2025 Corporate Compass: Insights for a transformative year

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Rama Variankaval: Hello everyone, welcome to What's The Deal? our investment banking series on J.P. Morgan's Making Sense. I am your host, Rama Variankaval. I'm the global head of Corporate Advisory, and I'm joined today by my colleague, Evan Junek, who is the global head of Corporate Finance Advisory. Not to confuse you with those two names, they, they do sound quite similar.

Evan Junek: (laughs)

Rama Variankaval: And our jobs are quite similar. And of the things that Evan and I have been working on together for several years now is this annual report that we put out, we call it the Corporate Compass. And in today's episode, we would like to talk about the latest edition that will be released in the first week of 2025. We are recording this podcast in the, near the end of 2024. So, Evan, welcome, thanks for joining.

Evan Junek: Thanks, Rama. Look forward to doing this again. And I think we've got, like every year, a lot of fascinating data and statistics to unpack.

Rama Variankaval: So, like every year, this has, again, been a year with lots happening, perhaps even more so than some of the more recent years. The story of the year has to be election. So why don't we start there? I know there was elections around the the world. If you were to maybe start there and then we'll get into the capital markets aspects.

Evan Junek: Yeah. Well, obviously for those of you who are listening from the US, and frankly even for people around the world, it's hard to have ignored the U.S. presidential election as a key driver of a lot of media attention. And obviously we'll talk about the potential policy implications of that election result as well as part of this conversation. So just to give you some context, half of the global population last year was in a country that voted for a federal election. There were 100 federal elections held over 2024¹, and perhaps most strikingly in terms of the results of those elections, about 80% saw incumbents lose seats or votes from the last election. So, clearly we've seen not just this trend in the U.S., where we've seen the pendulum swing back and forth between democrats and republicans, but there seems to be a broader phenomenon of incumbents, especially in 2024, losing seats, losing power, and losing some of their voice.

Rama Variankaval: And it seems like, uh, perhaps this is always the case, it just brought into sharper focus, given how many elections there were, and some very fundamental questions were on the ballot. So, we already within just weeks of the U.S. election, we are beginning to see impacts in various markets, capital markets, forecasts of economists. So what are kind of some of the highlights of those changes you will say in terms of macroeconomic or capital market focus?

Evan Junek: So, general themes and trends have been as follows, and I'll summarize these as more reflective of economist views, and not just J.P. Morgan's economist views, but consensus economist views across the market. So, generally speaking, the view has been on a 2025 basis, growth is expected to go up or has increased relative to expectations prior to the U.S. presidential election. Interestingly enough, 2026 has remained flat. So, clearly there seems to be some instinct of near term growth potential, and we'll talk a lot more about this, about the potential of 2025 versus 2026. But 2025 expectations increased for growth, 2026, flat. From an inflation perspective, we see expectations increasing for both 2025 and 2026, arguably a reflection of expectations for things like tariffs, maybe things like deportations, factors that we believe, in aggregate, will have an impact on increases in prices and therefore inflation. Expectations for interest rates have increased. And as you say, we are recording this in late December, we just saw the Fed cut by 25 basis points, but also message a slowing of the pace or expected slowing of the pace of Fed rate cuts into 2025, and that manifests itself in the expectations as well. And we have also seen the U.S. dollar strengthen, or our expectations for the U.S. dollar strengthening as well. Taking all that together, I think we're seeing a market that is expecting strong near-term growth, especially in the U.S., that may be more plagued by inflation, candidly. We see maybe inflation being higher for longer and rates also expecting to be higher for longer, and the U.S. dollar strengthen- really a reflection of this theme of U.S. exceptionalism persisting on an ongoing basis.

Rama Variankaval: Makes sense. And it seems like the equity markets are reacting quite consistently with that story, right? Expecting the U.S. exceptionalism to be the theme, at least in the near term. We saw in the equity markets, quite strong performance through the course of the year, but especially in the last several weeks post election. It's interesting, I know you're the one who's kind of looked at this statistic deeply. The first year after there was a so called trifecta, which is the same party in the U.S. controlling the legislative and the executive branches, usually it's a very good year for the equity markets in the U.S.

Evan Junek: That's right, about 80% higher than we've seen-

Rama Variankaval: 80% higher.

Evan Junek: 80% higher than a typical, average year of performance for the S&P.

