It was a winning year for investors, as stock prices climbed to record highs.  Capital markets found support from a resilient economy, rising corporate profits and a more accommodative Federal Reserve.  These positive results are especially noteworthy, given the tumultuous events around the world and dramatic election season here at home.  While the trends that contributed to a profitable 2024 are continuing into the new year, we also believe risks have increased along with valuations.  

Federal government priorities change with the outcome of each Presidential election.  The incoming Trump administration will have the support of Republican majorities in the Senate and House of Representatives, with broad implications for immigration, fiscal issues and foreign policy.  They will be operating in a world where geopolitical instability has escalated around the globe.  The influence of government policies could prove consequential to our economy in the coming year.

The Federal Reserve largely delivered on promises to ease monetary policy in 2024, with three interest rate reductions totaling a full one percentage point.  That effort is more uncertain in the coming year.  Inflation is a stubborn adversary, and getting that last tick down to the Fed’s target level of two percent is proving difficult.  At their most recent meeting, Fed Chair Jerome Powell indicated a likely slowdown in further rate easing.  Expectations are now calibrating just two more rate reductions in 2025, possibly spaced out during the year.  The bellwether 10-year Treasury yield has actually moved upward to around 4.59 percent, and Wall Street is now predicting economic growth of two to three percent in 2025.  As a result, the Treasury yield curve has regained a “normal” shape, with positive two-to-ten year slope, suggesting the risk of recession has diminished.

The new administration is promising tighter control over our nation’s borders and deportation of people found to have entered the U.S. illegally.  That could have an impact on the labor pool, particularly for some sectors of the economy that typically rely on immigrant workers.  Our economy is currently running at full employment, which suggests any reductions in the number of people in the workforce could create a barrier to growth.  On the other hand, there is newfound pressure to address existing obstacles to the legal immigration process, including support for the H-1B visa program that allows skilled workers to remain in the country.  It is an open issue to see how the net change in our nation’s labor pool affects businesses.

Corporate profits are running strong, and analysts expect further double-digit gains.  According to FactSet Earnings Insight, estimates call for earnings to climb 14.8 percent in 2025.  That sets a high bar for stocks.  With prices now trading at a somewhat lofty 22 times expected earnings, prices could be sensitive to any disappointments around the quarterly financial reports.  International trade will be another focus this year.  Companies that comprise the S&P 500 index generate roughly one-third of their revenues abroad, making government trade policy an important factor for planning purposes.  

Capital markets have been on an upswing, and the Wall Street forecast for 2025 calls for another strong year of rising corporate profits in a growing economy.  With so much optimism baked into prices, the opportunity for setbacks is always present.  We believe there are some additional risks as we head into the New Year.  It would not be a surprise if the path to progress this year turns out to be a somewhat bumpier one.  

We are grateful for a productive and profitable 2024.  As with all good adventures, the new year brings a combination of optimism and uncertainty.  Our best wishes to you and your family for a healthy and happy 2025.