By Eljona Shkreli, Head of Investor Relations, Stratus Financial
As we enter 2025, the global economy remains at a crossroads, influenced by the normalization of post-pandemic trends and the introduction of new political and economic policies. The U.S. economy has demonstrated resilience, surpassing 2024 financial outlook projections and outpacing global growth. However, uncertainties surrounding inflation, fiscal policy, and geopolitical tensions make 2025 a year of diverse possibilities. The new administration’s tariffs and regulations are expected to significantly impact the U.S. financial outlook for 2025. Furthermore, advancements in technology and sustainability initiatives are anticipated to play a critical role in shaping market dynamics. In this evolving landscape, strategic planning and adaptability will be essential for leveraging emerging opportunities.
Before we dive into 2025 projections, we can take a peek in 2024 and its economic events.
2024: Overall, A Solid Foundation
Reflecting on 2024, the global economy surpassed expectations, growing by 2.6% while U.S. inflation eased to 2.7%. In the U.S., consumer spending improved, inflation settled near historical norms, the job market stabilized, and corporate earnings rebounded after two slow years.
The S&P 500 soared 23%, countless record highs as the economy stayed strong, inflation dropped, and big tech stocks powered an AI-driven rally. Despite a late stumble, the U.S. stock index had its best consecutive years since 1997.
We believe Investors continued to remain optimistic about the resilient U.S. economy despite the Federal Reserve’s interest rate cuts. We don’t project similar gains through 2025, but we maintain a bullish outlook.
The Federal Reserve’s rate cuts fostered a positive environment for stocks, though the outlook may not be as optimistic as some hoped for the new year. Continued higher-than-expected interest rates are likely to impact borrowing costs and provide lower-risk alternatives to equities, shaping the financial outlook for 2025. Benchmark Treasury yields rose even before the Fed signaled uncertainty about additional rate cuts. While high stock prices may not derail the rally, they could limit long-term returns, emphasizing the importance of robust corporate profits. Notably, the S&P 500 soared by 28%, marking its second consecutive year of over 20% growth, while bonds delivered a modest 3% return, further influencing the evolving financial outlook.
Globally, 2024 had its challenges. Political turmoil was common, with major elections in 70 countries, including the U.S., UK, France, and India. These new governments are dealing with issues like rising debt, climate change, AI adoption, and as well as intensive immigration.
Key Projection Themes for 2025
Consumer and Labor Market Strength: The strong U.S. consumer base and labor market are expected to continue driving economic growth. Even if higher interest rates might slow spending a bit, wage growth is still set to outpace inflation, keeping consumer confidence high and spending steady. We remain optimistic that the new administration and reduced regulations will stimulate job market growth.
Deregulation, lower taxes, and the reshoring of supply chains are all set to boost business confidence and investment significantly. Plus, infrastructure projects and incentives for high-tech industries are likely to drive economic growth even further.
On the global front, Europe is still struggling with slow growth because of competitiveness problems and political uncertainty. At the same time, China is facing weak consumer confidence and increasing tensions with the U.S. These different growth rates between the U.S. and other major economies could change global trade patterns and capital flows.
Inflation Risks and Bond Market Volatility
Inflation Path: While inflation is expected to continually moderate, core inflation might stay slightly above the Federal Reserve’s 2% target. This is partly due to potential tariff effects projected with incoming republican administration which keeps medium-term expectations elevated. With that in mind, we’ll need to keep a close eye on the inflation trajectory, as it will significantly influence monetary policy decisions.
Interest Rate Dynamics: We can expect interest rates to be unpredictable as markets respond to inflation and more Treasury bonds being issued. The bond market’s reaction to these changes will be important for deciding fixed income investment strategies.
Fiscal Policy and Market Outcomes
The new U.S. administration’s fiscal policies, like tax cuts and targeted tariffs, will likely affect both growth and inflation. Balancing fiscal stimulus with careful budget management is key to keeping the economy stable. The Federal Reserve plans to slowly ease monetary policy to balance controlling inflation and supporting jobs. Their strategy for changing interest rates will depend on economic conditions and market expectations.
Global Economic Division Increases.
U.S.-China and U.S.-Europe Relations: We anticipate geopolitical tensions further on the rise, with expected higher tariffs and export controls impacting trade and investment sentiment. The strategic rivalry between major economies could reshape global supply chains and trade alliances, affecting how and where businesses operate.
Self-Reliance and Changing Globalization: Countries are increasingly focusing on domestic production and risk mitigation, leading to a significant reshaping of supply chain strategies. Investing more in local industries and technological innovation will be key drivers of economic resilience, helping nations to become more self-sufficient and better prepared for global disruptions.
Sectoral and Market Implications
Equities: Corporate profits and supportive policies are boosting stocks, but high prices might limit returns. Its suggested investors should balance tech sectors like AI and cloud computing with value stocks and alternative investments. The tech sector is set for growth, thanks to advances in AI, cybersecurity, and digital transformation. Private sector, alternative investing likely to further grow.
Fixed Income: Higher deficits and increased Treasury issuance mean bond yields are likely to stay high, which is good for income-focused investors. Municipal bonds have strong yields, though state finances face challenges. Navigating the bond market requires balancing credit quality and yield opportunities.
U.S. Assets: Despite high prices, U.S. assets are better positioned than international markets, driven by innovation and higher interest rates. The strong U.S. dollar might hurt export competitiveness but attract foreign investors. As usual, diversification across sectors and asset classes is key to managing risk and maintaining growth opportunities.
Global Growth and Resilience
Europe: Europe is facing weak demand and slowdowns in manufacturing, relying heavily on external trade. U.S. tariffs could make things worse. The European Central Bank’s monetary policies and fiscal measures will be crucial for economic recovery.
China: With new tariffs and policies in place, China’s economy is under pressure, Policymakers have taken steps to manage the slowdown, but rapid growth remains elusive. Structural reforms and boosting domestic consumption will be important for long-term stability.
Looking Further Ahead: Balancing Optimism with Uncertainty
Our financial outlook for 2025 is both promising, steady but also uncertain. Strong U.S. economic fundamentals and global growth provide optimism, but challenges like inflation, fiscal policy changes, and geopolitical tensions require caution and remain uncontrolled.
Investors should stay flexible, diversify their portfolios, and stick to long-term strategies. As policies and markets evolve, resilience will be key to navigating the year ahead. Additionally, the fast pace of technological advancements and environmental efforts will shape the economy. Adapting to these changes and staying informed about global events is important for good investment decisions. Having a forward-thinking mindset and taking advantage of new opportunities will help investors succeed.