A 2025 Market Outlook

By Chris Brown, CIMA®, CRPC™
Vice President — Investments

It’s 2025, the Year of the Wood Snake, or also known as the Year of the Green Snake. Based on Chinese culture the snake symbolizes wisdom and agility, according to Xinyi Wu with the South China Morning Post. Wu says, “The element of Wood represents growth, flexibility and tolerance. At the same time, wood also nurtures the element of fire, which represents vitality and change.”1

For many U.S. investors, we will be witnessing a big change in U.S. leadership with the inauguration of the 47th (and re-elected) president, Donald Trump. President Trump may create many policy changes based his initiatives communicated throughout his campaign trail in 2024. Will the changes to come create positive, negative, or no change at all for the U.S. markets? We will explore the three main points on where the direction of the U.S. economy heads for 2025, so let’s dive in.

U.S. Earnings

The outlook for the U.S. economy, U.S. consumers and markets remains strong going into 2025.  According to Vice President and Senior Earnings Analyst John Butters at Factset, analysts expect the S&P 500 to report double-digit earnings growth in calendar year (CY) 2025.

“The estimated Year-over-Year (YoY) earnings growth rate for CY 2025 is 14.8%, which is above the trailing 10-year average (annual) earnings growth rate of 8.0% (2014 – 2023),” he said.2

Analysts also expect a continuation of the catch-up trade with the S&P 493, which represents all the S&P 500 stocks minus the “Magnificent 7” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) companies.  If you need a little refresher on the “Magnificent 7” stocks please refer to my July 2023 article on “Widening the Moat for the S&P 500.”  The S&P 493 companies are expected to report earnings growth of 13% for CY 2025, which represents a 44% increase from analysts’ estimates for CY 2024 at 9%. As the Magnificent 7 growth decelerates, new names from the S&P 493 will catch up. This provides a narrative that investors may be looking for returns from companies with more attractive valuations and within sectors that may have underperformed in 2024. These sectors may include healthcare, materials and industrials that are all projected to report double digit growth for CY 2025. Overall, many analysts are projecting the S&P 500 to finish the year around 6,680 for 2025. This would equate to a 2025 S&P return of 11.3% based on a 2024 year-end S&P performance of 6,000.

Policy Fog Ahead

The new Trump administration may lead to many policy changes soon, which may create further unknowns to the markets and the U.S. economy. Trump’s potential policies would include the following: Tariffs up, taxes down, reeling in government spending and reduced immigration. The biggest concern for markets in the new year are newly imposed tariffs on all imported goods, estimated at 10%, with a 60% tariff on all Chinese goods. (side note: President Joe Biden continued many of Trump’s first-term tariffs and increased Section 301 tariffs on China last month.)3

We will soon find out if this is “tough talk” to negotiate better terms with other global economies. The unintended consequence to these tariffs is the uncertainty to those companies that derive a large portion of their revenues internationally. Below is the chart based on the S&P sectors that derive their revenues internationally compared to those sectors that create most, if not all, of their revenue domestically. It is a bit premature to make any predictions on any policy impact at this point, but this is an area of risk we will be monitoring throughout the year.

The Fed

After Jerome Powell’s Federal Open Market Committee (FOMC) presser on December 18, the equity markets showed their uncertainty for the Fed to maintain an accommodative interest rate environment by selling off almost 3% in the S&P 500 and undergoing a 3.5% selloff in the Nasdaq Composite. Powell, the Federal Reserve Chair, said, “Economic activity has continued to expand at a solid pace, with an unemployment rate that remains low, and inflation that remains somewhat elevated.” 

It will be interesting to see how the fiscal policy by the Trump administration will affect the future of possible Fed rate cuts. At this time, the market is projecting one 25 bps rate cut in 2025 with and only a 51% possibility of a second rate cut in December 2025 based on the CME FedWatch tool. The probability for additional rate cuts can easily change in the near future based on new economic data.  We will continue to monitor the two main areas that impact future Fed rate policy: Personal Consumption Expenditures (PCE), also known as consumer spending, and the U.S. labor markets.

In summation, I feel that the U.S. economy is still within the guard rails of cautious optimism. We have not reached over-exuberance yet, even though it may feel like it when you hear about weird crypto tokens like “FartCoin” go up 450% in 2024. This area of speculative bets has existed well before the crypto markets came into the picture. 

In the 1990s it was “fill-in-the-blank dot com,” and in the 1980s it was commercial real estate tied in with high yield bonds. The most important thing to understand about long-term investing is knowing the difference between gambling and investing, understanding the difference between investing and trading, and knowing your risk tolerance, time horizon and investment objectives.  Personal finance is exactly that — it’s personal.  Speaking with a financial professional may help you understand how to compartmentalize and craft your personal investment plan for the future versus scratching your speculative trading itch with “YOLO” money.