Rama Variankaval: That's amazing. And then you layer on top of it what's expected to be or can be expected to be a very pro stock market administration, seems that 2025, there's a lot of reason to be optimistic if you're exposed to the U.S. equity markets. But let's talk actually about the debt markets. Historically, it used to be the debt markets, especially the U.S. treasury market that was both a referee on the quality and quantity of policy coming out of DC, and also influence the course of policy. Again, it seems to be now the stock market more and more. But back to the debt market, the rates, what's going on with the U.S. federal balance sheet? What does that mean for long term rates, and for our clients, what does it mean for borrowing costs?

Evan Junek: Well, as you rightly noted, obviously a lot of expectations of the implications of policy being baked into capital markets, both on the credit and the equity side right now. On the credit side, more specifically, the treasury market side, there has been a clear concern about the level of the U.S. deficit, our spending in excess of our income, and the ultimate impact to our underlying balance sheet, which, in the context of a deficit spending scenario has seen debt increase over time. That is made worse by the fact that the U.S. government is now borrowing at the higher interest costs as well. And so our interest expense line is ballooning along with our balance sheet. That all has the potential to have negative impacts on treasury markets. And when I say negative impacts, I mean it runs the risk of having treasury rates run higher than they have historically. As we talk about this, ten year treasury rates have been bouncing around, call it four to four and a half percent, anywhere in that area for the last several weeks. And what's interesting, especially from the perspective of a corporate borrower today, is that if you rewind the clock say, five or six years, the components of a borrowing cost were the underlying treasurer rate and spreads, or risk premium. The component of the treasury rates was relatively modest in that overall borrowing cost equation. Today, that phenomenon has reversed. And so today, more than 80% of a company's borrowing cost comes in the form of the underlying treasury rate. That's the highest level it's been since prior to the great financial crisis in 2008 and 2009, and really underscores the impact or potential impact of policy, even if it's not directly related to company or corporate decision making, but how U.S. policy could influence underlying treasurer rates and by extension borrowing costs of the typical U.S. company.

Rama Variankaval: Interesting. And so that doesn't sound great if I was a borrower. But I guess the other side of that same argument, both for the individual company or the U.S. economy or the U.S. federal government is growth, that we make up for the higher cost of borrowing and the higher cost of capital by delivering more growth. I assume that is the logic. The U.S. has, in fact, historically delivered better growth than other developed markets at least. Maybe there are one or two exceptions, big economy exemptions in the world now, maybe India being really the only notable one. Otherwise, the U.S. does have a better track of kind of delivering on growth. And also, I think the U.S. investors have historically rewarded growth better. So the premium for growth in the U.S. has always been higher. And I guess that's one of the reason for, if you're gonna... a company that's looking at a higher cost of capital, to feel perhaps less bad about that is to say, as long as you're delivering growth, you will get rewarded on the other end. So the return on the capital can also be higher, right? Stay on the growth theme, almost impossible to talk about growth without talking about AI. Talk to us about where do you see the potential of AI? How much capital might be needed to sustain this?

Evan Junek: Yeah, uh, look. I think you can't talk about growth in the United States right now without talking about this fundamental... It's the modern industrial revolution taking place in front of our eyes. And I will stop short of trying to guess or forecast exactly how AI will influence our future even over the next year. But I think the most amazing thing to observe, really is two things around the AI boom, and we'll tie it to a couple other points as well. First is the quantum of capital being deployed, frankly by a very small number of companies in very unique positions within the market is extraordinary. So we'll use the Magnificent 7 as a proxy for that group. And, in fact, that's not even a really fair assessment because there are companies within that cohort that are not focused on AI as much, and there are frankly companies outside of that cohort that are more focused on AI. But just for a simplistic summary, we'll focus on that Magnificent 7 collection of firms. In 2024, those firms are expected to have spent, between CapEx and R&D, almost half a trillion dollars, amongst just those seven companies, on investment. That is a staggering number. Just to put that in perspective, that is not cashflow that they are borrowing or capital that they are borrowing from external sources, that is hardly 60% of the cashflow generation that those companies in aggregate are going to generate over that same time period. So just to give you the specific number, more than $850 billion of cashflow being generated by those companies against roughly $500 billion of investment. Another maybe staggering point of comparison for you, the U.S. military budget is about $900 billion a year, per year. So, think about seven companies investing more than half our annual military budget primarily focused just on one new emerging technology. There is no choice, in some sense, but to generate some level of base load growth in the U.S. economy as a result of that quantum of spending from a small number of companies.

Rama Variankaval: That's amazing and quite some incredible statistics. Then is it fair to then kind of extrapolate from that and connect it to the previous conversation about how the U.S. markets watch growth? If you look back at the last, say, 10 years, the typical U.S. corporate, set aside the Magnificent 7, has focused a lot on return on investment capital, right? Improving margins, paying down debt, maybe doing buybacks, dividends, etc. Do you foresee that changing? Is there a incentive for companies, not directly in the AI field, to follow this algorithm of investing for growth and expecting that the market will do all that?

