Northern Trust’s 2025 Capital Market Assumptions: A Comprehensive Outlook on Global Markets
Northern Trust has unveiled its highly anticipated Capital Market Assumptions 2025 Edition, offering a forward-looking analysis of global financial markets and economic trends. The report forecasts moderate performance for global equities, an uptick in high yield bond returns, and robust growth potential in private credit. These projections are underpinned by three pivotal themes that Northern Trust believes will shape the investment landscape over the next decade: AI-Enabled Productivity, Navigating the Energy Transition, and Globalization: Bent, Not Broken. These trends not only provide insight into the macroeconomic environment but also serve as the foundation for expected returns across asset classes such as stocks, bonds, real assets, and alternatives.
According to Angelo Manioudakis, Northern Trust Asset Management’s (NTAM) Global Chief Investment Officer, the next ten years will present investors with a complex and evolving set of challenges and opportunities. As global economic growth moderates, identifying new drivers of growth will become increasingly critical. Manioudakis emphasizes that advancements in artificial intelligence (AI), the adoption of alternative energy sources, and shifts in global trade dynamics will create divergent paths for economic expansion worldwide. These factors will require investors to adopt a more nuanced and strategic approach to portfolio construction.
The CMA underscores the importance of understanding how these macroeconomic forces interact with asset class performance. For instance, the rise of AI is expected to enhance productivity, which could mitigate some of the adverse effects of demographic shifts and aging populations in developed economies. Similarly, the global push toward energy independence and sustainability will necessitate significant investments in new technologies and infrastructure, presenting both risks and opportunities for investors. Meanwhile, globalization—though undergoing transformation amid geopolitical tensions—remains a key driver of interconnectedness, albeit in a more fragmented form.
By examining these themes, Northern Trust provides a framework for investors to navigate the complexities of the coming decade. The report highlights the need for adaptability and foresight in an era where traditional economic models may no longer suffice. With this comprehensive outlook, Northern Trust aims to equip investors with the tools and insights necessary to make informed decisions in an increasingly dynamic global market.
Long-Term Return Expectations Across Asset Classes
Northern Trust’s Capital Market Assumptions 2025 Edition provides detailed long-term return expectations for various asset classes, reflecting a cautious yet optimistic outlook for the next decade. In the equity space, U.S. equities are projected to deliver an annualized return of 7.5%, outpacing their developed markets ex-U.S. counterparts, which are forecasted at 5.8%. This divergence is largely attributed to the continued dominance of U.S. companies in sectors such as technology and healthcare, coupled with stronger corporate earnings growth and innovation-driven competitive advantages. Emerging markets, while facing structural challenges, are still expected to generate a respectable 6.4% annualized return, buoyed by favorable demographics and increasing integration into global supply chains.
In fixed income, Northern Trust anticipates modest but steady returns. U.S. investment grade bonds are projected to yield 4.7% annually, supported by stable economic growth and solid credit fundamentals. High yield bonds, on the other hand, are expected to outperform their investment-grade peers with a 5.6% annualized return, driven by improving credit spreads from current low levels. The report notes that while spreads may widen slightly, they are likely to remain below historical averages, reflecting a supportive macroeconomic environment characterized by low default rates and manageable debt levels.
Real assets, particularly global listed infrastructure, are poised to benefit from transformative trends such as the surge in electricity demand fueled by AI adoption. Northern Trust forecasts a 6.6% annualized return for this asset class, with utilities playing a pivotal role in meeting rising energy needs. Infrastructure investments are further bolstered by their defensive characteristics, including stable cash flows and inflation-linked pricing mechanisms, making them attractive in uncertain economic climates.
Alternatives, especially private credit and private equity, are expected to offer compelling opportunities relative to public markets. Private credit is projected to deliver an 8.4% annualized return, driven by declining interest rates and heightened demand for flexible financing solutions to support mergers and acquisitions (M&A). Meanwhile, private equity is anticipated to achieve a robust 10.1% annualized return, fueled by AI-related innovations and increased M&A activity. These segments are likely to attract significant investor interest as they capitalize on inefficiencies and growth opportunities in less liquid markets.
Overall, Northern Trust’s forecasts highlight a nuanced investment landscape where selectivity and strategic allocation will be key to achieving desired outcomes. While equity returns are expected to moderate from recent highs, fixed income and alternatives offer avenues for diversification and enhanced returns, underscoring the importance of a balanced and forward-looking portfolio strategy.
