2025 market outlook: navigating bull-, bear-, and base-case scenarios

Seeking clarity amid uncertainty

The global economic and investment landscape is influenced by many different factors, including, but not limited to, geopolitical events, monetary policy, and market expectations. To help investors navigate this environment, we decided to examine three potential scenarios—a bull, a bear, and a base case—and assign our best estimate of the probability of each scenario playing out.

Our goal is simple: to help investors better understand the investment backdrop that we could find ourselves in over the coming 12 months and enable them to build the best portfolio that can help bring them closer to their objectives.

1 The bear-case scenario

In our view, we’re unlikely to enter a bear market in 2025, which is why we’ve only assigned a 15% probability to it playing out in the year ahead.

Scenario assumptions

In such a scenario, we can expect global equities to experience significant declines as the combination of economic, political, and financial factors creates widespread uncertainty, ultimately reducing corporate profitability. 

Similarly, the global economic landscape will likely deteriorate with both manufacturing and services Purchasing Managers’ Indexes (PMIs) falling into contractionary territory (below the 50-point reading). Stagflation—a period of slow growth and high unemployment rate accompanied by inflation—may also become entrenched in major economies around the world, and the likelihood of a global economic recession could rise.

The likelihood of a bear-case scenario playing out will also depend on whether we see a retreat from open trade. Should the world’s top trading nations adopt a broad-based approach to tariffs, inflation could become more of a problem than the sticky variety that policymakers have had to deal with in the past year. Central banks could also find themselves in a situation in which they may be forced to hit pause on monetary easing and instead make an about-face and return to hiking rates. This scenario envisions a confluence of adverse conditions that collectively undermine economic growth, corporate profitability, and market confidence.

Investment implications

In our view, investors should look to apply strategies that can potentially protect capital and manage risks if the bear-case scenario plays out. This may include increasing portfolio allocations to high-quality fixed-income securities such as U.S. Treasuries. Within equities, it may make sense to prioritize investments in high-quality companies with strong balance sheets, stable cash flows, and a history of consistent performance.

Investors may also want to consider alternative investments such as real assets in such a scenario as they typically exhibit lower correlations with publicly traded securities. It’s our belief that active management can play a critical role in navigating risks and capitalizing on opportunities as dislocations emerge. In a bear-case scenario, we expect the CAD/USD to trade within the $0.67 to $0.70 range. 

We’ve long spoken about the importance of staying invested during the market’s best and worst days. Our view remains unchanged: Maintaining a long-term perspective is key to successfully managing investments during bear markets.

2 The bull-case scenario

We’ve assigned a 30% probability to the bull-case scenario playing out in 2025.

Scenario assumptions

In our bull-case scenario, the global economic landscape would enjoy above-trend growth, boosted by a combination of strong consumer activity in the United States and meaningful growth in China, spurred by stimulus measures introduced in 2024. For markets to be able to take off meaningfully, this resurgence in economic activity would need to be supported by declining inflation rates, a development that would enable global central banks to continue lowering interest rates. 

Should such a scenario play out, easing global financial conditions and positive monetary policy impulses are likely to become tailwinds for growth. It’s also worth noting that changes in global central banks’ policy rates often lead manufacturing activities. Given that over 50% of the world’s central banks that we follow are cutting rates as of this writing, we’re likely to see a resurgence in global manufacturing activities if policy direction doesn’t change.

In our bull case, U.S. policymakers—notwithstanding the ever-present challenges of bureaucratic intransigence and the need for congressional approval—would pursue pro-cyclical policies such as individual and corporate tax cuts as well as deregulation measures that would be supportive of small businesses. We also assume that parts of the Tax Cuts and Jobs Act of 2017 would be successfully renewed and a series of tax breaks—including eliminating federal tax on tips, overtime pay, and Social Security benefits—would be introduced, providing support for the U.S. consumer; meanwhile, corporate tax rates would fall to 15% from 21%. In this scenario, which depends heavily on a cooperative Congress, we’ve assumed that the incoming administration would ultimately pursue a targeted approach to imposing tariffs.

In the case of China, the team’s assumption here is that the Chinese government would implement a combination of fiscal and monetary stimulus aimed at revitalizing the Chinese economy and reversing deflationary pressures. In this instance, it means that the People’s Bank of China would lower its key policy rate by a third and reduce mortgage rates to support the Chinese consumer. In this scenario, the team assumes that upcoming fiscal stimulus measures would be financed by issuing sovereign bonds and measures aimed at providing financial support for low-income households would be introduced. Our bull-case scenario also assumes that policymakers would announce plans to inject capital into China’s largest state banks with the goal of increasing loan issuance.

It’s worth noting that such a scenario would be reminiscent of what we saw in 2015/2016, a period marked by accommodative U.S. Federal Reserve (Fed) policy and aggressive Chinese stimulus.  

Investment implications

In a bullish scenario, investors can expect to benefit from strategies that are focused on alpha generation. On a practical level, this may include increasing allocations to equities, prioritizing investments that typically do well when markets slip into risk-on mode, such as growth companies (think the Nasdaq Index), small- and mid-cap firms, cyclical firms (including those listed in the S&P/TSX Index), and select emerging markets. Cyclical commodities such as oil and base metals typically do well in such a scenario too.

