Economic Outlook 2025: A Year of Growth and Opportunities
As we enter 2025, the U.S. economy is poised for continued expansion, driven by a strong consumer, solid corporate investment, and above-trend government spending. Our forecast suggests a GDP growth rate of 1.8%, slightly lower than the 2.0% rate in 2023, but still above the estimated long-term trend growth rate.
Consumer Spending: The Key to Growth
Consumer spending, which accounts for approximately two-thirds of overall GDP, will be crucial in driving economic growth in 2025. With low unemployment, record-high stock prices, and rising home prices, the consumer is well-positioned to support the economy. However, a downturn in any of these factors could lead to a slowdown.
Inflation: A Gradual Decline
Inflation trends, which were a major concern in 2022-2023, have started to fade. The Fed has successfully raised interest rates to combat inflation, and we expect core inflation to edge slowly towards 2.0% in 2025. While producer prices are falling, sticky prices such as shelter and transportation remain high. We anticipate the Fed will reduce its target rate for overnight lending by another 75 basis points in the first half of 2025.
Dollar, Gold, and Oil: A Complex Interplay
The U.S. dollar is expected to remain strong in 2025, driven by the relative strength of the U.S. economy and demand for U.S. investments. Gold, which is near all-time highs, may continue to rise as investors seek safe-haven assets. 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 our forecast average price for West Texas Intermediate crude oil in 2025 at $75 per barrel.
Yield Curve: A Steepening Trend
The yield curve, which returned to its normal upward slope in 2024, 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. At the long end of the curve, aggressive government spending may establish a floor on long-term rates.
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. Our revised forecast models full-year EPS growth of about 12%. Equity valuations, which improved during 2024, are expected to widen modestly in 2025 as rates continue to head lower.
Segments and Sectors: Growth Takes Center Stage
In terms of market segments, growth is expected to set the pace in 2025, driven by declining interest rates and improving EPS growth. We recommend an over-weight on large-caps due to their superior growth prospects and financial strength. Our model for sector ratings suggests that Communication Services, Information Technology, and Healthcare are among the top sectors to watch in 2025.
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