Evan Junek: I think I'll take the easy exit on the answer to that question which is, of course, it depends. I think there are gonna continue to be industries that find themselves constrained. Constrained not by, candidly, regulation, although some may be, constrained by their investors.

Rama Variankaval: Hmm.

Evan Junek: Constrained by those who provide them capital. And I'll pick on the commodity linked sectors for the most part, would, would probably fall under this category, where not withstanding stronger commodity prices over the last few years across a number of different vectors, those companies have stayed incredibly disciplined when it comes to the quantum of CapEx. Most of those companies have not seen CapEx numbers increase, certainly not consistent with the kinds of companies we've seen who have exposure to the AI boom. That said, I do think there are lessons we can learn from those capital intensive more cyclical firms, which is that those companies have ultimately found themselves more focused on things like return on investment capital and return thresholds. I think you have to imagine that these large AI firms will not perpetually get a blank check to invest in something that isn't ultimately going to generate returns for investors. But in fairness to those companies, and something we've not, frankly specifically talked about in this report, but work we've done separately, the Magnificent 7 companies, in aggregate, have actually seen their return on invested capital improve over the last five years, not degrade. Again, another staggering stat for companies who are investing at this level of intensity, and a testament to, frankly, the profitability of their underlying businesses that are otherwise supporting this kind of investment.

Rama Variankaval: Again, just nothing but short of amazing. It also kind of makes me wonder, how does the rest of the world compete with that? But you've hit on something that clearly is top of mind for lots of people, which is deregulation, right? It's been a theme of the incoming administration. I think it's fair to say that most corporate participants in the U.S. economy will point out to the cost of excess regulation, right? And it's, again, I don't think it was anyone's intent, but through years of adding yet another piece of regulation to solve yet another issue, we are now in a position where it seems like many sectors are burdened by regulation. That has been a headwind to growth. Clearly that seems to be primed for change. What do you expect... And by the way, just a, a statistic just to kind of match you with perhaps a staggering statistic of my own, if you just look at the potential capital relief that the large U.S. banks will get if the most stringent capital rules are not implemented, the basel III end game, that frees up about $150 billion of bank capital². And if you assume a seven times type multiple for kind of capital to loan we're talking over a trillion dollars of capacity that these big U.S. banks will have to put to work in the credit market, which obviously has multiplier effect on the economic activity it can generate. So, that's just a small piece of the regulation pie, if you will. But I know there is regulation across many sectors. Where do you see that going and the potential impact of all that?

Evan Junek: So, that's a great question. It's hard to even fathom all the potential areas in which deregulation could influence both corporate decision making and, frankly, even just individual decision making as well. To maybe keep it anchored a little bit in the capital markets, I think where we're seeing this is amongst the smaller Cap firms in the market. So, one of the consequences of this Magnificent 7 trend we've seen in the market, we talked about it last year in this discussion, is that if you look at the S&P 500 sort of headline multiple, we're, we're at or near, depending on when you take the measurement, all time highs. In contrast, mid-cap and small-cap companies have not benefited from that same level of out performance over time. In fact, the gap between large-cap and small-cap remains relatively elevated versus history in terms of the relative evaluation we see between those cohorts of firms. Since the middle of this year, we've seen a little bit of a reversal of that trend, and we've seen an acceleration of that trend since the results of the U.S. presidential election. One interpretation of that would be that those companies are more likely to be beneficiaries of a more deregulated business operating environment. And that's intuitive, right, in the sense that smaller companies typically don't have the wherewithal and the resources and the economy to scale to operate most effectively in a more regulated environment. And so as a result, we could see small and mid-cap firms outperforming. We might see that out performance leading to things like M&A opportunities, right? We may see people maybe more willing to transact in a world where evaluations are more robust than they have been historically, and, essentially, those companies playing a little bit of catch up relative to the large-caps who have benefited from the benefits of size and scale.

Rama Variankaval: Makes sense. Is it fair to say also perhaps that the relative performance of the smaller mid-cap companies, relative to the big guys, that is, is an opportunity for the private equity community to take a look at? I mean, obviously that is their sweet spot, if you will, as opposed to that large-cap. It's been, again, the under performance has perhaps created an opportunity and now we are at this juncture where if you can go and invest in these smaller cap companies and then let them scale up, let them ride the growth wave, perhaps that's something that the private equity guys might want to see happen too.

