At the core of our 2025 market outlook lies the anticipated economic impact of Donald Trump’s second term as US President.
We expect a policy environment marked by a mix of disinflationary pro-business initiatives aimed at stimulating supply-side productivity, coupled with inflationary populist measures such as tariffs and immigration restrictions. These competing forces will shape the market landscape, requiring wealth advisors and RIAs to remain agile and prepared for shifting dynamics across asset classes.
Baseline Economic Outlook
Our central scenario envisions a resilient US economy, driven by a stronger small business sector and improved corporate profit margins. These trends point to sustained employment levels and a stable growth trajectory. We anticipate that productivity gains and increased capital investment will partially offset inflationary pressures stemming from populist policies. If inflation moderates as expected, the Federal Reserve may begin gradually lowering interest rates, providing a supportive backdrop for financial markets.
Equity Market Expectations
Equities stand to benefit from this environment, supported by growth-oriented, pro-business policies and potential global rate cuts. A more favorable business climate is likely to spur consumer and corporate spending, despite potential headwinds from protectionist trade policies. Wealth advisors should consider maintaining an overweight allocation in sectors poised for productivity gains, such as industrials, technology, and consumer discretionary, while remaining cautious about industries sensitive to trade and labor cost pressures.
Fixed Income Opportunities
In fixed income markets, we see continued attractiveness in US mortgage-backed securities (MBS) and Asian high-yield bonds, given relatively tight credit spreads. With inflation expected to decline gradually, investors could benefit from extending duration in fixed income portfolios by late 2025 or early 2026. This strategic shift could help capture potential yield gains as central banks shift toward more accommodative monetary policies.
Downside Risks to Consider
Several risks could disrupt this positive outlook. A key concern is that productivity gains may fail to materialize, allowing inflationary pressures from tariffs and supply-chain constraints to persist. In such a scenario, the Fed might delay or limit interest rate cuts, leading to slower economic growth and increased market volatility. Equity valuations could come under pressure, particularly in sectors with stretched price-to-earnings ratios.
In fixed income, higher-than-expected inflation could push risk-free yields upward, limiting the potential for tighter credit spreads. This would increase borrowing costs and strain corporate balance sheets, particularly in lower-rated credit segments. Advisors should consider diversifying fixed income exposure to mitigate this risk while remaining selective in credit allocations.
AI Investment and Tech Sector Risks
Another potential downside involves high expectations for artificial intelligence (AI)-driven investments. If productivity enhancements from AI technologies fall short or revenue generation lags behind investment costs, investor sentiment toward tech stocks could deteriorate. Given the tech sector's heavy weighting in major equity indexes, such a development could weigh on overall market performance. RIAs should closely monitor technological trends while balancing tech exposure with more traditional sectors.
Potential Upside Scenarios
Conversely, the market could surprise to the upside if economic and technological factors align. A tech-driven economic boom similar to the mid-1990s could unfold if rapid technological innovation, particularly in AI and automation, drives sustained productivity gains and keeps inflation in check. In this optimistic scenario, equity markets could experience a valuation surge, with interest rates stabilizing or even declining further.
If this tech-driven growth materializes, RIAs should be prepared to capitalize on emerging opportunities in innovation-focused sectors, including semiconductors, cloud computing, and advanced manufacturing. However, maintaining a disciplined approach to valuation risks will be critical in this environment.
Strategic Asset Allocation Considerations
Given the interplay of inflationary and disinflationary forces expected in 2025, a balanced and dynamic investment strategy is essential. Advisors should prioritize diversification across asset classes and geographies while incorporating inflation hedges such as commodities or inflation-linked bonds where appropriate. Equity portfolios should tilt toward sectors with strong productivity potential and international markets poised for recovery from recent downturns.
Navigating Elevated Market Volatility
Heightened geopolitical tensions and unforeseen macroeconomic events remain ever-present risks. Advisors should maintain a nimble approach to portfolio management, ready to adjust allocations as new information emerges. Tactical adjustments, such as increasing cash positions during periods of heightened volatility or reallocating to defensive sectors, may be prudent.
Conclusion
Overall, we maintain a cautiously optimistic outlook for 2025, characterized by balanced risk and opportunity. While disinflationary forces are expected to gain traction as the year progresses, populist-driven inflationary pressures could cause periodic disruptions. The evolving policy environment under Trump 2.0 underscores the need for a flexible, forward-looking approach to investment strategy. By remaining vigilant and adaptive, RIAs can navigate these complex dynamics while positioning portfolios for long-term success.
