Quarterly Market Outlook
Q2 2025
Author
Chief Investment Officer
Our current forecasts attempt to incorporate these many impulses, and we have concluded that in the base case upside risk to inflation is certainly higher – ~ 2.75%, unemployment grinds slightly higher – 4.3%-4.5%, and that growth in the US is likely softer – 1.5%-2%. We have meaningfully shifted the likelihood of recession up to 30%, and the prospects of above trend growth in the bull case down to 15%. A soft landing is still the most likely outcome, but in an environment where risks remain skewed significantly to the downside.
Leaving political views aside, the Trump Administration’s attempt to “flood the zone” across a range of policy measures, if successful, is likely to create at least a transitory impulse in inflation, higher unemployment, and slower growth in the short and possibly medium term.
From the Federal Reserve’s perspective, even after assuming some haircut to these changes, they are likely to end up further from their unemployment target (rising above 4.2% and moving towards 4.5%) and their inflation target – though the remedy from a base rate perspective requires lower rates in the former and higher rates in the latter. Monetary policy is not the best tool for making adjustments in this scenario, and the Fed is likely to remain cautious as things play out in Washington. We see the Fed easing 3 more times by mid-2026, with risks to that forecast skewed to the downside (4+ rate cuts if things skew towards our bear case).
The consumer is entering into this period of volatility with a strong balance sheet at the aggregate level, though the pace of savings is running low and credit is still tightening for borrowers at the lower end of the credit spectrum.
Real estate, in our view, continues to provide the best opportunity set as we deploy capital in the first half of 2025. Risk/reward in commercial bridge lending, residential transition loans, home improvement loans, and home equity lines of credit (e.g. HELOCs) stand out.
In corporate debt, we have seen a mix of opportunities. Putting capital to work in asset-based corporate transactions, like CLO warehouse facilities offers attractive risk/reward, though corporate term loans offered in the middle-market direct lending sector seem more fairly valued. Spreads in direct lending have compressed among the sectors that we track, where capital flows into the sector have in many cases left lenders competing on price. Fundamentals look fair in these markets, though we are paying close attention to corporate margins as rates stay somewhat elevated, potential supply chain disruptions are an imminent threat, and a more cautious consumer stand weigh on profitability.
Despite recent volatility in public markets, we see this as an opportune time to invest in private credit. Although growth forecasts have been lowered, we still anticipate a soft landing where equity valuations may be challenged, and income-oriented investments offer the best relative value.
- The leverage loan default rate based on number of issuers has increased modestly off a low base to ~1.9% in February. It has been trending up since reaching a low point in 2021. While it’s elevated versus recent past, it is in line with the circa 2015-2019 period, and remains below the average of ~2.3% since 2007.
- Data coming out of the recent FOMC meeting points to higher inflation and a reduced number of Fed Funds rate cuts in 2025 versus expectations as of 4Q24. Both of these data points are headwinds to corporate borrowers.
- Fundamentals remain supportive due to secular trends in residential housing. The overbuilding into the GFC is offset by the underbuilding and re-expansion of households post the GFC providing support to real estate valuations.
- Multifamily starts have reverted back to pre-COVID levels after peaking in 2021-2022 period, providing a more supportive backdrop to multifamily lending.
- Despite the recent softening in broader markets, securitized consumer spreads have remained tighter in some markets versus the beginning of the year and last year. Several data points raise caution such as higher delinquencies, elevated losses, and macro uncertainty from tariffs.
- Cumulative net losses in both prime and subprime auto for recent vintage years (2022, 2023, and 2024) are tracking higher than 2019, 2020 and 2021 vintages indicating a combination of potentially weaker borrowers, looser underwriting standards, and/or lower asset values.
The views expressed in this chart are those of the Investment Team of Nomura Capital Management LLC and are based on the Investment Team’s forward-looking assessment of credit markets as of the date referenced above. The views expressed herein are subject to change at any time following the publication of this report. The arrows in the chart reflect the change in the Investment Team’s outlook of each credit market since its prior quarterly market commentary. This chart is provided for informational purposes only and is not intended to represent a recommendation from Nomura Capital Management LLC to invest in, or divest from, the credit market asset classes referenced herein.
The views expressed in this chart are those of the Investment Team of Nomura Capital Management LLC and are based on the Investment Team’s forward-looking assessment of the general macro-economic environment as of the date of this report. The Bull/Base/Bear Market (“Market Scenarios”) outcome probabilities noted in this report reflect the Investment Team’s forward-looking estimate of the probability of each Market Scenario occurring within the next 12-18 months from the date of this report. The market metrics noted within this report (Growth, Inflation, Unemployment, Risk Assets, Base Rates and Volatility) represent the Investment Team’s forward-looking estimate of each market metric resulting from the corresponding Market Scenario. All views and estimates contained within this report are as of the date of this report and are subject to change at any time following the publication of this report.
Data sourced from Bloomberg, Federal Reserve Bank of St Louis, US Census Bureau
Source: J.P. Morgan; PitchBook Data, Inc.; Bloomberg Finance, L.P.; S&P/IHSMarkit; New York Fed Consumer Credit Panel/Equifax
Data sourced from Bloomberg
CPI = The Consumer Price Index; PCE = Personal consumption expenditures; Cleveland Fed NTRR = Federal Reserve Bank of Cleveland New Tenants Repeat Rent Index; CPI OER = Consumer Price Index Owners’ Equivalent Rent
CPI is a measure of inflation compiled by the US Bureau of Labor Studies. PCE stands for Personal Consumption Expenditures, which is a measure of how much money US households spend on goods and services. It’s a key indicator of economic growth and inflation.
Data sourced from Bloomberg
Data sourced from Bloomberg
C&I Large = Commercial & Industrial Large Energy Users; C&I Small = Commercial & Industrial Small Energy Users
These materials reflect the opinion of NCM on the date of production. Opinions and statements of financial market trends that are based on current market conditions constitute our judgement and are subject to change without notice. Past performance does not guarantee future results. Where data is presented that is prepared by third parties, such information will be cited, and these sources have been deemed to be reliable. However, NCM does not independently verify or otherwise warrant the accuracy of this information. All investments are subject to risks, including the risk of loss of principal.