Economic Headwinds Chill M&A Deals

by Christine Short of Wall Street Horizon, 3/21/25

Takeaways

  • Corporate dealmaking continues to struggle in 2025, with Q1 M&A announcements currently set to come in at their lowest level since the COVID-19 pandemic

  • Stubbornly high interest rates, driven by sticky inflation, are making matters worse, with the Federal Reserve just upping their projections for core prices in 2025

  • Google’s acquisition of cloud security startup Wiz this week will be closely watched as a bellwether for further M&A activity this year

With only eight trading days left in the first quarter, M&A announcements are set to come in at their lowest level since Q2 2020. There have only been 77 M&A announcements in Q1 2025, compared to 112 last quarter and 105 in the same quarter one year ago. In Q2 2020, when the world was shut down due to the COVID-19 pandemic, there were only 41 M&A announcements.

total M&A

Let’s Make a Deal… or Not

Dealmaking has been more-or-less stagnant for the last three years, at least in part due to high interest rates and a tough regulatory environment. When President Trump was elected this past November, analysts predicted that dealmaking would open up again. At that time the Federal Reserve had just started to lower interest rates, starting with that jumbo 50 basis point cut in September, and signaled they intended to cut further in 2025.1 Lower rates make the cost of borrowing capital cheaper, and therefore tend to make deals more attractive to pursue. President Trump’s support of looser antitrust regulation was also anticipated to have a positive impact on M&A and IPO activity in the new year.

However, interest rates have remained elevated, as the progress on inflation seen in the last quarter of 2024 has been put on hold, forcing the Fed to say they were in no rush to lower rates any further.2 That may change however, as many of the economic indicators used by the Fed to make this decision are starting to weaken. At today’s FOMC meeting, the Central Bank held rates steady and indicated they still see two rate cuts coming in 2025.3 However, the Fed did downgrade their outlook for economic growth, now expecting the US economy to accelerate just 1.7% this year, vs. the prior estimate of 2.1% at their December meeting.4 They also increased their inflation projection for the year, now seeing core prices growing 2.8% in 2025, up from the prior estimate of 2.5%.5

Complicating matters further, the US markets have been on a rollercoaster ride for the last several weeks, with the S&P 500® officially hitting correction territory last week when it closed down 10% from its record high on February 19.6 It is likely that investors are feeling uncertain about US trade policy with tariff implementations being announced and changed every few days, along with retaliatory tariffs being implemented from affected countries. This has also worried consumers who are feeling less certain about their jobs and purchasing power as tariffs would likely lead to higher inflation. The latest reading of the University of Michigan consumer sentiment shows the index falling to 57.9, the lowest reading since November 2022.7