by James Liu, CFA / on December 20, 2024
To advisors: At Clearnomics, we proudly serve thousands of advisors as they help clients achieve their financial goals. We hope that these client-friendly insights below are valuable as you work with your clients and engage prospects.
As we end 2024, one key lesson from the past year is that many investors worried too much about potential problems that never happened. Instead of a severe economic downturn, we saw strong market performance, lower inflation, and steady growth.
Looking ahead to 2025, the focus should be on finding balance. While markets are doing well now, there are still things to watch carefully, like high stock prices and changing interest rates.
2025 outlook: Seven important insights to provide perspective
1. Setting expectations for 2025: Markets can do well even when people are worried. This was evident in 2024, where investors spent much of their time worrying about a “hard landing” as the Fed kept rates high to fight inflation. Fortunately, this never materialized. Looking at the year ahead, investors appear less worried and generally more upbeat. However, it is important to remember that actual conditions may change, so a vigilant approach is needed.
2. Economic growth, including inflation and jobs: Inflation, measured with the Consumer Price Index, has slowed to only 2.6% year-over-year. Unemployment remains low at 4.2%, and 2.3 million new jobs have been created over the past twelve months. This is positive news for the economy. Looking ahead, investors expect continued low inflation, no recession, and new innovations to fuel economic growth in 2025. However, a range of outcomes exist which is why it’s important to manage uncertainty with a carefully constructed portfolio.
3. The speed and size of Fed rate cuts: The Federal Reserve has started lowering interest rates, and more cuts are expected in 2025. Lower rates usually help the economy and investments grow. This could be good news for both stocks and bonds, though the exact timing of rate changes is hard to predict. Investors are looking at this development positively, but it’s important not to get carried away.
4. From the presidential election to policy: With the election over, markets can focus on actual policies instead of uncertainty. While politics often feel important for investing, history shows that markets can do well regardless of the political environment. There are still concerns about trade wars and government debt, but these issues usually have less impact on markets than many fear. It’s better to focus on broader economic trends when making investment decisions.
5. Artificial intelligence and innovation: AI has attracted a lot of attention, with many technology stocks soaring. The question is not whether AI will continue to advance, but whether these AI-related companies will grow fast enough to warrant their valuations. While technology companies have done very well, other parts of the market are also growing too. In fact, all eleven sectors of the S&P 500 have generated strong positive returns this year.
6. High valuations: Markets did extremely well over the past year, partially due to the strength of corporate America. Yet, stock prices have gone up even more than company earnings have grown. This means stocks are expensive compared to history. When this happens, it’s smart to spread money across different types of investments, creating portfolio balance.
7. Support for all asset classes, helping manage risk: While we see a lot of positives in the market environment, we should stay vigilant. People might spend less as they use up their savings, both individuals and businesses have taken on more debt, and geopolitical risks continue to grow. To help manage risks, it is important to have different types of investments that can perform well, from U.S. stocks to international investments and bonds.
In 2025, investors should celebrate positive outcomes but remain vigilant
It’s been a great year overall from an investment perspective, with many things to be thankful for. Markets have shown remarkable resilience, and economic growth is healthy.
Looking into 2025, investors should remain vigilant and focused on the long-term. A balanced, diversified approach continues to serve as a foundational strategy for navigating market cycles, while maintaining perspective on both opportunities and potential risks in the financial landscape.
The bottom line? Markets were resilient in 2024, with strong performance despite the uncertainty. As we turn to 2025, investors can celebrate a strong year for markets, but as always, should stay focused on the long-term and on maintaining portfolio balance.