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Stocks are rallying hard as the economy refuses to buckle. Will it last in 2025?
U.S. stocks have been powering to fresh record highs in the final leg of 2024, with investors getting a second wind from promises of deregulation, tax cut and tariffs from a second Trump administration and its “America first” agenda.
November’s election and Republican “red sweep” have been tied to anger about the economy and inflation . Both have been creeping higher lately, albeit in a “goldilocks” zone for now.
Yet the economy and inflation will be critical as the Federal Reserve weighs how much to lower rates next year. They also might post a challenge to Wall Street forecasts that call for a third straight year of big gains for stocks.
Read: Inflation rate climbs for the first time since the summer. Fed weighs how much to cut rates.
“While the market loves deregulation — while [investors] love knowing who the incoming president is going to be — I think there’s some potential risks built up in the system,” said Alex Atanasiu, a portfolio manager at Glenmede Investment Management.
Take the popular group of “Magnificent Seven” technology stocks led by Nvidia Corp., NVDA which together represent a stunning 31% share of the S&P 500’s market capitalization. While their elevated valuations have fed off optimism around artificial intelligence, they also have be subject to bouts of worrying weakness at the end of November.
Read : A stumble for tech stocks is a worrying sign heading into 2025: analyst
While small-cap stocks RUT tend to be less reliant on revenues that come from aboard, Atanasiu at Glenmede said the same limited group of megacap tech stocks helping power the S&P 500’s large gains this year could see revenues walloped if Trump makes good on his threat to unleash new tariffs on his first day in office.
“Also, with those largest names, people park money there,” Atanasiu said, warning that some investors have come to think of big-tech names like Apple Inc., AAPL Amazon.com Inc., AMZN Microsoft Corp., MSFT Meta Platforms Inc., META Tesla Inc., TSLA and Alphabet Inc. GOOG as risk free investments. “It’s great on the way up, not on the way down.”
Broader rally, new risks
One of the biggest surprise for stocks this year has been the market’s deepening resilience, as earlier recession concerns faded and the Fed took its time in lowering rates.
“The first half of the year was dominated by megacap,” said Kevin Gordon, senior investment strategist at Schwab. The average stock just wasn’t doing very well, he said, making it a fragile bull market.
But around midsummer that changed as the rally broadened to include more stocks. “Pretty much everyone is participating in the parade,” Gordon said, adding that the economic and stock-market story now looks more in harmony.
Still, not knowing the extent of Trump’s aggressiveness on tariffs or immigration remains a risk in 2025.
In a sign that Trump could revive a “fly-by-night” approach to policy, Gordon said drawbacks could arise if late-evening posts on social media that threatened 25% tariffs good from on Canada and Mexico become the norm.
“That doesn’t mean markets go down, but it brings back volatility as a bigger risk,” Gordon said.
Check out: Inflation may reach these levels on Trump tariffs on Canada, Mexico, chart shows
Trump’s threats to restrict immigrant labor also risk pinching labor supply and growth, and down the line could become a “big wet blanket” on confidence, Gordon said.
Why cut rates more?
The Fed already has lowered it policy rate by 75 basis points since September, bringing it to a 4.5% to 4.75% range, with another cut of 25 basis points possible in December.
“When we look at today, where equity markets have gone and at financial conditions, there isn’t a real strong case that we need to lower rates really quickly at this point,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.
The economy has kept growing at a strong 2.8% pace when looking at third-quarter gross domestic product. The hope is that risks from additional Trump tariffs and related policies could be dialed back before they risk adding to an already large U.S. debt load.
“It’s possible that growth could be even stronger next year,” said Jim Baird, chief investment officer at Plante Moran Financial, which he views as great news for equity markets, even if it could lead to fewer Fed rate cuts.
“What we’ve seen,” Baird said, was that “a majority of Americans got what they wanted out of the election,” pointing to resilient consumer sentiment , a stronger stock market heading into year-end and portfolios rising in value.
All three major stock market gauges ended lower ahead of Thanksgiving, but with the S&P 500 index SPX up 25.8% on the year, Dow Jones Industrial Average DJIA 18.7% higher and Nasdaq Composite Index COMP on pace for a 27% yearly gain.
In November alone, the Dow was on pace for a 7.1% gain ahead of Black Friday, putting it on pace for its best month since October 2022, according to Dow Jones Market Data.
“You focus on that,” Baird said.