Fixed Income Forecasts: Credit Spreads and Economic Growth Dynamics
Northern Trust’s Capital Market Assumptions 2025 Edition paints a cautiously optimistic picture for fixed income markets over the next decade, with credit spreads projected to rise moderately from their current historically low levels. Anwiti Bahuguna, NTAM’s Chief Investment Officer of Global Asset Allocation, explains that this trend will be underpinned by stable economic growth and resilient credit fundamentals, which should prevent spreads from reaching their long-term averages. The report anticipates that while spreads may widen slightly due to normalization following the post-pandemic recovery, they will remain constrained by the absence of systemic risks and a generally supportive macroeconomic environment.
Stable economic growth is expected to play a pivotal role in maintaining healthy credit conditions. Northern Trust projects that GDP growth will moderate globally but remain sufficient to sustain corporate profitability and reduce default risks. This stability will be particularly beneficial for high yield bonds, which are poised to outperform investment-grade bonds due to their higher sensitivity to economic conditions. Additionally, the report highlights that strong corporate balance sheets and disciplined capital management practices will further reinforce credit quality, mitigating the likelihood of widespread defaults even if spreads experience periodic volatility.
Bahuguna emphasizes that the interplay between credit spreads and economic growth will create opportunities for fixed income investors, particularly in sectors tied to technological innovation and infrastructure development. For example, industries benefiting from AI adoption and the energy transition are likely to see sustained demand, translating into lower borrowing costs and tighter spreads. Furthermore, the report suggests that central banks’ gradual shift toward neutral monetary policies will help maintain equilibrium in fixed income markets, balancing liquidity with prudent risk management.
Ultimately, Northern Trust’s analysis underscores the importance of a strategic approach to fixed income investing. By focusing on sectors with robust growth prospects and strong credit profiles, investors can capitalize on the relatively attractive returns offered by high yield bonds while navigating the complexities of a shifting economic landscape.
The Growing Appeal of Private Investments in a Changing Market Landscape
As traditional public markets face headwinds from moderating equity returns and tightening credit spreads, private investments are emerging as a compelling alternative for investors seeking higher returns and diversification. Northern Trust’s Capital Market Assumptions 2025 Edition highlights the growing attractiveness of private credit and private equity, driven by structural shifts in the global economy and evolving investor preferences.
Declining interest rates are expected to play a pivotal role in fueling demand for private credit, as companies increasingly turn to non-bank lenders for flexible financing solutions. This trend is particularly relevant in the context of mergers and acquisitions (M&A), where private credit is becoming a preferred funding source due to its ability to provide tailored capital structures and faster execution timelines compared to traditional bank loans.
Private equity, meanwhile, is poised to benefit significantly from the transformative impact of AI and other technological advancements. Northern Trust forecasts double-digit growth in this asset class, driven by the proliferation of AI-enabled innovations that are reshaping industries and creating new opportunities for value creation. The report notes that private equity firms are uniquely positioned to capitalize on these trends, leveraging their expertise in operational improvements and strategic partnerships to unlock hidden potential in portfolio companies. Moreover, the increasing complexity of global supply chains and the fragmentation of globalization are creating fertile ground for private equity investments in sectors such as logistics, manufacturing, and renewable energy.
Venture capital, a subset of private equity, is also expected to thrive in this environment, particularly as startups harness AI and other cutting-edge technologies to disrupt traditional business models. Northern Trust points out that declining interest rates will lower the cost of capital for early-stage companies, enabling them to scale rapidly and attract investor interest. This dynamic is likely to drive heightened activity in venture capital markets, with investors drawn to the potential for outsized returns in high-growth sectors such as biotechnology, fintech, and clean energy.
The appeal of private investments extends beyond their return potential; they also offer diversification benefits that are increasingly valuable in a volatile market environment. Unlike publicly traded securities, private investments are less susceptible to short-term market fluctuations, providing a stabilizing effect on portfolios. Furthermore, the illiquidity premium associated with private markets often translates into higher returns over the long term, rewarding patient capital. As Northern Trust’s analysis suggests, the convergence of declining interest rates, AI-driven innovation, and structural changes in the global economy positions private credit, private equity, and venture capital as critical components of a forward-looking investment strategy.
