Economic Outlook 2025: Eight Key Predictions
The US Economy: A Steady Growth Path
We anticipate the US economy to continue its expansion in 2025, driven by a strong consumer, solid corporate investment, and above-trend government spending. With a projected GDP growth rate of 1.8%, the economy is expected to remain on a stable growth path. However, we will be closely monitoring unemployment claims, as a rise above 300,000 could signal a slowdown.
Inflation: A Gradual Decline
Inflation trends will continue to play a crucial role in shaping the stock market in 2025. We expect core inflation to edge slowly towards 2.0% as the Fed reduces interest rates. While producer prices are falling, sticky prices such as shelter and transportation remain high. Wage growth has declined to around 4% year over year, and we predict the Fed will cut its target rate by another 75 basis points in the first half of 2025.
Currency, Commodities, and Oil
The US dollar is expected to remain strong in 2025, driven by the relative strength of the US economy and demand for US investments. Gold prices will likely remain high, reflecting the perceived safety of hard assets amid global conflicts. Our forecast trading range for gold in 2025 is $2,800-$2,300, with an average forecast of $2,600. Oil prices, on the other hand, may decline due to a favorable supply-and-demand equation, with an average forecast price of $75 per barrel.
The Yield Curve: A Steepening Trend
The yield curve returned to its normal upward slope in 2024 and is expected to steepen further in 2025. With inflation trends calming, the Fed has started to lower short-term rates, and we anticipate further cuts in the first half of 2025. Our current forecast range for the benchmark 10-year Treasury bond is 3.75-4.75%.
Earnings and Valuations: A Positive Outlook
Corporate profits are expected to grow at a solid high-single-digit pace in 2025, driven by improved performance in sectors such as Energy, Materials, and Industrials. We have raised our forecast for S&P 500 earnings from continuing operations to $276, reflecting full-year EPS growth of about 12%. Equity valuations have improved during 2024, and we expect stock valuation multiples to widen modestly in 2025 as rates continue to head lower.
Segments and Sectors: Growth Takes the Lead
In terms of market segments, we predict growth to set the pace in 2025 as interest rates decline and EPS growth picks up. US stocks are expected to continue outperforming global stocks, and small-cap stocks offer relatively low valuations compared to large-caps. Our model for sector ratings recommends an Over-Weight on Communication Services, Information Technology, and other sectors with superior growth prospects and financial strength.
Healthcare and Consumer Defensive: Stable Growth
Healthcare and Consumer Defensive sectors are expected to experience stable growth in 2025, driven by demographic trends and consumer spending habits. These sectors offer a relatively safe haven for investors seeking predictable returns.
Consumer Cyclical: A Mixed Bag
The Consumer Cyclical sector is expected to experience a mixed performance in 2025, driven by factors such as consumer spending, interest rates, and global economic trends. While some sub-sectors may experience growth, others may face challenges, making it essential for investors to be selective in their investment choices.
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