Evan Junek: Absolutely. And I think you see that in the private equity data. The amount of capital that's recycled, the amount of monetizations that we've seen take place within the private equity asset space is roughly a half to a third over the last few years of its historic level of... historic pace, let's say. And, absolutely. We could definitely see a scenario where the performance of small and mid-cap firms improving could lead to more transactions with respect to those sponsor owned companies, and certainly could lead to a baseline improvement of the overall M&A market as well.

Rama Variankaval: And I know you've done some, you know, interesting analytics at that, looking at historical factors that drive the volumes in M&A markets and how they are positioned right now. Would you mind maybe talking a little bit about that?

Evan Junek: Absolutely. So, obviously we've got a lot of people out there trying to sort of anticipate what might happen with M&A markets into 2025. We took a little bit more of a statistical based approach and said, look, at the end of the day, the velocity of M&A is driven likely by the health of the underlying economy, so we looked at GDP growth, U.S. GDP growth. It's probably driven by financing markets, so we looked at treasury rates. And it's probably driven by valuation, so we looked at S&P 500 valuation ratios, PE ratios. And those three variables actually do have a statistically significant relationship with the overall value of M&A being announced in the U.S. in a given year. And so we analyzed the last 15 years or so, to assess putting in some of the data for next year, what that might imply in terms of M&A velocity and M&A activity. And the results suggest that M&A markets may improve or increase, or M&A volumes may increase by five to 20% next year based on current expectations. And I think you could argue that that might be an underestimation of the ultimate result of M&A activity because of some of the deregulation topics we also just discussed, right? In a world of lower regulations we could see that number being biased, even higher.

Rama Variankaval: Makes sense, very good. I'm starting to get worried that we're almost at time, but we haven't talked about any of the downsides. We have talked about all the good things, but the story is never that simple, never that straightforward. So, let's spend maybe a couple minutes talking about what could go wrong. Are there risks that you are kind of focused on? What should, again, our clients who are using these statistics, these data points to make decisions, what should they also keep in mind?

Evan Junek: So, I think at top of the list in terms of risks has to be geopolitical. And one of the things we examine in the piece actually to illustrate the fact that the world we're living in today has more active state conflicts taking place than at any point in modern history all the way back to World War II. And that is happening despite the fact that we continue to flirt with all time highs in U.S. equity markets, certainly in large-cap U.S. equity markets. And I think you have to look at that contrast, and it's obvious to recognize that there is a persistent risk there. I think from the perspective of most corporate decision makers, that risk comes in the form of supply chains, sourcing of goods and services, and we do look, and, at some very specific kinds of key commodities and goods that have very elevated levels of concentration. So, just to give you a few examples, rare earth metals, 69% of the global sourcing of rare earth metals comes from China. 66% of advanced semiconductor manufacturing capabilities come from Taiwan, right? We have a select set of goods and services that we rely very heavily upon that we have very concentrated exposure to in terms of overall geopolitical risk. So, geopolitical risk is definitely one that's high on our list. Second, as a corollary, is China. What we looked at is we did a more deeper dive in sort of the internal workings of China, right? China itself is not the economic powerhouse that it has been known historically, right? Their growth has come down, their youth unemployment is high. Housing prices have declined. Exports have declined into the U.S., although that's a more nuanced comment. And at the same time, China remains in a very, certainly on a relative basis, in a position of strength versus the U.S. due to its own sovereign balance sheet. And so it does have arguably the tools in the toolbox to manage through some of those risks in maybe a way that even the U.S. can't operate right now.

Rama Variankaval: Meaning often more stimulus because they haven't quite done that in any great measure yet?

Evan Junek: Potentially, right? If it ultimately comes to that. I think the other dynamic that I think is maybe, uh, maybe to draw it back to our conversation about elections, is I think most of the conversation today is about thinking about, "Oh, well, tariffs, for instance, will be a bilateral negotiation tool with many of the countries in which we actively trade." Well, that's a little bit framed in the context of us negotiating with sort of a constant on the other side, right? With somebody who sort of has established priorities, established objectives. Remember, we've seen 80% of the world's incumbents, effectively, or I should say in the elections that were made, 80% of incumbents have lost power. So it's not clear entirely in some of these countries what those objectives will be. We've got variables changing on both sides of these equations that need to be considered. And by contrast, China has had a single ruler for more than a decade now, right? And they have a level a stability and consistency to their strategy that is certainly going to contribute to the posture of their negotiations on a go for basis, and arguably their long term economic success as well, good or bad.

