4 Key Factors to Watch in 2025
With just two trading days left in 2024, it’s safe to say it was a stellar year for stocks. For some investors, it may feel like the market has been running too hot. But if we look at just bull market years since 1932, the average annualized return for U.S. stocks is 23%. That puts performance in 2023 and 2024 well within the historical norm.
To be fair, this does not mean that 2025 is destined to be a great year. There are key factors to watch in the new year, four of which I detail below for investors.1
- What Will the Path of Interest Rates Actually Look Like?
The Fed has a lot of moving parts to navigate in 2025.
At the moment, the Fed’s core concerns—inflation and the labor market—appear to be stable. The unemployment rate is hovering in a range just above 4%, and the labor force has remained about the same size in the past quarter. The possibility of mass deportations and the almost certain reversal of lax immigration policies are poised to tighten the labor market (increasing job openings relative to unemployed workers), which could increase wage pressure. It will be a factor for the Fed to watch.2
Then there’s inflation. The latest CPI print showed prices rising 2.6% year-over-year in October, a slight pickup from September’s 2.4% pace. On a monthly basis, prices increased at a seasonally adjusted rate of 0.2%, in-line with expectations. Core prices, which strip out volatile food and energy prices, rose 3.3% year-over-year and 0.3% from October. In short, the inflation fight is in a relatively solid place, but it’s not yet won.
Discover Market Opportunities in 2025 with Data-Driven Insights
As we close out a remarkable 2024 for stocks, many investors are asking: What’s next? With interest rates, inflation, and labor market dynamics all in play, 2025 brings new opportunities—but also key challenges.
Our December 2024 Stock Market Outlook Report3 delivers the actionable insights you need to navigate the year ahead with confidence. This expertly curated guide breaks down:
- Post-election market insights – What political shifts mean for investors.
- Key U.S. economic data – Trends shaping the economy.
- Global market analysis – How international factors could impact your portfolio.
- Zacks S&P 500 earnings insights
If you have $500,000 or more to invest and want to learn more about these forecasts, click the link below to get your free report today!
IT’S FREE. Download the Just-Released December 2024 Stock Market Outlook3
CPI (blue line) and Core CPI (green line) Year-Over-Year % Change
As it stands today, the Fed has cut rates by 100 basis points as the economy has continued growing at a solid pace, which is generally the opposite of what you’d expect to see. The incoming administration has promised fiscal stimulus in the form of tax cuts, and other policies like deregulation are designed to spur growth. That has thrown the path of interest rates into question, as evidenced clearly by Federal Reserve Chairman Jerome Powell’s December statement that “we’re going to be cautious about further rate cuts.”
- Turning Ideas into Policies
Long-time investors know that when it comes to policies, it’s important to focus on what politicians and parties do, not what they say. With Republicans taking control of Congress and the White House, it’s reasonable to expect that many of the policy proposals from the campaign trail will be pursued. But whether they’re enacted is a different story.
One example is tariffs. President-elect Trump has floated the idea of implementing a 60% tariff on all imports from China and up to 10% on imports from other countries. In response, China has restricted the export of certain essential materials, some of which are critical components in the production of semiconductors, satellites, and night vision equipment. President-elect Trump has also suggested a 25% tariff on goods from Mexico, the U.S.’s largest trading partner, as well as on Canadian imports. Exchanges like these insert uncertainty into global trade relations, but investors should remain patient to see how it actually plays out.
We could also see significant changes in the regulatory landscape. President-elect Trump is expected to appoint new heads for agencies such as the Federal Trade Commission and the Justice Department’s antitrust division, which oversees mergers and acquisitions, with nearly 40% of the S&P 500 market cap under scrutiny. These leadership shifts, along with broader changes in Washington, are expected to mark a new era of deregulation. This is generally supportive of earnings and economic growth, but again, investors should take a wait-and-see approach for now.
- A Broadening of Earnings Growth
In 2023 and 2024, a lion’s share of the market’s strong performance was fueled by some of the U.S.’s largest companies, namely the “Magnificent Seven” mega-cap technology stocks. As of November 30, the Magnificent Seven were up +41% year-to-date versus only 18% for the remaining 493 stocks. That means just seven stocks accounted for an astonishing 47% of the index’s gains.
These strong market returns have come on the back of strong earnings growth. The Magnificent Seven have grown their earnings by 40% compared to the ‘other 493 stocks’ 2% earnings growth. 2025 could see a change in this dynamic.
We expect the ‘other 493’ stocks in the S&P 500 to grow earnings by 5x relative to 2024, while Magnificent Seven earnings decelerate. This ‘broadening’ of earnings growth could trigger some rotation in the market, in our view, which may benefit small- and mid-cap stocks over large-cap stocks and perhaps favor non-Technology sectors.
- Expecting Lower Yields on Cash
Though the Fed has indicated its intent to be more cautious about lowering rates, we’ve already seen 100 basis points in cuts—which has led to yields on cash declining in 2024. In my view, we could see cash rates come down even further in the new year, which for investors means seeing cash underperform other asset classes. Indeed, in 10 of the last 12 twelve cutting cycles, stocks and bonds have outperformed cash.
This is not to say that investors should move all of their cash off the sidelines and into other asset classes. As I’ve written many times before, it’s crucial to keep about one year’s worth of income needs in cash, for emergency purposes. But beyond those levels, I’d be looking to deploy that cash into asset classes that have the potential for higher returns, like stocks and bonds.
Bottom Line for Investors
Looking ahead to the new year, we’re seeing strong fundamentals pointing to more economic growth, and Zacks sees 13.4% annual earnings growth for S&P 500 companies on 5.5% higher revenues.
But one final factor investors will need to bear in mind is that the S&P 500 already trades at a relatively high premium relative to expected 2025 earnings—which could make strong upside more challenging to come by. It is certainly possible, but it would require strong upside surprises throughout the year.
In a market like this, staying focused means relying on objective analysis—not speculation or headlines. Understanding where opportunities lie and how evolving market forces could impact your portfolio is essential as we enter 2025.
Our December Stock Market Outlook Report5 delivers the clear, actionable insights you need to stay on track, including:
- Post-election market insights – What political shifts mean for investors.
- Key U.S. economic data – Trends shaping the economy.
- Global market analysis – How international factors could impact your portfolio.
- Zacks S&P 500 earnings insights
If you have $500,000 or more to invest, request our free December Stock Market Outlook Report5 today!
Disclosure
2 Wall Street Journal. December 16, 2024. https://www.wsj.com/economy/central-banking/federal-reserve-interest-rates-2025-1c5cc687?mod=economy_feat1_central-banking_pos1
3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
4 Fred Economic Data. December 11, 2024. https://fred.stlouisfed.org/seriesBeta/CPIAUCSL
5 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
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