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The latest CFO survey by Duke University and the Federal Reserve Banks of Richmond and Atlanta shows rising optimism regarding the economy and their own company, see chart below.
Source: Duke University, FRB Richmond, FRB Atlanta, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The finance textbook says that investors should diversify their investments. But there is little diversification today when buying the S&P 500. The combined weight of stocks with a weight of 3% or more in the S&P 500 index is at an all-time high and continues to rise, see chart below.
The bottom line is that buying the S&P 500 gives the impression that you are buying 500 different stocks and diversifying your investments. But the reality is that the high and growing concentration in the S&P 500 continues to be a major problem.
In short, investors should ensure that their portfolio is not all levered to Nvidia earnings.
Sources: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Autos are usually one of the most interest-rate-sensitive sectors in the economy. When the Fed raises interest rates, you would expect car sales to decline.
But that is not what has happened during this cycle.
Instead, car sales have been going up despite the Fed raising interest rates from zero to 5.5% over a short period.
The source of strong demand for cars has been robust income growth, low unemployment, households having excess savings after the pandemic, and significant increases in stock prices and home prices, leading to a higher share of cars purchased with cash.
Combined with the Fed now cutting interest rates, the outlook for car sales continues to be strong, see also the steady increase in car sales since the Fed began to cut interest rates in September.
Source: WARD’s Automotive Group, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Below is a list of risks to markets in 2025, including the probability that each risk materializes.
Note: Probabilities do not add up to 100%. Several risks can materialize at the same time. Source: Apollo Chief Economist See important disclaimers at the bottom of the page.
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Total employment in the federal government is 2.7 million, and the total cost of wages and salaries is roughly $400 billion.
The chart below shows that most federal government workers are in the US Postal Service, Veterans Affairs, Homeland Security, and the Army, Navy, Air Force, and Department of Defense.
Source: US Office of Personnel Management, BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The first chart below shows that the FOMC continues to revise higher where they think the Fed funds rate will be by the end of 2026.
The second chart shows that the Fed continues to revise higher where they think the Fed funds rate will be in the long run.
The third chart shows that the market continues to revise higher where it thinks the Fed funds rate is going.
The entire purpose of the Fed in keeping interest rates higher for longer is to slow down consumer spending, capex spending, and corporate earnings so that inflation begins to move lower toward the Fed’s 2% inflation target.
The bottom line is that interest rates staying higher for longer is the number one theme in markets as we enter 2025.
This has significant implications for asset allocation and portfolio construction because the most important variable in the finance textbook is the risk-free interest rate. When the risk-free rate goes up, it raises the bar for returns on equities, particularly in a situation where returns in equities have been driven entirely by a handful of tech stocks. In short, higher for longer has important implications for how investors should think about debt versus equity in 2025.
Sources: Bloomberg, Apollo Chief Economist 
Sources: Federal Reserve Board, Apollo Chief Economist 
Sources: Federal Reserve Board, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Looking at transcripts of earnings calls shows that there is more talk about tariffs among firms in the industrial, health care, consumer discretionary, and IT sectors, see chart below.
Source: Bloomberg ECAN <GO>, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The Fed has now cut interest rates 100 bps this year. In a strong economy where growth over the past two quarters has been 3.0% and 2.8%, see chart below, the Atlanta Fed expects GDP growth in the fourth quarter to be 3.2%, well above the CBO’s 2% estimate of long-run US growth.
The strong economy, combined with the potential for lower taxes, higher tariffs, and restrictions on immigration, has increased the risk that the Fed will have to hike rates in 2025. We see a 40% probability that the Fed will raise interest rates in 2025.
For investors, it is starting to look similar to 2022—too high inflation, rising interest rates, and falling stock prices.
The bottom line is that there are significant downside risks to the 60/40 portfolio as we enter 2025.
Source: BEA, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Investors are extremely bullish on the stock market, and a record-high share think that there is less than 10% probability of a crash over the coming six months, see chart below.
Source: Yale School of Management, Robert Shiller, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The macro outlook is simple at the moment. The US economy is strong and Europe is weak.
But there are some crucial nuances in the outlook for Europe.
Core countries such as Germany and France are weak, but the periphery countries—Spain, Portugal, and Greece—are strong, see chart below.
This unusual intra-European divergence has important implications for rates, credit, and asset allocation more broadly.
Note: Country groupings are nominal GDP weighted. Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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