M&A outlook signals firming US deal market activity in 2025

Recent economic data confirms the US economy remains on solid footing. Upward revisions to income growth and historically robust productivity growth remain the key pillars to the US economic outperformance while selective consumer prudence in the face of high prices continues to drive disinflation. What appears to be unfolding before our eyes is a soft-landing scenario that only the most optimistic dream of. With hurricanes and strikes likely to inject volatility in economic data in coming weeks, Fed officials will likely illustrate policy gradualism following an outsized 50bps “catch-up” rate cut in September and a 25bps cut in November.

Looking ahead, the EY Macroeconomics team’s US economic outlook foresees consumers and businesses still spending but doing so more prudently amid still-elevated costs and rates. We continue to expect a bifurcated consumer spending outlook with lower-income households with larger debt burdens exercising more spending restraint, while families at the higher end of the income spectrum still spend, albeit with more discretion. We foresee real GDP growth averaging 2.7% in 2024 and easing to 2.0% in 2025 but note the unusually elevated level of policy uncertainty. Given robust but gently decelerating economic activity, strong productivity growth and softening inflation, we continue to anticipate measured monetary policy easing. As policymakers more carefully feel their way to a neutral policy stance, the Fed may decide to slow the recalibration process. We anticipate a rate cut at every other meeting in 2025, for a total of 100bps of easing.

After a slowdown in the second half of 2024, the Deal Barometer estimates the volume of corporate M&A deals (for deals over $100 million) will gradually pick up, rising 8% in 2025 after a likely 11% increase in 2024.

Over the pre-pandemic decade, annual corporate M&A deal volumes averaged between 800 and 1,000 deals. But the low inflation and low-interest rate environment in 2020-21 resulted in a large boost for deal volume, registering an impressive jump of more than 90% in 2021 to around 1,900 deals. 

With 830 deals year-to-date through September, the Deal Barometer anticipates around 1,080 deals in 2024 and around 1,170 deals in 2025.

However, in our optimistic macroeconomic scenario – where GDP growth and corporate profits are stronger, inflation cooler and interest rates lower – our Deal Barometer anticipates more rapid recovery for 2024 with the total number of M&A deals increasing 11% in 2025. 

In our pessimistic scenario – where GDP growth and corporate profits are weaker, inflation hotter and interest rates higher – deal volume is expected to show a muted recovery with 5% growth in 2025.

Figure 1: US corporate M&A deal volume

The Deal Barometer estimates PE deal volume will gradually pick up, rising 16% in 2025 after a likely 20% increase in 2024. 

Over the pre-pandemic decade, PE deal volumes averaged between 375 and 500 deals over $100m per annum. But the low inflation and low-interest rate environment in 2020-21 resulted in a large boost for deal volume, registering an impressive jump of just under 90% in 2021 to nearly 890 deals. 

With 278 deals year-to-date through September, the Deal Barometer anticipates around 380 deals in 2024 and around 440 deals in 2025. This would still leave deal volumes 6% below the 2018-19 average. 

In our optimistic macroeconomic scenario – where GDP growth and corporate profits are stronger, inflation cooler and interest rates lower – PE deal volumes would rise faster in 2025, up 32% year over year (y/y). This would put deal volume 13% above the 2018-19 average.

In our pessimistic macroeconomic scenario – where GDP growth and corporate profits are weaker, inflation hotter and interest rates higher – PE deal volume would decline slightly in 2025, down 3%.

Figure 2: US PE deal volume

As illustrated in our latest EY PE Pulse survey, rising sentiment is translating more directly into M&A activity while the valuation disconnect – one of the primary market impediments – is beginning to narrow enough that an increasing proportion of transactions is reaching the finish line. However, exits continue to seek the more fulsome recovery evident on the buyside.

Fed rate cuts can be a strong tailwind for sponsors and for the M&A market more broadly – not only by lowering PE’s cost of capital and making it easier to underwrite investments, but also in building transactors’ confidence around the macro flightpath and target valuations. 

In our latest PE Pulse survey, 74% of general partners expect that deployment activity will increase over the next six months; that’s up from 63% at the beginning of the year. Survey respondents also cited an increased volume of assets coming to market as the most critical factor needed to jumpstart additional deployment activity, ahead of financing issues, fundraising concerns and even valuations. 

For much of the last year, there’s been a broad sense that too few high-quality assets were coming to market, and those that did were bid aggressively by sponsors looking to deploy capital. Reduced borrowing costs and positive momentum across the broader capital markets should help encourage a normalization of transaction flow over the coming months. 

It’s very likely that tech will continue to be a powerful theme, driven by both a rotation back into more growth-oriented assets in light of Fed rate cuts and the long-term secular promise of the sector. Spaces like data infrastructure also continue to attract significant attention driven by long-term secular themes, including companies’ continued transition to the cloud, growth in the Internet of Things space and rapidly growing data needs from artificial intelligence adoption.