Key Takeaways
The U.S. economy should see solid underpinnings in 2025, supported by a steady U.S. consumer and easing inflation. With trend GDP growth expected, we see several factors that could further support the U.S. as well as the global economy in the new year. However, a number of key wild cards, and more so than in years past, will determine the trajectory of the economy and financial markets.
Our baseline expectation for 2025 points to a positive view for U.S. risk assets, but with a wider distribution of outcomes. Specifically, the wild cards and different set of policy proposals could lead to heightened volatility, dislocations, and notable rotations under the index surface. It will be important for investors to maintain their strategic allocations while staying nimble throughout the year.
A Solid Foundation for the U.S. Economy
The economic foundation for 2025 looks solid, with the U.S. economy expected to grow at 2.1% – or its trend rate.1 Consumer spending is forecasted to once again be a key driver, as consumption is expected to grow at 2.3%, supported by continued growth in real disposable income and rising household wealth.2
With the economy on solid footing, we see four factors further contributing to a positive U.S. outlook: Rate relief, deregulation, capital market activity, and productivity gains.
Ongoing rate relief should persist at the front end of the yield curve, as the Fed is expected to continue its easing cycle in 2025 – albeit at a more gradual pace. This should benefit areas such as the consumer, commercial real estate (CRE), corporate loans, and private credit.
Deregulation, specifically in the financial and energy sectors, should fuel growth and ignite animal spirits. During the first year of President Trump’s previous term, his administration enacted just 22 economically significant rules – the fewest since President Reagan – a trend we would expect to see continue in his second term.3
We expect an uptick in capital markets activity driven by financial deregulation and improved sentiment. M&A activity is expected to rise by 25% in 2025, with 750 deals greater than $100 million expected to be completed, marking a return to pre-pandemic levels.4 IPO activity should also pick up, with our IPO activity barometer suggesting a more friendly IPO environment.5
Finally, labor productivity, particularly in the business sector (“productivity”)6, is on the rise and is expected to accelerate with the increasing adoption of AI. Over the past five years, annual productivity growth has accelerated to +2.1%, exceeding the prior five-year average of +1.4%.7 This productivity improvement has been a driver of above-trend growth in the U.S.
Economic Growth Could Also Pick Up Globally
Global economic growth is also set to pick up across various international economies due to monetary and fiscal policy developments that should support activity in Europe, Japan and China.
In 2025, Eurozone growth is forecasted to improve to 1.1%, based on private consumption that should be supported by solid wage growth and an elevated savings rate. Japan’s economy is expected to grow by 1.2%, with the potential for further consumption to be supported by a basic income tax cut. China may fall short of its 5% growth target, as it is forecasted to grow at 4.5%.8 We believe policymakers will continue to ease fiscal and monetary policy as they look to support growth, especially given the threat of tariffs.
Still, investors will face plenty of wild cards in 2025
Despite the solid underpinnings for the U.S. economy and supportive policy proposals out of certain international economies, we see plenty of key wild cards in 2025. We believe these variables will ultimately determine the actual economic and market outcomes for 2025 as they could either spur market volatility or produce a more positive outcome than our baseline.
There are five key wild cards that we think investors will be focused on in 2025:
Tariffs
Aggressive tariff strategies could stifle trade and growth, but if they result in negotiated trade agreements, they could support growth instead. A universal tariff could also put the Fed in a challenging position because it could lift core PCE inflation above 3% YoY in 2025.
Taxes
The Tax Cuts and Jobs Act (TCJA) is expected to be extended, but the timing and scope of tax reform are still unknown, given some serious questions about the budget deficit.
YoY PCE inflation could lift above
Budget Deficits
Extending the 2017 tax cuts is projected to add $4.6 trillion to the federal deficit over the next decade.9 However, the Trump administration will likely be focused on reducing the budget deficit over the next four years, especially considering Scott Bessent’s appointment as Treasury Secretary.
A key pillar of Bessent’s so-called “3-3-3” economic plan aims to reduce the deficit to 3% of GDP by 2028 – down from 7% today.10
Monetary Policy
There is a non-zero chance of the Fed pausing its rate-cutting cycle if inflation proves sticky.
Big Tech Oversight
Regulatory oversight of Big Tech under a second Trump administration presents a mixed picture. The administration is expected to adopt a more business-friendly stance, but ongoing cases against Google, Meta, Apple, and Amazon remain uncertain.
Wildcards could lead to a bumpy road in 2025
Our baseline expectation for 2025 points to a positive view for U.S. risk assets, but with a wide distribution of possible outcomes. Assuming a forward price-to-earnings ratio of 22x and 2026 bottom-up consensus earnings of $305, this would imply a fair value of around 6,700 on the S&P 500 at the end of 2025.11
However, the return profile for U.S. equities will likely be punctuated by periods of higher volatility than we saw in 2024. During Trump’s first term, the VIX averaged 18.1, which is higher than this year’s average of 15.5.12
The wild cards could also lead to notable divergences next year. The “America First” policies under a second Trump term could set up distinct winners and losers. In 2025, we would favor companies that have a high share of U.S. revenues.
Higher volatility should also create a greater opportunity for private markets, which tend to benefit during these periods. Additionally, a pick-up in capital markets activity could lead to an increase in monetizations next year, specifically for private equity.
This market setup calls for staying invested and maintaining strategic allocations to equities, fixed income, and alternatives in 2025. But the wild cards and different set of policy proposals could lead to heightened volatility, dislocations and notable rotations under the index surface.
Investors will be well served by staying nimble throughout the year, especially as opportunities present themselves.
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Authors
Anastasia Amoroso
Managing Director,
Chief Investment Strategist
Kunal Shah
Managing Director,
Head of Private Asset
Research & Model Portfolios
Peter Repetto
Vice President,
Investment Strategist
Joseph Burns
Managing Director,
Head of Hedge Fund Research
Nicholas Weaver
Associate,
Investment Strategist
Aaron Schwartz, CFA
Vice President,
Research & Education
1. Bloomberg, as of Dec. 9, 2024.
2. Bloomberg, as of Dec. 9, 2024.
3. The George Washington University Regulatory Studies Center, Office of the Federal Register, Office of Information and Regulatory Affairs, as of Mar. 1, 2024.
4. Goldman Sachs, as of Nov. 18, 2024.
5. S&P Capital IQ, iCapital Investment Strategy, as of Dec. 6, 2024. Note: Data as of November 2024. The iCapital IPO Activity Barometer is a leading measure designed to offer forward-looking insights into underlying trends in U.S. IPO activity.
6. Note: Business sector labor productivity excludes general government, private households, and nonprofit institutions.
7. Bureau of Labor Statistics, iCapital Investment Strategy, as of Dec. 9, 2024.
8. Bloomberg, as of Dec. 9, 2024.
9. Congressional Budget Office, “Budgetary Outcomes Under Alternative Assumptions About Spending and Revenues”, as of May 8, 2024.
10. Axios, Nov. 25, 2024.
11. S&P Capital IQ, as of Dec. 9, 2024.
12. CBOE, as of Dec. 5, 2024.
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