Institutional investors are entering 2025 with cautious optimism, bolstered by positive economic conditions and expectations for continued market growth. However, as they survey the horizon, a variety of lurking risks – including geopolitical tensions, trade conflicts, and inflationary pressures – remain top of mind, according to the Natixis Investment Managers’ Global Survey of Institutional Investors released last Wednesday.

After a year of strong returns, the survey reveals a complex and nuanced outlook for the coming year.

In October 2024, Natixis surveyed 500 institutional investors who collectively manage $28.3 trillion in assets for public and private pensions, insurers, foundations, endowments, and sovereign wealth funds worldwide. Among the participants were 86 institutional investors in the US responsible for managing $5 trillion in assets.

Optimism Prevails Amid Economic Uncertainty

Despite acknowledging the range of economic risks, institutional investors have an optimistic outlook for the economy in 2025, a notable shift in sentiment from 2024. According to the survey, 73% of U.S. institutional investors believe a recession is unlikely in the year ahead, a significant improvement from the beginning of 2024, when 62% anticipated a recession.

One key reason for this optimism is the Federal Reserve’s successful navigation of the U.S. economy, which 73% of U.S. investors believe has resulted in a “soft landing.” They expect this soft landing to continue in 2025. This belief has led to improved confidence in both equity and bond markets, with 59% of U.S. respondents expressing bullishness about stocks going into 2025.

While recession fears have subsided, investors remain vigilant about potential threats to market stability. U.S. institutional investors are keeping a close eye on inflation, valuation concerns, and geopolitical risks, including the ongoing conflict in Ukraine and tensions with China.

“Subsiding recession fears in 2024 have given way to enthusiasm for strong returns on the horizon, but investors are still looking over their shoulder at the geopolitical and economic risks,” says Dave Goodsell, Executive Director of the Natixis Center for Investor Insight at the press conference last week announcing the survey’s release.

Geopolitical Risks Are A Primary Concern

Geopolitical risks are the most significant worry for institutional investors globally. U.S. investors are focused on the expansion of ongoing conflicts, such as the wars in Ukraine and Gaza. About 33% of U.S. investors listed these conflicts as their top macroeconomic concern. By contrast, institutional investors outside the U.S. are more concerned about U.S./China relations, with 34% of global investors citing it as their primary geopolitical concern.

The ongoing war in Ukraine looms large in the minds of U.S. institutional investors, with 78% believing the conflict will continue into 2025, while only 22% anticipate a resolution by that time. Similarly, 60% of U.S. investors think the Gaza conflict will spread to neighboring regions. A growing concern among both U.S. and global investors is the increasing alliance between Russia, North Korea, and Iran, which is seen as contributing to greater economic instability.

In addition to traditional geopolitical risks, U.S. investors are also wary of new frontiers, such as space and the Arctic, where they foresee potential geopolitical disputes. Technological risks, particularly the role of artificial intelligence (AI), are another area of concern. Nearly 70% of U.S. institutional investors believe that AI will introduce new geopolitical risks, while 71% view AI as a tool that could unlock new investment opportunities.

Economic Outlook: Optimism and Caution

Despite geopolitical challenges, the economic outlook for 2025 is generally positive. U.S. institutional investors are bullish on both equity and bond markets. A majority (59%) of U.S. investors expressed optimism about stocks, with 73% expecting the Federal Reserve to implement one to three rate cuts in 2025. Forty percent of respondents believe the rate cuts will provide an accelerated upside for stocks.

Within the equity markets, U.S. investors expect growth to be more widespread across sectors in 2025, with 48% predicting outperformance in financials and energy, healthcare (44%), and information technology (42%). Meanwhile consumer discretionary is expected to lag, with only 19% of respondents predicting strong growth in this area.

Among U.S. respondents 59% are optimistic about the bond market’s outlook. Despite global concerns about corporate defaults, 73% of U.S. institutional investors anticipate that defaults will remain low in 2025. However, they plan to stay vigilant with 72% emphasizing the importance of active management in fixed income investing.

Valuations: A Major Concern for U.S. Investors

While there is considerable optimism about market conditions, many institutional investors are wary of the current level of market valuations. After a prolonged bull market, valuations have become a top concern. Among U.S. respondents, 63% consider valuations to be one of the top risks to their portfolios in 2025. Additionally, 40% of U.S. investors consider inflation their top risk. Among U.S. institutions 57% believe volatility will increase in the stock market.

Investors are also adjusting their strategies in response to these risks. There has been a noticeable shift toward taking on more risk, with 34% of U.S. institutional investors indicating that they are actively increasing their exposure to riskier assets. This is a marked change from 2024, when 58% of investors were focused on de-risking their portfolios.

In addition to managing risk, institutional investors are leaning more heavily on active management. In 2024, 76% of U.S. institutional investors reported that their actively managed investments outperformed their benchmarks, and 60% believe that active investing will again outperform passive strategies in 2025.

Private Markets: Bullish but Challenging

Private markets remain a major area of interest for institutional investors, especially in the U.S. Roughly 60% of U.S. respondents are bullish on private equity, while 59% are optimistic about private debt. In fact, 65% of U.S. institutional investors believe that a portfolio with 60% stocks, 20% bonds, and 20% alternatives will outperform the traditional 60/40 portfolio.

Overall, institutional investors enter 2025 with a cautiously optimistic outlook, fueled by expectations of continued economic growth and the potential for attractive returns in both public and private markets. However, they remain acutely aware of the risks that could derail this positive trajectory, particularly those tied to geopolitical tensions, inflation, and lofty valuations. As these investors navigate the year ahead, their focus will likely be on balancing opportunities for growth with the need for vigilance in an increasingly complex and volatile global environment.