Q1 2025 Macro Outlook: Resilience Meets Reality

The global economy enters 2025 with momentum that has surprised most observers, including us. Growth has been resilient in the face of restrictive monetary policy, inflation has continued to moderate without triggering recession, and labor markets have remained healthy. The widely anticipated "hard landing" of 2023-2024 did not materialize, and the consensus narrative has shifted decisively toward a soft landing.

But beneath this generally constructive picture lie meaningful headwinds and risks that will shape investment outcomes in 2025 and beyond. Our Q1 macro outlook focuses on three areas: where we agree with consensus, where we disagree, and what it means for portfolio positioning across our investment platforms.

**Where we agree with consensus**

We share the consensus view that the global economy is unlikely to enter outright recession in 2025. Labor markets remain too healthy, consumer balance sheets are too strong, and corporate earnings are too resilient for a traditional recession to materialize without a significant exogenous shock. Central banks have meaningful capacity to ease policy if conditions deteriorate, and many already have begun to do so cautiously.

We also agree that inflation will continue to moderate across most developed economies, though the path to central bank targets will be slower and bumpier than markets currently expect. Wage growth, services inflation, and shelter costs remain stickier than goods inflation, which suggests that the "last mile" of disinflation will be the hardest.

**Where we disagree with consensus**

We diverge from consensus in three respects.

**First**, we believe interest rates will settle at structurally higher levels than markets currently price. The forces that kept rates near zero in the 2010s—deflationary technology shocks, surplus global savings, demographics favoring saving over consumption—are reversing. Higher defense spending, energy transition investment, deglobalization, and demographic aging will all push real interest rates higher over time. We expect 10-year U.S. Treasury yields to average 4.5-5.0% over the next five years, compared with the 3.5-4.0% range implied by current forward markets.

**Second**, we expect more meaningful dispersion in corporate earnings outcomes than consensus. The combination of higher capital costs, persistent cost pressures, and uneven demand patterns will create wider gaps between winners and losers within sectors. Companies with pricing power, operational excellence, and strong balance sheets will continue to perform well. Companies without those characteristics will struggle, and earnings disappointments will be more frequent than markets currently anticipate.

**Third**, we are more cautious on the immediate AI productivity benefits at the macroeconomic level than consensus. We believe AI is a transformative technology that will eventually drive significant productivity gains, but we expect those gains to materialize over five to ten years rather than the eighteen to twenty-four months that some market participants are now projecting. Near-term, AI deployment will be associated with significant capital expenditure, organizational disruption, and uneven results.

**Portfolio positioning implications**

Our portfolio positioning across Aethon's investment platforms reflects this view.

In private equity, we are emphasizing businesses with strong pricing power, defensive demand characteristics, and exposure to structural growth themes including aging populations, energy transition, and digital infrastructure. We are de-emphasizing cyclical businesses and businesses dependent on continued multiple expansion for returns.

In real estate, we are leaning into the dislocations in European logistics, life sciences, and residential sectors, where we believe valuations have overcorrected relative to fundamentals. We are also pursuing selective opportunities in U.S. multifamily housing where supply growth is moderating.

In credit, we continue to see attractive risk-adjusted returns in senior secured direct lending, particularly for middle-market companies in defensive sectors. We are maintaining conservative underwriting standards and avoiding sectors with high cyclicality or refinancing risk.

In infrastructure, we are accelerating deployment in renewable energy, energy storage, and digital infrastructure, where the combination of policy support, contracted cash flows, and structural demand growth creates compelling investment opportunities.

The most important risk we are monitoring is the potential for a sudden shift in interest rate expectations. If markets become convinced that rates will remain elevated for an extended period, asset prices could reprice meaningfully across both public and private markets. We are positioning our portfolio for this scenario by maintaining conservative leverage levels, extending debt maturities where possible, and emphasizing assets with strong fundamental cash flow generation.

We enter 2025 with cautious optimism. The macro environment remains supportive of disciplined investing, but the easy gains of the post-pandemic recovery are behind us. Generating attractive returns from here will require selectivity, operational excellence, and patient capital deployment. These have always been Aethon's core competencies, and we believe they will be more important than ever in the year ahead.