With markets setting new records and the economy growing at a healthy pace, the question arises: Can 2024’s positive momentum continue into 2025? Raymond James Chief Investment Officer Larry Adam shares 10 key themes to watch in the coming year. He anticipates challenges and volatility spikes, requiring careful portfolio decisions, but believes that the momentum will ultimately continue.
Too much optimism?
Consumer, business and investor confidence all saw boosts following the 2024 election. Donald Trump’s second term is expected to introduce policies related to taxes and tariffs that may pose new risks and stir up debates in Congress. For equity investors – and for the Fed if it’s unable to cut interest rates further if inflation rises – there’s little room for error regarding economic and earnings disappointments.
Economic growth to continue, but at a moderated pace
A resilient consumer, steady job growth, fiscal spending from programs like the Inflation Reduction Act and the CHIPs Act, and continued investment in transformative areas like artificial intelligence, all support a fifth consecutive year of economic growth.
Monetary policy: Focus less on the number of Fed rate cuts and more on the result
As the Fed works toward containing inflation and supporting a healthy labor market, tariffs could serve as a wildcard, although those risks are believed to be overstated. While the Fed is anticipated to cut rates twice in 2025, the focus should be less on the number of cuts and more on their results, looking for a continuation of expansion. Fewer rate cuts should help to support fixed income, as cash yields should average north of 4% throughout 2025.
Look for the yield curve to steepen
As the Fed prepared to cut interest rates for the first time in 2024, the expectation was that yields would follow historical trends and move lower after the rate cut was announced. That didn’t happen, and for 2025, continued Fed easing is likely to take the short-term rate lower and steepen the yield curve. Longer-term interest rates are poised to be range-bound for much of the year and end up at a level close to where they are today, with the 2025 year-end 10-year Treasury yield expected to be 4.50%.
Dial back equity market expectations
For the first time since the late 1990s, the S&P 500 posted consecutive annual returns of more than 20%. While the fundamentals of the market are healthy – a strong economy, positive earnings growth and robust corporate activity – equity market expectations need to be dialed back in the upcoming year due to high valuations and potential complacency. Stock prices are expected to rise more slowly as company earnings grow faster, helping earnings catch up to current prices. The S&P 500 is predicted to reach 6,375 by the end of 2025, with a price-to-earnings ratio of 23-24 times and earnings per share of $270.
Mid-cap stocks poised to have their moment
Large-cap stocks have dominated the last two years, and small-cap stocks garnered attention in late 2024 as beneficiaries of aggressive Fed rate cut expectations. In 2025, mid-cap stocks, with their balanced approach, might be positioned to outperform. With 76% of their revenues coming from the US, mid-cap stocks are somewhat insulated from tariff exposure and are expected to see strong earnings growth, around 13% in 2025, with attractive valuations, which could be the desired equity market sweet spot.
Three sectors to watch in 2025
Investors should follow long-term macro themes and focus on sectors with the best earnings potential. Here’s what’s favorable about technology, industrials, and health care:
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Technology: AI enthusiasm, constant innovation, and strong corporate investment.
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Industrials: Benefit from continued government spending, reindustrialization of the US, AI buildout, and re-electrification of the power system.
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Health care: Hidden potential with attractive valuations that don’t appear to match the earnings power driven by increasing healthcare needs supported by demographic trends.
US to remain on top of global equities, but keep an eye on Japan
The US is likely to once again be the top performer in the global equity market, driven by superior economic growth, higher earnings growth, more dynamic leadership and exposure to preferred sectors like technology, industrials and health care. Japan ranks just behind the US, benefiting from an improved economy and a shift away from deflation, and should gain if global growth stabilizes in 2025.
Next stage of the bull market to present tougher challenges for investors
The market gains of the past two years will be harder to come by in 2025, and stretched valuations are likely to generate more volatility and muted returns, pushing fundamentals to the forefront. Investors are cautioned against taking on excessive risk across asset classes, as higher beta asset classes without a solid fundamental backdrop will likely face difficulties. In a shifting policy landscape, 2025 will likely be a year where active management – especially in commodities, emerging markets and small-caps – proves its worth.
Important asset allocation reminders
Amidst the uncertainty of the coming year, it's important to remember the goal of investing: to build wealth. America's wealth has grown to record highs. Consult with your financial advisor first. Your advisor is the professional you can rely on to answer your questions and provide confidence when faced with pressure-panicked headlines.
Stay focused and committed.
Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Raymond James Chief Investment Officer and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. Diversification does not guarantee a profit nor protect against loss. The S&P 500 is an unmanaged index of 500 widely held stocks. An investment cannot be made in this index. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in small-cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
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