Rama Variankaval: Yep. Makes sense. Look, China definitely is one we can do a separate episode on or several ones on. The ability to think about the world on multiple time scales is something that they're uniquely better positioned than anybody else to even, partly because of the government system they have. Any other risks? I mean, it does feel that the U.S. consumer is something to talk about as well there, right?

Evan Junek: Yeah. Look, one thing we unpacked a little bit is the evolving risk profile of the U.S. consumer. And part of that goes into the opportunities that they've had to invest over the last several years. We've seen the typical consumer now more invested in the stock market than they have been historically, but with the recognition that investment in the stock market also comes with concentration risk, right? In large part to the Magnificent 7 which now represent circa 25 to 30% of the overall stock market. So the typical person that maybe invested in stocks in a diversified way, but are still exposed to a handful of big names in a big way. Investment in volatile cryptocurrency has increased substantially. The opportunities for participating in betting markets have increased significantly. And all the while we've seen credit card debt creep back up and even pass levels we saw pre-pandemic. And when things are going well, especially with the equity capital markets, I think that has the potential to create a lot of individual wealth, but it also creates risks to the downside.

Rama Variankaval: Got it. So there are risks all the way from the federal balance sheet all the way down to the consumer where this gamification of everything has allowed people to make bets that maybe even five, ten years ago they were either unable to or unwilling to. But despite all that, what I think is fair to say there is lots of reasons to be optimistic in the new year, in 2025 at the very least. The policy environment can be expected to be supportive. The stock market is, in fact, an important indicator of the policy direction and the market seems to be feeling pretty good about where the country is going, the U.S. economy at least is going. And so any kind of last words? If you're in the seats of one of our clients, you are a CEO or a CFO thinking about decisions you need to make, what would be one or two kind of tangible pieces of advice you might give?

Evan Junek: Yeah, so first, I think we have to acknowledge that this acceleration of change that we've seen so long in the technology, right? The technology we carry in our pockets, the technology we see on screens. That pace of change, that acceleration of change is now manifesting itself in other parts of our lives, right? It's manifesting itself in our politics to some extent, it's manifesting itself in the physical things we're building now, in large part, in connection with things like AI, right? With now the largest technology companies in some sense becoming the large infrastructure companies. So, this acceleration of change is something that companies need to become increasingly aware of and prepared for. And that means becoming more nimble or staying nimble. It means being ready to make decisions rapidly. And it means being prepared for uncertainty to some extent. As a corollary to that, the second point I would say is, you're spot on that I think we see a lot of reason to be really excited about 2025, from everything from deregulation trends, to the potential underlying growth and AI opportunities and investment opportunities we see across the market. When you start to look at the back half of '25 and into '26, there starts to be much more uncertainty. We can talk excitedly about things like deregulation, about things like individual tax cuts and all that sort of thing, but by the time we get to the end of 2025, by the time we're talking again next year, we're gonna have to see how these things actually get implemented. And that's where I think the rubber is gonna really meet the road. And the excitement and exuberance you see in markets today may be warranted, but it also may be overplayed. And so being prepared to act proactively in the first half of 2025, being on the front foot makes a lot of sense. And finally, all of this has to be done through the lens of being prepared for the elements of uncertainty we see that remain so prevalent. And making sure that when you get through those opportunities or you take advantage of those opportunities, that you're left from a position of strength to be prepared for more uncertainty to come.

Rama Variankaval: More uncertainty to come, that seems like as good a place as any to stop. Evan, thank you so much for joining me, and, and thank you for your fantastic work leading the Corporate Compass for the year. To all our listeners, thank you for listening, and I hope everyone has a fantastic 2025. Thank you.

Evan Junek: Thanks, Rama.

Voiceover: Thanks for listening to What's The Deal? If you've enjoyed this conversation, we hope you'll review, rate, and subscribe to J.P. Morgan's Making Sense to stay on top of the latest industry news and trends, available on Apple Podcast, Spotify, and YouTube. To stay ahead of the curve, sign up for J.P. Morgan's In Context newsletter, packed full of market views and expert insights delivered straight to you. To subscribe, just visit jpmorgan.com/in-context. This material was prepared by the investment banking group of J.P. Morgan Securities LLC and not the firm's research department. It is for informational purposed only, and is not intended as an offer or solicitation for the purchase, sale, or tender of any financial instrument. © 2025 JPMorgan Chase & Company. All rights reserved.

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_{1. 100 countries held federal elections, which includes 27 elections held in European Union member states to elect representatives to the European Parliament; these are captured as unique individual elections.}

_{2. Estimate of minimum regulatory bank capital for 8 largest U.S.-based banks by assets.}