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Key themes and risks are likely to be increasingly interconnected this year. We expect the trajectory of credit conditions to maintain positive momentum over what promises to be another disruptive period for global markets. But geopolitical uncertainties could redirect central banks' monetary easing efforts, which could redefine this supportive credit landscape.

What We're Watching

2025 is likely to be a year of promise and peril. Easing inflation and resilient labor markets and consumer spending may deliver more favorable credit conditions. But the speed and extent of monetary policy remain in question--and trade and geopolitical tensions increase the peril present in an already tumultuous environment.

Ultimately, global credit conditions are likely to remain supportive this year. But any improvement will be along a narrow path strewn with overlapping risks.

Against this backdrop, we will be closely watching key emerging and established risks, including the direction of monetary easing and renewed focus on sovereign debt amid credit headwinds; how capital flows evolve as private credit responds to lower yields; the implications of geopolitical uncertainty on market volatility, global trade, and commodities; major economies' race to electric vehicle dominance; and the rise of data centers and AI.

These risks and opportunities have the capacity to affect our interconnected world and the credit markets that underpin it.

What We Think And Why

Globally, our economic base case for 2025 calls for falling interest rates and a soft landing for most economies.

Further monetary easing this year should help ease financial pressures on corporates, with growth likely taking over profitability as a cash flow driver and positive revenue and EBITDA expansion likely to emerge across almost all sectors. Looking at private markets, the potential for further rate cuts should provide relief for private credit borrowers through lower funding costs in 2025, even as many have already benefited from repricing and improving financing conditions to date.

Certain industries experiencing innovation--particularly digital infrastructure and AI--regardless of the evolving economic and operating environment will likely continue to attract additional attention. Since the speed and extent of data center growth have taken many by surprise, there are only a few plans in place to provide the physical infrastructure that these power-hungry assets require. As a result, investment opportunities and funding requirements are likely to increase this year due to demand for new facilities and resultant high rental prices.

We expect sectors exposed to data centers will continue to benefit from favorable tailwinds in 2025. After that, pressure could likely increase as bottlenecks materialize.

On the other hand, the rapid expansion of generative AI will exacerbate existing dependencies on big technology firms this year. The increasing reliance of companies on a few third-party providers of hardware, cloud services, specialized software, and advanced generative AI models exacerbates single-provider risk.

But while the global economy and financial markets remained remarkably resilient in 2024 to multiple sources of material geopolitical uncertainty, forthcoming decisions by new governments could heighten market volatility throughout this year. Globally, government policies are likely to be more difficult to predict, and fiscal flexibility remains constrained for many governments against the backdrop of rising debt levels. Tighter trade and protectionism will likely dent real GDP growth and could weaken financial conditions. Tariffs could affect markets--regional nuances, retaliatory tariffs, and other policies or second-order effects will determine the extent of their impact. A plethora of possible scenarios complicates the market's ability to price the tariff-related risk.

Overall, this year may face increased risks to our baseline. Trade tensions and geopolitical disruptions could result in higher inflation and subsequently constrain central banks' capacity to lower policy rates.

What Could Change

Overall, President-elect Donald Trump's return to the White House means geopolitical, trade, and fiscal policy choices are all in play--and are likely to be the most impactful outcomes for the global agenda. The U.S.'s ongoing economic outperformance and the possible policy choices increase the likelihood that the interest rate descent may not meet prior market expectations.

Forecasting is a challenge amid significant uncertainty about the timing, magnitude, and effect of proposed tariffs, immigration reforms, tax cuts, and regulatory shifts. If inflation pressures reemerge, many central banks worldwide--led by the Federal Reserve, and likely followed by others, including in emerging markets--will halt the rate-cutting cycle.

Even in this context of heightened uncertainty, we expect positive ratings performance at a global scale. Our forward-looking credit cycle indicators continue to signal a potential credit recovery in 2025, reflecting rising leverage and accommodative financing conditions.

Writer: Molly Mintz