Trump 2.0 may drive higher uncertainty around inflation and deficit risks. Immigration and tariffs may be inflationary, but corporate tax cuts are disinflationary as benefits get passed onto the consumer. Lower oil prices from increased energy production could also help. Lighter regulations will be positive for financials, energy and technology sectors. A pickup in merger-and acquisition activity may occur with lessened regulatory scrutiny.
U.S. equities should remain supported by continued economic expansion and earnings growth, ongoing easing by global central banks, and a likely 1Q wind down of the Fed’s quantitative tightening. Consumers are largely flush with cash and record wealth, although there is evidence of fraying at the low end amid some mid-level consumers. The Fed is in easing mode but will likely dial its dovish intent down in 2025 due to sticky inflation, with potential upside risks due to continued economic growth and trade/tariff issues.
The stock market is already pricing in an optimistic backdrop and carries high valuations, creating risks as we enter 2025. An early-in-the-new-year pullback is possible (if not probable) given the sharp gains, froth in sentiment, and stretched valuations, leaving the market vulnerable to bad news or simply in need of consolidation. Note that stocks tend to be strong in November/December, but weaker in January/February.
Both 2023 and 2024 surprised strongly on the upside in a macro sense, which led to a phenomenal rally for risk assets. Indeed, the S&P 500 has just posted back-to-back annual returns above +20% for the first time since the late-1990s.
It’s true that this has clearly raised the bar for another outperformance in 2025. But with growth still resilient, alongside accommodative financial conditions and ongoing rate cuts, this is a very good setup as we move forward. And unlike the period from 2008-2022, if we do get an economic downturn, central banks have a lot more scope to rapidly cut rates in response.
So, as we look forward to 2025, we shouldn’t let a pessimism bias overtake us. Of course, random and unexpected shocks are likely to hit at several points. But the current market backdrop is an incredibly favorable one, meaning that 2025 is capable of being another strong year.
