Investing in 2025: Market Factors to Consider

Looking back on 2024, it clearly echoed many of the themes from 2023. There were brief economic growth scares along the way, but the broader economy continued to defy expectations to the upside. Stocks continued their strong performance, and the S&P 500 recorded its second consecutive year of 20% plus returns. After the election, the anticipation of potentially market-friendly policies from the incoming administration also helped bolster stocks. However, the bond market experienced another lackluster year. While the Fed initiated rate cuts, it could not overcome policy ambiguity and uneasiness over rising debt levels. This led to volatility in the bond market. As we look ahead to 2025, we remain cautiously optimistic. Cautious because we know that no market environment is ever permanent. Optimistic because we recognize constructive long-term technology trends are in place. Plus, potential tax policy and deregulation efforts in 2025 could provide a tailwind — particularly from an economic perspective.

As we enter 2025, the economic landscape remains complex, marked by both opportunities and potential risks. In the year ahead, investors should be thinking about the following:

Look for the economy to slow but not tip into recession:

The economy will likely downshift throughout 2025 as consumer spending begins to moderate from recent speeds. Pent-up demand for business capital expenditures, favorable tax policy, and likely deregulation are expected to be positive catalysts that should help offset some consumer softening.

Be prepared for inflation hiccups and changing narratives around rates:

Some inflationary pressures may re-emerge in 2025 as new policies are introduced. However overall inflation is expected to remain subdued. Upticks in inflation could lead to a slower pace of Federal Reserve (Fed) rate cuts than expected that force markets to adjust to yields staying higher for longer.

Remember that so goes employment, so will go the economy:

The labor market continues to show signs that it is slowly shifting. Workers are becoming less inclined to switch jobs and the average workweek for private payrolls has declined, which is indicative of a weakening demand for labor. We expect the unemployment rate will continue to move up moderately in the coming quarters. Anything more than gradual would be a clear sign that our base case is wrong, and the economy is entering a more pronounced slowdown.

It was another impressive year for stocks. The market was driven higher by unwavering trends in technology, an enduring economy with lowering inflation, interest rate cuts, and the hope of investor-friendly new administration. As we look towards 2025, investors should consider:

Varied upside potential:

If they persist, a combination of moderating inflation, stable interest rates, and strong earnings growth supports a higher S&P 500 valuation. Our fair value target range for 2025 is 6,275 to 6,375. Potential upside could come from lower rates, productivity gains, and confirmation of market friendly policies from the new administration.

Avoiding recession is key:

The stock market has historically delivered single digit returns in the 12 months following an initial rate cut from the Fed, but when recession has been avoided, the median gain has been closer to 11%.

Potential risks:

While not the base case, a much slower-than-expected economy, coupled with a volatile interest rate policy, would be a serious headwind. Additionally, resurgent inflationary pressures in response to new policy or another increase in geopolitical tensions could also further undermine the current positive narrative for stocks.

Don’t expect a one-way street higher:

We should expect equity markets to undergo 10% corrections throughout the year. Be prepared for bouts of volatility in 2025 and consider buying equities on market pullbacks. We expect equity returns to still be favorable in 2025, but the upside will not be as robust as 2024.

At Victory we remain excited about the opportunities 2025 will offer. If you have questions about any of the topics we discussed above, please give us a call. We are always happy to help. Wishing you a safe and productive first month of the year. Be Well!

ASHLEY ROSSER, PRESIDENT

Prior to her career in the financial services industry, Ashley earned her Bachelor of Science in Nursing from Cedarville University.

Ashley decided to make a career change from her ten years within the healthcare industry as a pediatric emergency room nurse to retirement and 401K investment planning. She joined Victory Fiduciary Consulting in 2008 after obtaining her Series 65 professional financial license and went on to earn her AIF (Accredited Investment Fiduciary) professional designation from the Center for Fiduciary Studies.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.