The annual report prepared by Standard and Poor’s for the year 2025 presents a list of ten “questions that matter”, with which the agency wants to warn of the most important challenges and issues for markets and the world economy in the next 12 months. The background context is clear for S&P: the recovery continues, but uncertainty is very high, with several open fronts that can derail the world economy, or turn around the fundamental situation of many assets if the greatest risks materialize. Geopolitics, lower interest rates or issues linked to the development of artificial intelligence are the most important issues that could cause the recovery scenario to encounter potholes.
“We are entering 2025 and we see a year of promise and danger. The decline in interest rates and soft landings in large economies promise that there will be favorable credit conditions. On the other hand, the increase in geopolitical tensions and Trade tensions increase the dangers in a context that is already tumultuous,” highlights S&P at the beginning of its report.
In this context, S&P breaks down the questions it considers key for next year. These are ten key questions, for which they try to answer and offer their opinion of what they think will happen, and why.
- What happens if the interest rate cut disappoints?
The first big question posed by the agency has to do with lowering rates. It is one of the key drivers for markets and economic growth next year, as it will create attractive financial conditions for debt and to boost economic activity. “Our base scenario includes rate cuts,” S&P acknowledges, but states that “the prolonged good performance of the US economy, together with a higher level of investment, implies that the neutral interest rate has been able to increase,” they indicate. In addition, they warn that “the re-election of Donald Trump increases the risk of higher rates.”
S&P reminds how this can affect investors: “If inflationary pressures reappear, central banks will stop the rate cut,” they warn and this would be transmitted to the bond market: “The stillness of the markets may end, forcing the long-term rates rise rapidly”, and this, “a sustained period of high rates, will force the indebted to adapt”, probably “through investment adjustments, shareholder remuneration cuts or, simply, margins lower,” he points out.
- Has the debate between austerity and growth returned?
This second question is focused on Europe, where the green light for the high deficits of the past is beginning to go out and Brussels is beginning to demand that deficit ceilings be respected again. “The reactivation of fiscal rules They should help stabilize the sovereign debt of EU countries. At the same time, by supporting low private investment and consumption, the return to austerity may end up worsening debt sustainability, and backfire, because Europe and Germany, in particular, face structural challenges to their economic model of exports and little investment,” the agency explains.
This “debate between austerity or growth is relevant for the credit of Germany and also the US,” indicates S&P, but believes that “Germany’s fiscal policy will continue to be narrow and will be one of the country’s strengths in the face of its rating.” in addition to hoping that “the status of the dollar as the world’s first reserve currency will allow the United States to have flexibility in its fiscal and trade balance.”
- How will private credit respond to falling debt yields?
The base scenario proposed by the agency in this sense is that “the rate cuts will be a relief for private borrowers, due to lower debt costs in 2025, even taking into account that many have already benefited from the improvement in the financial conditions,” they point out. This will reach the point that “companies are going to benefit more from rate cuts in 2025 than they have this year,” S&P believes.
- Does the rate cut justify the market’s optimism?
That the rate cut is good for the stock market is nothing new, but the increases in the major indices have been so strong in recent months that there are many analysts and investors who wonder if they could have gone too far. The market needs the rate cut to justify current valuations, and if it does not meet expectations, it is logical to expect that there will be problems in the stock market.
In this sense, S&P warns that “inflation may end up being stickier than expected and rates, consequently, higher than expected,” which would lead to “a context of stagflationary growth that would be less favorable for the economy.” corporate credit,” they point out.
- How will markets navigate geopolitical risks?
The agency explains how “financial markets have been very resistant in 2024 to sources of geopolitical uncertainty. 2025 may bring more volatility, taking into account the possible resolution, or escalation, of some of the sources of uncertainty,” it explains, in reference to the rumor of negotiations to end conflicts such as those in Ukraine and Russia and the Middle East. However, they recognize that “it is not at all clear that the economy in 2025 will be able to be a support for the markets,” the agency indicates.
