced in. Economists anticipate inflation will stay above target, new tariffs are expected, and assets have already responded to these factors. Additionally, futures reflect fewer rate cuts than the Fed's projections for 2025.
In sum, Allen believes investors should not let a pessimism bias overtake them. While unexpected shocks are likely to occur at some, the “current market backdrop is an incredibly favorable one, meaning that 2025 is capable of being another strong year,” the strategist concluded.