Swiss Re has shared insights indicating that current asset prices are grounded in an expectation of a 2.7% economic growth rate in the US for the first quarter of 2025, with inflation expected to return to its 2% target.

This optimistic growth outlook, however, carries the risk of asset price declines if actual data falls short of expectations.

Specifically, equities are pricing in the most favorable growth and inflation scenarios, while Treasuries suggest US growth and inflation rates above 2%. These market-implied perspectives offer valuable insights for investors, including insurers, by highlighting potential market correction risks and informing hedging strategies.

The analysis suggests that, overall, asset prices project continuous strong economic activity in the US through 2024, with some even anticipating a reacceleration towards year-end. This projection diverges from Swiss Re’s baseline view, which predicts robust but slowing growth in the US.

The expectation of an economic deceleration underscores the potential for price corrections if growth indeed slows. On an inflationary level, most asset prices are expected to align with the 2% target within a year, providing crucial information for insurers in their asset allocation decision-making.

Regarding asset price performance quarter-over-quarter:

According to Swiss Re’s findings, asset prices on average imply a 3.4% quarter-over-quarter annualized GDP growth rate for the current quarter and 2.7% in the first quarter of 2025. Equity markets indicate susceptibility to short-term corrections if growth does not meet the implied 4.4% growth expectations.

For inflation, the analysis suggests an average asset price implied inflation rate of 3.3% for the current quarter, converging to 2.2% one year out. This aligns closely with current inflation swap rates, which forecast a 2.3% inflation rate in the first quarter of 2025. Swiss Re notes that while equities present a benign inflation outlook, Treasury yields are positioned more accurately for an above-target inflation scenario.

In conclusion, Swiss Re’s analysis reveals that most assets are priced for sustained strong economic activity and an inflation return to the 2% target by 2025. Equities, in particular, display optimism regarding growth and inflation, whereas Treasury yields offer a more cautious perspective on inflation expectations.