2025 Economic Outlook
by Stephen Kyne, CFP
Sterling Manor Financial
for Saratoga TODAY
A double exposure image of skyscrapers with overlay of financial graphs, set against a blurred background, illustrating the concept of business growth
The markets in 2024 were dominated, largely, by AI/IT and the Fed.
The S&P 500 and the NASDAQ 100 were up 23% and 25%, respectively. On the surface that may appear to suggest that stocks, in general, did very well, however a deeper dig shows that a huge share of returns were limited to a very few stocks.
The “Magnificent 7” stocks make up nearly 33% of the S&P 500 that you often see quoted, and nearly 50% of the NASDAQ 100, the other 493 and 93, respectively, make up the rest. Weighting in these indices is proportional to the size of the companies. If you flatten it out and take all 500 companies in the S&P at equal weight, you’ll find a return of only about 12% for the year, which paints a very different picture. Investors have plowed funds into these few names, at the expense of the broader market.
Looking ahead to the new year, we are cautiously optimistic about US stock markets providing positive returns for 2025. Much will depend on the governing policies and priorities of the new administration, which we believe we’ll learn in rapid succession in the third week of January.
It was announced by the President-elect that we’ll be re-naming the Gulf of Mexico the “Gulf of America”, as well as putting “substantial” economic pressure on Canada to surrender its sovereignty and become the 51st state. Once those very pressing issues are settled, maybe everything else will fall into place, and we can end this piece here.
If only that were true…
Sideshows like these create unnecessary distractions and uncertainty for businesses and the markets. If there is one thing financial markets crave, it’s certainty. Volatility arising from this uncertainty is likely to affect domestic and international markets, as investors vacillate between bullish sentiment and defensive posturing.
Word is beginning to circulate about a possible emergency declaration by the incoming President, which would give him extraordinary power to enact economic measures, which would continue to create uncertainty
It’s widely expected that we will see tariffs placed on imports from Canada, Mexico, China, and several other trading partners. The severity of these tariffs will determine to what degree they are inflationary and impact prices. In general, tariffs would be passed on to the consumer, and we believe companies will largely maintain their margins. If tariffs are too high, however, and the consumer capitulates, we have concerns about the longevity of the current bull market.
Tariffs will likely be met with retaliatory tariffs, which could make US-made products comparatively more expense on foreign markets, exacerbating a situation already created by the strength of the US Dollar. The knock-on effect here may be cuts in production and a loss of US jobs.
As discussed in last month’s piece, an immigration policy that would see the wholesale collection and deportation of undocumented workers would be incredibly disruptive to vital areas of the economy, especially agriculture and construction, and could weigh further on US markets.
The election of Donald Trump has many assuming that the 2017 tax cuts will be renewed, as many are due to sunset and revert to their 2017 levels at the end of this year. We think this is probably a simplistic view, as the narrow majority in the House is comprised partially of fiscal hawks who are unlikely to blindly sign off on a set of tax laws which is expected to add more than $4.5 trillion to the nation’s $36.2 trillion debt.
This debate will happen, of course, only if and when Congress avoids default this year by raising the debt ceiling even further. The debt ceiling was temporarily suspended in June 2023, by the aptly named “Fiscal Responsibility Act.”
The Fed, which had the market waiting with bated breath for a rate cut for more than a year, finally gave in last year and reduced rates by 1% by year-end. It’s our belief that the Fed is unlikely to take any further action around rates until it has a firm understanding of the effects of new legislation and economic policies. We do not expect rates to come down dramatically in 2025, barring some economic or geopolitical calamity which necessitates it.
In general, we believe there are more headwinds than tailwinds and that this year will be volatile, but overall positive for the US stock markets. We hope to see a healthy broadening of the market away from the “Mag 7” stocks; prudent fiscal, foreign, and domestic policy; and a Fed that continues to loosen. If those don’t materialize, we are optimistic that the US economy is on sound enough footing that it will win in spite of it all, but at the expense of international markets.
Remember that this piece contains forward-looking statements which are opinion, based on information currently available, and subject to change. As always, work closely with your Certified Financial Planner® professional to help ensure your financial strategy reflects your needs and the realities of the economic landscape, whatever they may be.
Stephen Kyne, CFP® is a Partner at Sterling Manor Financial, LLC in Saratoga Springs.
Sterling Manor Financial, LLC is an SEC Registered Investment Advisor and does not provide tax or legal advice, nor is it a third-party administrator. Consult your attorney or accountant prior to implementing any tax or legal strategies.