After a year in which more than half of the world’s population has been called to the polls, the year 2025 appears to continue to be a source of geopolitical uncertainty. One need only look at the development of political events in recent days, in places like France or South Korea, to confirm that geopolitics will likely continue to be a major source of volatility in the coming months.
- How will trade policies affect credit conditions?
The return of Donald Trump to the White House and the trade protectionism measures he has proposed are one of the most important elements to monitor for next year. “Protectionism has grown in recent years and there is now a risk of an increase in this regard. Increased trade restrictions usually have a negative impact on real GDP and can weaken financial conditions if they substantially increase inflation and, consequently, interest rates,” they explain from S&P.
This is clear to the agency, but they also consider that “tariffs could end up being a negotiation tactic to secure other interests that are not related to trade,” and they also assess the possibility that “stimulus measures could offset the impact of tariffs,” they point out. Furthermore, S&P does not rule out that protectionist policies may end up changing course when the wave of measures and countermeasures by rival trading partners that seek to impose tariffs begins.
- Can crude oil prices generate a shock to the economy?
It is evident that a rebound in crude oil prices would have negative implications for many economies, but S&P rules out, a priori, that there will be scares on this front next year. The tranquility that oil prices have been experiencing since September, without leaving a range of 10 dollars since then and, despite the geopolitical events that are taking place, is good proof of this.
“We expect prices to remain contained in 2025,” highlights the agency, and warns that “the supply of crude oil continues to be the key factor for prices, as demand prospects point towards a fall,” they indicate. However, there are some elements to take into account in this regard: “A disruption in critical trade routes can generate an increase in crude oil prices,” reminds S&P, and warns that “high energy prices can ruin disinflationary efforts.
However, there is also another side to this coin, and the agency highlights how “political uncertainty is likely to generate a stronger than expected fall in oil prices”, at a time when, without decisions such as the keep supply limited by OPEC+, the crude oil market is in a situation of clear oversupply.
- How will the US and Europe respond to Chinese leadership in clean technologies?
The conflict between Europe and China with electric cars has put on the table that the development of this new technology by the Asian giant has raised blisters in other regions of the planet, and that it has the potential to generate clashes in the coming months. “China has established itself over the last 20 years as the unrivaled leader in electric car technologies and supply chains. In the process, Europe and the US falling behind in their capabilities means they will have to face dilemmas of costs and commercial costs that will affect their domestic automakers,” says S&P.
For the agency, it seems clear that traditional manufacturers are going to come under pressure in the coming quarters. “Non-Chinese manufacturers will be under pressure to improve their manufacturing efficiency, and to accelerate their entry into the market, while maintaining strong investment capacity,” notes S&P. This, for a region with such an important weight in the automotive sector, such as Europe, can have a notable impact on the economy and markets.
- Can data center development keep pace with demand?
One of the businesses most closely linked to the development of AI and digitalization, in general, are data centers, a necessary infrastructure that is being developed intensively by large technology firms in order to cover the needs of citizens. Demand continues to grow, and the agency believes that “the sectors most exposed to data centers will continue to benefit from tailwinds in 2025”, and “after that, pressure will likely increase as the bottlenecks,” they indicate.
- Can innovations in the crypto world reduce concentration risks due to Artificial Intelligence?
The last point that S&P raises crosses the development of two different factors, as opposing forces that can balance each other. One of the problems that are perceived, on the business front, due to the development of AI, is the enormous concentration of power that is accumulating in a few hands, since there is a small group of companies, the technological giants of the United States. , which are very well positioned for the advances that AI promises to generate.
In this sense, “the concentration of big technology companies is growing, and is likely to be even more driven in 2025”, something that could reduce the crypto world, since “the advances in decentralization brought by the crypto world and the Edge artificial intelligence, which focuses on providing AI capabilities specific to each device, “can reduce some of the risks associated with centralization, if these developments are adopted quickly,” the agency explains.
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