AI-Enabled Productivity: A Catalyst for Economic Growth and Demographic Challenges
One of the defining themes shaping Northern Trust’s Capital Market Assumptions 2025 Edition is the transformative potential of AI-enabled productivity. As businesses across the globe accelerate their adoption of artificial intelligence, this technological revolution is expected to play a pivotal role in enhancing economic growth while addressing pressing demographic challenges. Aging populations and declining workforce participation rates in many developed economies have raised concerns about long-term productivity stagnation. However, Northern Trust’s experts argue that AI adoption can counteract these trends by streamlining operations, automating repetitive tasks, and unlocking new efficiencies across industries.
The report highlights several ways in which AI is already driving productivity gains. For instance, advanced machine learning algorithms are enabling manufacturers to optimize supply chains, reduce waste, and improve production cycles. In the healthcare sector, AI-powered diagnostics and personalized medicine are not only improving patient outcomes but also reducing operational costs. Similarly, financial institutions are leveraging AI to enhance fraud detection, streamline customer service, and develop innovative investment strategies. These applications demonstrate how AI can amplify human capabilities, allowing organizations to achieve more with fewer resources—a critical factor as labor forces shrink in many regions.
Beyond operational efficiencies, AI is also fostering entirely new industries and business models, creating opportunities for job creation and economic expansion. Northern Trust points to the rise of AI-driven platforms in areas such as e-commerce, autonomous vehicles, and renewable energy as examples of how innovation can spur growth. At the same time, the report acknowledges the need for proactive policy measures to ensure that the benefits of AI are distributed equitably. Investments in reskilling and upskilling programs, for example, will be essential to prepare workers for the demands of an AI-driven economy.
By addressing demographic headwinds and unlocking new sources of growth, AI-enabled productivity is poised to become a cornerstone of economic resilience in the coming decade. Northern Trust’s analysis underscores the importance of embracing this technological shift, not only to mitigate the challenges posed by aging populations but also to position economies for sustainable and inclusive growth in an increasingly competitive global landscape.
Navigating the Energy Transition: Policy, Innovation, and Investment Implications
The global energy transition represents one of the most profound transformations of the 21st century, reshaping how societies generate, distribute, and consume energy. Northern Trust’s Capital Market Assumptions 2025 Edition identifies this transition as a critical theme influencing markets and economies over the next decade. Rising energy demand, coupled with the imperative for energy independence, underscores the urgency of adopting sustainable practices and innovative technologies. Policymakers, businesses, and investors must navigate a complex interplay of regulatory frameworks, technological breakthroughs, and financial mechanisms to meet these evolving needs.
Policy plays a central role in accelerating the energy transition, with governments worldwide implementing ambitious targets to reduce carbon emissions and promote renewable energy adoption. Subsidies for solar and wind power, carbon pricing mechanisms, and incentives for electric vehicle adoption are just a few examples of how regulatory frameworks are driving change. Northern Trust highlights that these policies not only aim to combat climate change but also seek to enhance energy security by reducing reliance on fossil fuels and foreign imports. However, the report cautions that inconsistent or poorly designed policies could lead to market distortions, underscoring the need for coordinated global efforts.
Technological innovation is equally vital in facilitating the shift to cleaner energy sources. Advances in battery storage, hydrogen production, and smart grid technologies are transforming the feasibility and scalability of renewable energy systems. For instance, breakthroughs in lithium-ion batteries are extending the range and affordability of electric vehicles, while innovations in hydrogen electrolysis are paving the way for carbon-free industrial processes. Northern Trust emphasizes that continued investment in research and development will be crucial to overcoming existing barriers, such as intermittency in renewable energy generation and the high upfront costs of green infrastructure.
From an investment perspective, the energy transition presents both risks and opportunities. Traditional energy companies face mounting pressure to adapt their business models or risk obsolescence, while renewable energy firms and clean tech startups are attracting significant capital inflows. Northern Trust forecasts that sectors aligned with the energy transition, such as utilities, infrastructure, and green technologies, will experience robust growth, driven by favorable policies and technological advancements. However, investors must remain vigilant about potential pitfalls, including regulatory uncertainty, technological setbacks, and geopolitical tensions that could disrupt supply chains for critical materials like rare earth metals.