Within fixed income, we believe an overweight in credit relative to government bonds would make sense in a bull-case scenario, and high-yield bonds are likely to outperform their higher-quality peers as well. Finally, in this instance, we expect the CAD/USD to trade within the $0.74 to $0.78 range.

3 Our base-case scenario

All things considered, we believe this is the most likely scenario that will play out in 2025. We’ve assigned a 55% chance of this taking place.

Scenario assumptions

In our base-case scenario, the global economic landscape would experience below-trend growth, weighed down by tapped-out consumers who are feeling the burden of still-high borrowing costs—despite rate cuts—and, over in China, stimulus measures that turn out to be only marginally effective at reigniting the economy. In this scenario, inflationary pressure will continue to ease, enabling global central banks to continue to lower interest rates in an orderly fashion.

More than likely, key economies that contribute to shaping the global growth (such as the U.S., China, India, and the eurozone) will experience anemic growth in 2025. We expect the Canadian economy to face significant headwinds in such an environment, in light of how sensitive Canadian consumers are to interest rates, which remains elevated despite recent rate cuts. While the balance of risks remains to the downside, we don’t expect the global economy to experience a material recession. 

In the United States, financial conditions—as illustrated by the Chicago Fed National Financial Conditions Credit Subindex—remains neither too tight (which could signal a pending material economic slowdown) nor too easy (which could point to rising inflation). In other words, we’re likely to find ourselves in a Goldilocks environment in terms of financial conditions.

In our base case, the incoming U.S. administration’s campaign pledges relating to undocumented migrants and tariffs wouldn’t be as broad based as anticipated. We’ve also taken the view that the Trump administration will adopt a targeted and pragmatic approach to tariffs and seek to negotiate trade agreements with key partners. On the other hand, we believe that the corporate tax policies discussed during the presidential election campaign would be implemented in a more broad-based fashion, again on the provision that Congress is willing to cooperate.

In terms of monetary policy, we believe the Fed will keep lowering rates as inflationary pressure continues to ease. That said, we expect policy uncertainty to remain pronounced as the U.S. central bank adopts a data-dependent approach to its future rate decisions. Should this happen, it would mean that monthly economic indicators such as employment rates and consumer spending would take on even more significance than they already do.

In contrast, we expect the Bank of Canada to keep cutting rates to stimulate economic activity amid concerns about sluggish growth. Being highly integrated with global markets, Canada is—in this scenario—susceptible to disruptions caused by trade policies and/or international conflicts. 

Despite these challenges, our base-case expectation is that the U.S. stock market will remain resilient and post positive returns in 2025.

Throughout much of 2023, the S&P 500 Index’s performance was primarily driven by mega-cap technology names. This changed in 2024 when the rally broadened, with 493 of the index’s component companies contributing to roughly half of its total in the year.¹ That said, the valuation of the S&P 500 Index remains expensive from a market-cap-weighted perspective relative to its equal-weighted peers.

In our view, the broader U.S. stock market—specifically, firms besides the mega-cap technology giants—will benefit from the incoming Trump administration’s focus on the domestic economy. Their relatively cheaper valuation could become an important driver for the S&P 500 Index in 2025.

That said, we expect the index’s return profile to be uneven in the year ahead, with sectors that are less rate sensitive and less affected by external economic conditions outperforming their peers. Investors may need to navigate these fluctuations carefully and focus on firms that can weather economic storms. Given that we’re moving into the latter stages of the economic cycle, it may make sense for investors to focus on firms that have traditionally done well during this period. Factors to keep in mind include high profitability measures, recurring cash flow, and pricing power. 

Investment implications

Should our base-case expectation play out, it would make sense for investors to adopt strategies that strike a good balance between risk factors and potential returns. In our view, it would be preferable to adopt a balanced approach to portfolio management. Once again, active management can play a critical role in navigating risks and capitalizing on opportunities.

Within equities, we believe it would make sense to prioritize investments that are higher quality in nature while emphasizing diversification. Unsurprisingly, security selection would be critical in this kind of environment, and a broader index approach to investing may not be as preferable. Against such a backdrop, an allocation to global equities and U.S. mid-cap companies may make sense.

Within fixed income, flexibility will remain paramount as we may come to experience what’s arguably a period of extreme volatility within the sector. In our view, this wouldn’t be an ideal time to take on too much risk in fixed income. Finally, we expect that cyclical commodities would be likely to trade in a tight range, and the CAD/USD should trade within the $0.70 to $0.74 range.

A flexible approach to investing

The way we see it, understanding the range of possible economic and investment scenarios will be essential for navigating the complexities of global markets in 2025. By considering multiple potential outcomes, investors can better position themselves to protect capital, seize opportunities, and achieve their long-term financial goals. Although we believe that our base-case scenario will play out, we’re aware that we need to be ready to shift our views should the landscape begin to move in another direction.

1 Bloomberg, as of November 21, 2024.