As we lean into 2025, and with most Irish pension and lump sum bond investors funds, weighted more heavily in the U.S., than in the Eurozone, or other markets, let’s take a look at some possible threats and opportunities in the year ahead.
While it’s true that markets are unpredictable as sentiment battles fundamentals, I will attempt to provide some useful insights into the key factors, that the experts expect to drive economic growth and thus US Equity market performance, over the course of 2025.
Key Risk Factors
Stubborn Inflation
As was the case in most recent years, the inflation story is expected to play a huge role in 2025 and continue to remain solidly above the Federal Reserve’s target. With core PCE inflation already too high at 2.8%, significantly above the Fed’s 2% inflation target, this could force a raise in interest rates again.
Tough Trump Tariffs
Although the risks of a U.S. recession have considerably subsided, a disruptive global trade war, led by the introduction on high level global tariffs, could certainly impose downside risk. The question remains, however, what level of tariffs will be seen in reality, as Donald Trump will officially take office on Jan 20th.
US Government Debt
Despite U.S. stock valuations being generally high particularly amongst the magnificent 7, (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla) many market experts remain more immediately concerned about the U.S. national debt level. Understandably so, as this fiscal year the U.S. government is likely to spend as much, if not more, on federal debt servicing, as on the entire Defence Department budget.
In addition, some leading economists have expressed concern that the major buyers of U.S. national debt (government bonds) especially the likes of China, will start to demand a higher coupon rate; to reflect the growing deficit. Higher U.S. bond yields could drive investors out of stocks and into bonds.
Optimistic Cause
Strong U.S. Economy
Markets have had a good deal of time to come to terms with Donald Trump’s proposed directions of travel, but the differences between flagged versus actual policy actions may be key to what happens next.
Despite current uncertainties about the precise outlook for inflation, the U.S. continues to look forward to another year of decent earnings growth, backed by a resilient economy, which appears strong on many measures. Unemployment still remains low at 4.1% as of last December; consumers are showing resilience, and a tight housing market is contributing to historically high home equity values and a related wealth effect. Moreover, deregulation and tax cuts may prove catalysts to further growth.
Much like 2024, where higher wages and a robust labour market gave the American consumer the capacity to keep spending despite higher price levels, many experts expect another year in which this virtuous cycle of wage and job growth supports strong consumption, further supporting the labour demand.
Increased Mergers & Acquisitions
A new U.S. presidential administration could usher in relaxed antitrust and merger guidelines, facilitating deals, and a more positive regulatory environment for M&A activity. Stronger capital markets may spur deal making and a more robust rebound in to this space in 2025.
Clear AI Advantage
U.S. companies are much further along in using AI and other advanced data science techniques in optimizing their business models. Many expect gains to broaden as adoption of the tech spreads, as the gap between the Magnificent Seven and the rest of the market is expected to narrow, as more companies begin to reap the benefits of artificial intelligence.
Bottom Line
Whilst nobody can truly time the markets, we retain our longstanding believe that diversification is the name of the game, not only in terms of asset allocation, but particularly in terms of growth versus value stocks. And, with a focus on 2025, whilst we don’t believe that growth stock momentum is yet exhausted, we would urge investors to also look to large cap value, as well as holding mid-caps, as part of their equity portfolio holdings into 2025.
I also hold the view, that 2025 is going to be even more bumpy than more recent years in terms of market volatility. However, the right risk managed approach, aligned to risk appetite, should still produce positive results.
For more on this, and to learn about our client Investment Philosophy, with a view to discussing your lump sum or pension related investment needs, please get in touch.
Free Consultation
To arrange a free initial 30 minute consultation by phone or Zoom, please contact us today. Contact: Ken O’Gorman – Director – CB, QFA, RPA, SIA – One Quote Financial Brokers on: 01 845 0049 or email: ken@onequote.ie
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