The S&P 500, one of the most widely used stock market benchmarks, is still ascending in late 2024, having returned 26.9% on a year-to-date basis as of Dec. 17. That’s a great holiday present for stock investors, and there’s growing sentiment that 2025 could bring the same sterling results.
“We expect the bull market in global equities will likely continue in 2025, with the U.S. again likely to outperform the rest of the world,” says Arun Bharath, chief investment officer at Bel Air Investment Advisors in Los Angeles.
Bharath believes U.S. companies will generate stronger returns on equities and earnings growth across industries and sectors, thus providing dominant outperformance of U.S. equities against the rest of the world.
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“Market prognosticators are trying to make a case for outperformance to come from non-U.S. equities, citing high valuations in U.S. stocks against significantly discounted international and emerging equities,” Bharath notes. But he sees that scenario as unlikely: “Even at current elevated multiples, we anticipate U.S. stocks, which represent 64% of global equities, to outperform foreign stocks in 2025,” he says. “Furthermore, U.S. companies are much further along in using AI and other advanced data science techniques in optimizing their business models.”
That sounds promising for U.S. investors, but there is no shortage of tripwires that could derail market growth in the new year, with these seven “fear factors” leading the way:
— Stubborn inflation.
— Soaring public debt.
— The barbell effect.
— Tough Trump tariffs.
— A Federal Reserve pivot.
— Consumer anxiety about housing.
— An overall murky market picture.
Stubborn Inflation
Market watchers believe inflation will remain solidly above the Federal Reserve’s 2% target and linger there in 2025.
“That emphasizes our call of ‘stayflation,’ or inflation that hangs around for a long time,” says Michael Ashley Schulman, a financial advisor and chief investment officer at Running Point Capital Advisors in El Segundo, California.
Schulman remains cautious as risks such as geopolitical tensions, rising deficits and premature Fed easing of monetary policy could challenge the U.S. economy.
“Capital markets reflect these dynamics, with equities already showing high valuations while private markets, hedge funds, secondaries and private credit offer a more attractive balance of opportunities,” he says.
Schulman doesn’t see a downside crash in 2025, but it’s best to be prepared. “A quick stomach-churning correction is always a possibility that you want to keep in mind,” he says. “Having a preset financial plan can help guide one through such turmoil.”
Soaring Public Debt
While stock valuations are high and should remain that way into 2025, market experts don’t think the high stock valuations will trigger a crash — but other factors might.
“I’m worried the cost of the interest on our national debt is now out of control,” says Peter Tanous, founder and chairman emeritus of Lynx Investment Advisory in Washington, D.C. “This fiscal year, the government will spend over $800 billion on debt service on our federal debt. This figure will likely exceed the $850 billion cost of the Defense Department budget, which is a staggering amount,” he says.
Tanous believes that amount will get worse. “I’m concerned that a point in time will come soon when buyers of our national debt, namely countries like China, Japan, the U.K. and others, will demand that the U.S. put its fiscal house in order before they agree to buy more U.S. bonds,” he notes. “Of course, they will buy U.S. bonds, but they will likely demand a higher interest rate to reflect the growing deficit the U.S. is incurring.”
That, in turn, could lead to a spike in interest rates overnight, which would spook the market and cause a major stock market crash. “I’m certain this will happen, but I don’t know exactly when,” he says.
The Barbell Effect
Adam Coons, co-chief investment officer at Winthrop Capital Management in Indianapolis, sees market risks in two key areas in 2025.
“Risks to the stock market in the short term are somewhat barbelled,” he says. “On one end, if the consumer remains stronger than expected and inflation kicks back up, the stock market would likely experience some dislocations which would be driven by the market shifting its expectations that the Fed would no longer be able to cut interest rates further.”
On the other end of the spectrum, stocks would likely falter if employment data and consumer spending were to deteriorate more than expected. “That would be due to the increased possibility of a hard recession and that the Fed waited too long to decrease interest rates,” Coons adds.
Tough Trump Tariffs
President-elect Donald Trump will officially take office on Jan. 20, and when he does, economists expect trade tariffs to be a cornerstone of his policy.
This is not new for the incoming president, who enacted a tough tariff policy in his first presidential term. That included U.S. tariffs on commodities like steel and aluminum imports. In his second term, Trump said he would push 25% tariffs against Canada and Mexico, along with an additional 10% tariff on China imports.
“President Trump’s potential policies — higher tariffs, tax cuts and immigration restrictions — add further uncertainty, with implications for inflation, trade and fiscal sustainability,” Schulman says.
A Federal Reserve Pivot
The Fed has been on a rate-slashing roll of late, cutting its benchmark federal funds rate by half a percentage point in September and by 25 basis points in November. The Federal Open Market Committee met again on Dec. 17 and 18, and at press time was widely expected to cut rates by another quarter-point. That could be the last rate cut for a while as the Fed takes a wait-and-see attitude on the economy and the new Trump administration’s economic policies in 2025.
“Trump’s presidential victory could lead to potentially elevated inflation due to announced tariffs and higher deficits, but also higher nominal GDP growth,” says Vuk Vukovic, founding partner of the New York hedge fund firm Oraclum Capital.
Other market experts agree that the Fed must also factor in some high-profile geopolitical events.
“Although the risks of a U.S. recession have been greatly diluted, investors must remain vigilant over downside risks such as a disruptive global trade war, a sudden spike in bond yields and a shocking pivot by the Federal Reserve toward rate hikes,” says Han Tan, chief market analyst at Exinity, a trading and investment products firm. “These risk factors could pull the rug from under equity bulls, either by dealing a blow to the risk-on sentiment that fuels stock market gains or undermining the valuations and earnings outlooks for stocks.”
Consumer Anxiety About Housing
While consumers seem to be rallying for the 2024 holiday shopping season, sentiment is muted for larger purchases, especially housing.
According to a new U.S. housing market outlook from the real estate data and services firm Clever, 45% of buyers and 47% of sellers say home prices in their region will increase in 2025. Another 68% of buyers are worried that rising home prices will force them to delay their new home purchase in 2025. Meanwhile, 42% view mortgage rates as challenging right now, and 41% are highly concerned about getting a green light on a new mortgage next year.
An Overall Murky Market Picture
Reading the economic tea leaves isn’t easy in the current climate, but some key factors are obvious enough.
“Economic growth is better than expected,” says Lori Van Dusen, founder and CEO of LVW Advisors in Pittsford, New York. “However, the government makes up close to 30% of that. If you take that out, we see softness, more softness than people think.”
Van Dusen also notes that earnings growth has been very uneven recently, and there’s weakness in consumer discretionary spending.
“There’s continued margin pressures because companies are navigating higher costs, especially with labor and health care, plus continued supply chain challenges that have resulted in changes to consumer behavior,” she says.
When assessing the risk of investing in stocks, it’s important to study the three-legged stool of valuations, earnings growth and liquidity in the context of economic conditions, consumer sentiment and global events.
“Rising costs and consumer pullback compress corporate margins, and geopolitical conditions cause volatility,” Van Dusen says. “Meanwhile, supply chain challenges continue to be an issue, and the central banks are constantly evaluating interest rates.”
Van Dusen believes that while things appear stable for 2025, the underlying conditions are tenuous. “I’m always optimistic, but I encourage caution,” she says. “I’d rather look to compound at 8% to 10% per year versus going for a 15% return and ending up down 40%.”
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Will the Stock Market Crash in 2025? 7 Risk Factors originally appeared on usnews.com
Update 12/18/24: This story was previously published at an earlier date and has been updated with new information.