Ultimately, the energy transition is not merely an environmental imperative but also a catalyst for long-term economic and investment transformation. By aligning with this shift, stakeholders can position themselves to benefit from the profound changes reshaping the global energy landscape.
Globalization: Bent, Not Broken – Adapting to a Fragmented World
The third key theme identified in Northern Trust’s Capital Market Assumptions 2025 Edition is the evolving nature of globalization, which the report characterizes as “bent, not broken.” While globalization has undeniably slowed in recent years, it remains a powerful force shaping global trade and economic interconnectedness. However, geopolitical tensions, supply chain disruptions, and shifting trade alliances are morphing traditional patterns of globalization, creating both risks and opportunities for investors. Northern Trust emphasizes that this fragmented landscape requires a more selective and adaptive approach to international investments, as regional dynamics increasingly dictate economic outcomes.
Geopolitical tensions, particularly between major powers like the United States and China, have led to the reconfiguration of supply chains and trade agreements. Companies are now prioritizing resilience over efficiency, relocating production closer to home or diversifying suppliers to mitigate risks associated with geopolitical instability. This trend, often referred to as “nearshoring” or “friend-shoring,” is reshaping global trade flows and creating new hubs of economic activity. For example, Southeast Asia and Latin America are emerging as key beneficiaries of supply chain realignments, attracting significant foreign direct investment (FDI) as businesses seek to reduce reliance on single-source manufacturing bases.
At the same time, trade pacts are being renegotiated to reflect changing priorities. Regional trade agreements, such as the Regional Comprehensive Economic Partnership (RCEP) in Asia and the United States-Mexico-Canada Agreement (USMCA), are gaining prominence as countries seek to strengthen ties within their immediate spheres of influence. Northern Trust notes that these agreements often emphasize local content requirements and digital trade standards, signaling a shift toward more localized and technology-driven trade relationships. Investors who understand these nuances can identify opportunities in sectors aligned with regional priorities, such as electronics manufacturing in Asia or agricultural exports in Latin America.
Despite these challenges, globalization remains far from obsolete. Cross-border capital flows, technological diffusion, and cultural exchange continue to bind economies together, albeit in a more fragmented manner. Northern Trust’s analysis suggests that investors who adopt a selective approach—focusing on regions and industries with strong growth prospects and strategic alignment—can navigate this complex environment successfully. By recognizing the risks posed by geopolitical tensions and supply chain vulnerabilities while capitalizing on the opportunities created by regional trade dynamics, investors can position themselves to thrive in a world where globalization is bent but far from broken.
Strategic Insights for Investors in a Dynamic Decade
Northern Trust’s Capital Market Assumptions 2025 Edition offers a compelling roadmap for investors navigating the complexities of the next decade. The report underscores the importance of adaptability and foresight, emphasizing that traditional investment strategies may no longer suffice in an era defined by transformative trends such as AI adoption, the energy transition, and the evolution of globalization. To succeed in this dynamic environment, investors must embrace a forward-looking mindset, leveraging the insights provided by Northern Trust to anticipate shifts and capitalize on emerging opportunities.
The report’s emphasis on AI-enabled productivity highlights the need for investors to prioritize sectors and companies at the forefront of technological innovation. As AI reshapes industries and drives economic growth, portfolios should include exposure to firms leveraging AI to enhance efficiency, create new business models, or address demographic challenges. Similarly, the energy transition presents a dual opportunity: supporting the growth of renewable energy and green technologies while managing risks associated with legacy industries. Investors should consider allocating capital to utilities, infrastructure, and clean tech firms poised to benefit from policy tailwinds and technological advancements.
Globalization’s transformation into a more fragmented model requires a nuanced approach to international investments. By focusing on regional trade dynamics and supply chain realignments, investors can identify pockets of growth in emerging markets and sectors aligned with local priorities. Private investments, particularly in private credit and private equity, offer additional avenues for diversification and enhanced returns, particularly as declining interest rates and AI-driven innovations create fertile ground for value creation.
Ultimately, Northern Trust’s analysis serves as a call to action for investors to rethink traditional paradigms and embrace the opportunities presented by a rapidly changing world. By aligning portfolios with the megatrends shaping the global economy, investors can not only mitigate risks but also position themselves to achieve sustainable growth in the decade ahead.
