As 2025 approaches, investors in the United States find themselves standing at a crossroads, eyeing significant shifts in economic policy on the horizon. With changes anticipated in tariffs, deregulation, and tax policy, the central question is whether the robust performance of the U.S. economy can be sustained amidst evolving market dynamics.
The transition of power in Washington, D.C. is poised to wield considerable influence over the trajectories of stocks, bonds, and currency valuations as the new year unfolds. Investors may need to reconsider and recalibrate their portfolios in light of the expected changes. Forecasts suggest that the stock market may continue its impressive run, the U.S. dollar is likely to maintain its strength in the short term, and yields on U.S. government bonds are projected to rise steadily.
At the forefront of investor sentiment is a theme often referred to as “American exceptionalism.” Many believe that the solid performance of the U.S. economy is set to persist into the new year. Consumer spending remains robust, and the labor market displays remarkable resilience, allowing the U.S. economy to grow more steadily than many of its developed-market counterparts.
Tax reforms, including potential corporate tax rate reductions, are expected to provide further support to the economy. However, any such legislation would require congressional approval, which means the timeline for its impact could be uncertain. In contrast, while the eurozone experienced stronger-than-expected growth in the third quarter, the ​possibility of massive tariffs could cast a shadow over its economic outlook.
Sonu Varghese, a global macro strategist at Carson Group, encapsulates the prevailing sentiment: “With favorable monetary and fiscal policies on the horizon, we expect the U.S. economy to outpace the rest of the world in 2025.”
Another pivotal focus for investors will be the Federal Reserve’s actions regarding interest rates. In its December meeting, the Fed, after a series of aggressive hikes, opted for a continued reduction but indicated that the pace of future cuts would slow down. This expectation of a more accommodative monetary policy has been supportive of the U.S. stock markets; however, following the Fed meeting, there was a significant jump in benchmark U.S. Treasury yields, potentially hindering further equity market gains.
Throughout the year, the U.S. dollar has made a remarkable recovery against a basket of currencies, surprising many who had taken a bearish stance. Analysts now predict that the dollar will likely continue its upward trajectory, supported by solid economic growth in the United States and rising Treasury yields. In addition, tariffs and protectionist trade policies are seen as factors that could bolster dollar strength further.
Moreover, the outlook for escalating inflation could restrict the Fed’s ability to keep pace with other central banks in cutting rates. This scenario may strengthen the dollar even if other central banks continue their easing measures. Given the dollar's central role in global finance, its movements are crucial for investors to understand and anticipate what is to come.
A strong dollar, however, may exert pressure on the outlook for American multinational corporations and complicate the efforts of other countries’ central banks in their battles against inflation, as it tends to depreciate their currencies. Karl Schamotta, chief market strategist at Corpay, cautions, “A stunning surge in the dollar could break something in the global economy, but given the significant uncertainties surrounding the future and the fact that another round of ‘American exceptionalism’ has largely been priced in, achieving further exceptional performance may be challenging.”
Investors were reminded last week of how quickly market stability can turn into turmoil. Following the Fed's projection of fewer rate cuts than anticipated, coupled with intensified worries over the potential government shutdown, the U.S. stock market saw a sharp decline.
This experience reinforces a critical point: while global financial markets might maintain relative calm as they enter the new year, analysts are warning that a volatility shock is overdue. Analysts from Bank of America’s global research department do not expect a repeat of the record-low volatility levels seen in 2017.
With tariffs and central bank policies influencing the environment, the forex market may witness heightened volatility in the coming year. Fredrik Repton, a senior portfolio manager with Neuberger Berman’s global fixed income and currency management team, states, “Next year's financial market shock absorbers will be found in the forex market.”
Meanwhile, the excitement surrounding cryptocurrencies does not appear to be waning, with speculation around Bitcoin and related stocks anticipated to persist into the new year. According to Steve Sosnick, chief strategist at Interactive Brokers, “2024 is shaping up to be a year of speculation, rapidly evolving into a self-fulfilling frenzy.”
While such trades can occasionally encounter turbulence, as evidenced after the December Fed meeting, investor resolve to buy the dips has remained strong. Sosnick elaborates, “When something has been in wide use for a long time, people are reluctant to let go.”
Indeed, the efficacy of these trades has become apparent, particularly with anticipated regulatory environments favoring cryptocurrencies. Bitcoin hit a historic high of over $100,000 in December, reflecting strong demand and speculation in this arena. Stocks tied to cryptocurrencies have also been on the rise, with software company MicroStrategy, known for its Bitcoin holdings, leading the charge with a staggering increase of over 400% this year.
In this volatile yet promising landscape, investors find themselves navigating an intricate web of opportunities and uncertainties. As 2025 approaches, the strategies they employ and the sectors they focus on will likely prove crucial in determining their financial outcomes in a rapidly evolving market scenario.