Heading into 2025, Neuberger Berman predicted strong economic performance as earnings gains spread across sectors in their first quarter outlook. Buoyed by the high likelihood of recovering manufacturing, this growth creates an opportunity set beyond current mega-cap tech concentration within equities in Q1.
Expectations for strong consumer spending and increasing household net worth in the U.S. in 2024 paint an optimistic picture for spending in 2025.
“Stimulative financial conditions and fiscal policy could also add to growth in 2025, in our view,” Neuberger stated in their outlook. Ongoing easing by central banks contributed to growth forecasts for the year. “Of the 61 central banks we track, only four are increasing interest rates; in our view, this is the most market-friendly backdrop outside of recessions in three decades.”
Where to Seek Opportunity in Q1 2025
The firm’s forecast centers on the overdue industrial and manufacturing sector recovery. While industrial activity waned in the last two years, allowing growth-centric companies to take centerstage, Neuberger Berman predicts an end to the manufacturing recession this year. This, in turn, will lead “to a multiyear industrial recovery, a potential tailwind for value stocks and small caps.”
Several contributing factors will drive the industrial recovery in 2025. These include improvement in corporate capex, ongoing demand from corporate restocking, and strong retail sales. Such an environment would support the expansion of earnings growth across a number of sectors and a potential rotation from growth to value.
However, the firm is careful to note the challenges to such an outlook. Should mega-cap enthusiasm continue, the growing valuation gap between large- and small-caps could widen further. Furthermore, should earnings fail to diversify across sectors until later in the year, or capex expenditures falter, growth would continue to shine.
Despite the firm’s optimism for equities in Q1, much still feels fragile and uncertain. It’s the type of environment likely to favor active strategies. “In terms of style, the protracted outperformance of high-quality stocks relative to value stocks is reaching a level not observed in 26 years,” explained Nueberger Berman.
“We fear this shift has introduced a subtle risk: High-quality stocks—traditionally considered safer than the broader market— now have a beta exceeding 1.0, making them riskier than the overall S&P 500 Index.”
Look to Active Management Within Equities in 2025
Neuberger Berman offers a number of actively managed ETFs across a variety of asset classes. Whatever your outlook is for equities in Q1 and this year, the firm offers a way to express your predictions through an actively managed strategy. These include the Neuberger Berman Core Equity ETF (NBCR), the Neuberger Berman Growth ETF (NBGX), and the Neuberger Berman Small-Mid Cap ETF (NBSM).
NBCR offers a largely sector-neutral profile of high-quality companies. This style and sector-neutral approach offers the potential for reduced volatility compared to other actively managed strategies. The fund seeks long-term risk-adjusted returns for investors with the added tax efficiency of an ETF. NBCR also seeks to generate alpha long-term based on the Global Equity Research Team’s convictions. The management team for the ETF brings an average of 20 years of investing experiences to the table.
Meanwhile, the recently launched NGBX seeks long-term capital growth through its investments in large-cap companies. The management team of the fund brings an average of over 25 years of experience to bear. They seek to capture large-cap growth stocks demonstrating innovation while focusing on quality. By using both quantitative and qualitative analysis, the fund seeks companies that demonstrate elevated earnings, appealing sales growth, or returns that compete within their peer groups.
For those looking to the potential in the SMID space, NBSM is worth consideration. The fund invests in small- and midcap companies with elevated, sustainable growth potential. Its managers use bottom-up analysis when evaluating companies.
The strategy focuses on quality companies that generate reliable free cash flow and elevated profitability. The companies also have conservative balance sheets and business models that set them apart from peers. NBSM seeks to mitigate the elevated volatility inherent in small- and midcap investing, while reducing downside risk.
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