2025 Economic & Market Outlook

2025 Market & Economic Outlook

The books are now closed on 2024, and what a year it was. The highlight, of course, was the Presidential election, won by Donald Trump. As we look forward to 2025, there are numerous factors to consider, from potential policy changes under the returning Trump Administration to broader economic and market dynamics. This outlook seeks to provide a clear, educational, and apolitical perspective on the year ahead

Economy

• Consumer Strength: The U.S. economy remains robust, with the consumer in excellent shape. As of November 2024, unemployment stood at 4.2%, well below the full employment threshold of 5.5% (source: Bureau of Labor Statistics).
• Manufacturing Sector Challenges: The manufacturing sector has struggled, remaining in recession since October 2022, except for a brief expansion in March 2024 (source: Trading Economics). This divergence highlights the uneven economic experiences across regions and industries and helps to explain why some experience “two economies” over the past few years. (source: Bureau of Labor Statistics).
• Services Sector Dominance: The services sector continues to drive growth, supported by strong consumer spending and full employment.
• Key Indicators for 2025: One key to look out for in 2025 is to see if the manufacturing sector can finally break out of its funk and accelerate above 50 which would signal expansion. One critical input to this may lie, in the opinion of FSInsight, oil falling below $50/barrel which alone could seriously alleviate inflationary pressure allowing the economy to expand with lower rates.

Taxes and Deregulation

• Tax Policy: The extension or permanence of the 2017 tax cuts appears likely given the recent Republican sweep, which could sustain corporate earnings, disposable income and economic growth.
• Deregulation: Regulatory reductions may act as a "stealth tax cut," reducing compliance costs for businesses. According to the House Committee on the Budget, regulatory costs have totaled approximately $1.4 trillion over the past four years. A rollback could boost corporate profitability and market performance.

The Federal Reserve

• Interest Rate Outlook: The Federal Reserve’s approach to rate adjustments will remain a focal point. Slower rate cuts extending into 2026 could support a "soft landing" scenario, where growth moderates without significant unemployment spikes (source: FSInsight).
• Inflation Trends: Inflationary pressures remain concentrated in shelter costs, insurance, and labor markets. These categories show signs of easing, which, coupled with potential declines in oil prices, could create a favorable economic environment (source: FSInsight).

Policy Under Trump 2.0

• Deregulation: During Trump’s first term, deregulation was one cornerstone of his economic policy, aimed at reducing compliance burdens on businesses. The incoming administration has pledged to further streamline regulations, which could stimulate corporate growth (source: Government Executive).
• Tariff Policy: Tariff threats and actions will be closely watched. Between 2016 and 2020, $89 billion in tariffs were collected under Trump, compared to $144 billion under Biden from 2021 to 2024 (source: The Tax Foundation). So far, the economy has been able to absorb the additional tariffs under both Administrations. While tariffs can act as a one-time inflationary pressure, their long-term economic impact will depend on their implementation and scope (FSInsight).

Energy and Oil

• Oil Production and Prices: U.S. energy policy is shifting toward expansion, which could drive oil prices below $50/barrel (source: FSInsight). Lower energy costs would likely reduce inflationary pressures, creating room for the Federal Reserve to lower rates. Some analysts project the 10-year Treasury yield could fall to a range as low as 3.25%. This “call” is an outlier but worth paying close attention to. A move like this in the Treasury market could allow for Price/Earnings expansion and alleviate a lot of anxiety in the markets.

Housing

• According to Larry Adam at Raymond James, the rise in rates is weighing on the interest rate sensitive areas of the economy. With mortgage rates climbing above the psychological level of 7%—reaching the highest level (7.14%) in six months—mortgage purchase applications declined 18% over the last 3 weeks, as of 1/9/25, to their third lowest level on record. This trend should continue as mortgage rates will likely remain elevated over the next 12 months (we only see muted downside in yields), with residential investment likely a headwind for economic growth. Since shelter costs are the latest driver of inflation, a muted housing market could have an oversized impact on inflation coming down to The Fed’s 2% Target.

Favorable Sector Outlooks of Davis Executive Wealth Management Group

• Fixed Income: Long-duration, high-quality bonds remain attractive, given the asymmetrical risk of lower rates, which could enhance total returns.
• Small Caps: The Russell 2000 index has underperformed since 2021, but a more balanced economic expansion, potential deregulation, and lower rates could lead to a resurgence. Valuation gaps between large- and small-cap stocks are at multi-decade highs, presenting opportunities (source: Bloomberg).
• Cyclicals: Financials and industrials may benefit from a more expansionary economic environment.
• Technology: The sector remains strong, but any pullback in AI spending could pose risks. Close monitoring of this subsector will be crucial.

Conclusion

The return of the Trump Administration brings potential for significant economic and market shifts. While challenges persist, such as manufacturing weakness and tariff risks, there are also opportunities, including lower energy costs, a supportive consumer base, and deregulation.

If I had a “Biggest Worry” about the markets in 2025 and beyond, it’s the overconcentration of the so-called Magnificent 7 stocks and their impact on the S&P 500. Over the past 3 years alone, the S&P 500 has returned +8.93% while the S&P 500 Equal Weight Index (every stock gets the same weighting as opposed to being weighted by market capitalization) is +2.44% (Bloomberg). Historically, these numbers are quite similar and when they deviate, it usually means that to revert to the mean one must come up, the other goes down or they meet in the middle. To illustrate this point, on the last 2 pages of this report, you will find the trailing returns of the various equity markets ending in 2015 & 2024. Each box represents an asset class, with the gray box representing a diversified portfolio of those asset classes (equity, fixed income, etc. Details found in the footnote) and as you can see, depending on the time period you are looking at, sometimes it pays to be in an asset class like Large Cap and sometimes it pay to be diversified. Clearly these are two different markets and when a shift occurs, it could be a longer-term shift depending on your time horizon. Either way, it could spell trouble for passive index investors going forward which is something we are looking out for. ?

By staying informed and adaptable, investors can navigate the complexities of 2025. Thank you for your time and attention to this update.

Regards,

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Tim

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Timothy Davis, CFP?

Executive Managing Director – Wealth Manager

Partner

Davis Executive Wealth Management Group

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Steward Partners Global Advisory

One International Place,?Suite 3210

Boston, MA 02110

(Direct) 617-377-4418

(Office) 617-377-4422

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[email protected]

https://www.davisexecutivewealth.com

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*2019 - 2024 Forbes Best-In-State Wealth Advisor

https://www.forbes.com/profile/timothy-davis

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All recognition award information can be found on Steward Partners’ website at https://www.stewardpartners.com/Recognition.35.htm

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The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates.? All opinions are subject to change without notice.? Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.? Past performance is no guarantee of future results.

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Technology stocks may be especially volatile.

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Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

For index definitions click here

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Securities are offered through Steward Partners Investment Solutions, LLC (“SPIS”), registered broker/dealer, member FINRA/SIPC. Investment advisory services are offered through Steward Partners Investment Advisory, LLC (“SPIA”), an SEC-registered investment adviser. SPIS, SPIA, and Steward Partners Global Advisory, LLC are affiliates and collectively referred to as Steward Partners.

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