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Capital Markets 2025 outlook
US public markets are gearing up for a 2025 resurgence driven by interest rate cuts, pent-up investor demand and a growing backlog of IPO hopefuls.
After a year of inconsistent recovery, US mergers and acquisitions activity is poised to gain momentum in 2025 due to declining interest rates, large amounts of dry powder, the need for business model reinvention and shifting regulatory priorities. Despite a clearer economic and policy outlook, dealmakers will need to navigate a complex environment shaped by the reversal of certain Biden-era reforms, geopolitical challenges and slowing macroeconomic growth. The second Trump administration is signaling shifts in trade, tariffs and security policies. Dealmakers who succeed will be those who prioritize agility and strategic focus.
The US M&A recovery will likely accelerate in 2025 as dealmakers digest the implications of a new regulatory regime, the Fed’s interest rate pivot and other macroeconomic and geopolitical factors. The incoming Trump administration is intent on shaking up the status quo, including nominating regulators with non-traditional backgrounds. It has telegraphed a willingness to significantly alter US global trade and security policies, especially through tariffs.
As a result, the domestic and international dealmaking environment could be extremely volatile. We expect some industries, such as oil and gas, to benefit from significant deregulation. Others, such as Big Tech, may be scrutinized more closely. Cross-border deals will remain exposed to geopolitical uncertainty, with trade wars, tariffs and national security concerns complicating M&A strategy and execution.
While caution over the past year was understandable and consistent with similar election cycles, PwC expects the recovery to pick up now that some sources of uncertainty have been resolved. Along with the election, the Federal Reserve also has pivoted and the direction, if not the degree, of rate cuts is more certain.
Finally, a soft landing remains our baseline and M&A volume historically accelerates in non-recession years, according to PwC analysis of S&P Global data. There were 9,780 deals for $1.05 trillion in the first 11 months of 2024. Both volume and value were up slightly compared to the same period a year ago, when there were 9,653 deals for $1.02 trillion. Deal volume has been impacted over the past couple years due in part to a private equity (PE) exit drought.
PwC's analysis of PitchBook Data, Inc., found that several thousand PE exits were delayed over the past two years. Some of these exits are more likely to happen now that more certainty has returned to the market — meaning more potential targets for corporate acquirers.
Some of those portfolio companies may be mature enough that they consider an IPO exit strategy. The overall IPO market continued a gradual comeback this year, with proceeds raised nearly 50% higher than in 2023 and nearly four times the amount raised in 2022.
Activity was broad-based, with notable participation from industries including technology, life sciences, consumer markets and financial services. Stock prices of this year’s traditional IPOs were up nearly 29%, outperforming the S&P 500, which rose by 26% over the year as of November 29 — further highlighting the strength and investor interest in new offerings.
Looking ahead, today’s corporate development leaders operate in an ecosystem that’s being transformed by long-term mega trends, including radical technological advancements and significant demographic and political realignments.
Companies that don’t address these challenges could face the ire of activist investors and, eventually, obsolete business models.
Earnings per share (EPS) growth expectations have risen over the past year. PwC believes that many companies will turn to strategic M&A to fuel this expansion in addition to traditional organic growth.
This new environment will favor flexible dealmakers capable of strategic scenario planning around regulatory and geopolitical exposures.
Companies should prioritize simplifying their portfolios and having the capability to execute a focused value creation strategy amid a slowing economy.
We see three themes that will shape dealmaking in 2025: the need for companies to justify their valuations, an inflection point for regulatory activity, and the impact of geopolitical unrest on cross-border deals.
Businesses probably shouldn’t count on the macroeconomy alone to achieve their growth aspirations in 2025. After exiting a profit recession last year, strong corporate earnings contributed to stock prices reaching record highs in 2024. Projected profit estimates have risen in lockstep, but they may be overly optimistic in a slowing economy.
The S&P 500 in late November was trading at 22.5 times estimates of next year's earnings, according to a PwC analysis of data from S&P and FactSet. That's 40.1% higher than the average over the last 20 years. Meanwhile, PwC anticipates annual real GDP will have shown growth at 2.7% in 2024, but then moderate to 2.1% in 2025.
Cost management is another reason for concern over existing valuations. Inflation, while greatly reduced, is still higher than the Fed’s preferred 2% mark. That eats into company margins, as does a higher cost of capital. While short-term interest rates are dropping, they are still elevated compared to the past 15 years, and we don’t expect them to drop to the ultralow rates of the previous era. Increased tariffs and deportation efforts are important variables, as they could boost inflation — leading to the Fed raising interest rates again.
AI spending also factors into our valuation calculus. Despite some headwinds, $1 billion-plus deals — involving AI, cybersecurity, energy transition, insurance rollups and software targets — are being announced at one of the fastest paces in the last decade. Companies are pouring billions of dollars into AI with the expectation that it will eventually boost cost and revenue synergies. But not many companies are recognizing meaningful returns on AI yet. In the meantime, the increased spending may pressure the valuations of some companies.
Inorganic strategy will be key to closing this gap. Acquisitions can provide access to new markets, capabilities and product lines. They also contribute to cost synergies that make companies more efficient. Further, divestitures are a strategic way to rebalance underperforming portfolios and generate capital that can be used to reinvest in core offerings.
There is still a valuation gap between buyers and sellers. And while corporate cash levels are near historic highs, the money is often concentrated among the biggest players; potentially limiting volume in some industries. Finally, many companies so far have prioritized returning cash to shareholders or just sitting on it instead of investing in M&A. Lower interest rates may help encourage companies to put cash to work instead of holding on to it and earning relatively high rates.
The dealmaking environment was in a mild recovery during most of 2024. That recovery slowed in the run-up to the election consistent with past cycles. Some sources of uncertainty have now been answered. Dry powder is plentiful and there’s a backlog in the M&A pipeline. We believe the conditions are set for at least a moderate recovery and, assuming no external shocks, potentially much more than that.
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