Economic outlook: What to expect in 2025
Isaac Newton famously coined the phrase “What goes up must come down.”
The man who discovered the concept of gravity sat beneath an apple tree before being struck by the falling fruit, identifying the force that pulls objects toward earth instead of space.
In the stock market, what goes up doesn’t necessarily need to come back down. While some of history’s most popular sayings are thrown around to simplify complex topics, they shouldn’t always be applied universally.
For most, the financial markets are about as easy to understand as the complex physics equations mastered by Newton. Even the world’s top economists struggle to accurately forecast interest rates, corporate earnings, and that dreaded inflation term we’ve become reacquainted with the past few years.
Following a 20%+ return in the S&P 500 in 2023, many believed the stock market would come down to earth last year. That didn’t happen, with the market in 2024 posting a return in excess of 20% once again.
With so much uncertainty surrounding the economy, stock market, and bond market going forward, here’s what our firm sees on the horizon in 2025:
Economy
One of the biggest headaches for the Biden administration heading into the 2024 election was inflation. Despite the monthly Consumer Price Index (CPI) numbers consistently trending lower since the summer of 2022, inflation is cumulative and builds on previous increases. Many Americans simply didn’t care that inflation fell below 3% last year when cumulative food prices increased nearly 30% since 2019.
Despite persisting inflation, the one word to describe the economy in 2023 and 2024 is resilient. Expenses were not the only thing that inflated over that time period — household assets rose too. Home values and investment accounts have trended higher since 2023, with yields rising on savings and money market accounts, as well. As a result, consumer balance sheets have proven strong enough on average to combat the higher costs of goods and services.
In 2025, we see these strong economic trends continuing with additional tail winds.
President-elect Donald Trump’s agenda will focus on pro-growth economic policies. This should include deregulation across several industries, extending his 2017 tax cuts for individuals, and lowering corporate tax rates. These policies likely will put more money into consumers’ pockets and propel economic activity. In our view these tail winds will offset the negative economic impacts of increased tariffs and a more combative foreign trade policy by the incoming administration.
One key variable — how impactful will the Department of Government Efficiency (DOGE) ultimately be? The U.S. government is the single-largest employer in the country, employing nearly 2% of the population. DOGE will seek a mass reorganization of federal departments, which could cause significant layoffs and spending cuts, aiming to cut $2 trillion a year from the government’s budget. While likely beneficial over the long-term, this short-term headwind could cause negative economic impacts of unknown magnitude.
Stocks
Corporate earnings are a key driver of the stock market. Trump plans to boost business confidence from leaders and investors, domestic and abroad, including a plan to expedite approvals and permits for any company that invests $1 billion in the U.S. More investment dollars flowing into the economy should help businesses expand operations and grow earnings. Coupled with a strong consumer, we believe that strong corporate earnings will drive the stock market to new highs in the first half of 2025.
With that said, stock valuations will continue to become increasingly expensive. We could see the rally and momentum slowing in Q3 and Q4 of this year. According to Tom Lee at Fundstrat, the stock market has seen back-to-back years of 20% returns five times since 1871. In four of those five years, stocks fell in the following year. All five precedents saw stocks do worse in the second half of the third year following those two successful years. Could Sir Isaac be right after all?
Momentum and “Animal Spirits” also should be considered. Investor psychology can play a major role in pushing stocks higher or steepening a sell-off. We believe that current positive momentum will fade in the second half of 2025.
Bonds
Since 2020, long-term bond yields generally have risen across the fixed-income space. Yields have even moved higher since the election. While this can be great for new bond investors, rising interest rates have a negative impact on the value of existing bond funds. Interest rates tend to follow inflation, so the question is, where does inflation go from here?
We expect inflation and likely interest rates to linger near current levels or even see an uptick. If Trump’s pro-growth policies are effective, more money in consumers’ pockets also means more demand for goods and services. When demand outpaces supply, especially if Trump’s tariffs take effect, inflation could reignite and keep interest rates higher for longer.
In addition, the growing federal debt poses challenges. Global bond investors might demand more yield to compensate for additional risk of repayment, keeping interest rates high and bond returns at bay.
Investing in the financial markets doesn’t need to be complicated. Amid the uncertainty, stick to the time-tested strategies that have worked for so many: maintain a systematic and disciplined approach, think long-term, and remain patient despite market turbulence.
Hopefully, over time, your retirement accounts and investment balances will continue to move higher, contrary to Sir Isaac’s famous phrase.
• Jim Platania Jr. CFP, CPA is a wealth management adviser at Platania Financial Inc., 2 W. Northwest Highway, Arlington Heights. He can be reached at info@plataniafinancial.com or by phone at (847) 870-7526. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Securities and advisory services offered through LPL Financial, a registered investment adviser. Member FINRA/ SIPC.