2025 will likely see its share of obstacles, but not necessarily the same ones it faced in 2024. What are the complications to watch for, and can any of 2024’s outcomes serve as clues for future success?
Resilience Is The Name Of The Game
The U.S. economy showed its mettle in 2024, with the S&P 500 ending the year up nearly 25% despite inflation, recession fears, unprecedented political turmoil, and multiple international conflicts. In a year when the Federal Reserve maintained its “higher for longer” interest rate policy and the housing market remained stagnant, GDP still grew at nearly 3%, guiding the economy away from recession.
Many investors had a strong year despite such adversity, demonstrating how resilient the markets can be and serving as a helpful reminder for future patience during trying moments. Time in the market typically beats timing the market. In other words, you cannot reap the benefits of a resilient economy unless you invest in it.
The Consumer Is King
The U.S. unemployment rate remained low at 4.1%, with a record 160 million people employed. Additionally, wages have gradually caught up with inflation, boosting disposable income. With nearly seventy percent of the U.S. economy powered by consumer spending, it’s no surprise that high employment and steady disposable income kept the engine humming.
Americans appear to be saving about 2% less than they have over a 30-year average—4% rather than 6%. Whether or not that’s constructive behavior is up for discussion, but it does seem to reflect the notion that a gainfully employed public tends to spend. Few factors juice the economy more than a consumer with a job looking to purchase goods and services with their hard-earned wages. This trend has the potential to continue through 2025.
Productivity On The Rise
Productivity is another compelling catalyst for economic growth. Thanks to massive investments in artificial intelligence and the speed of innovative technology, U.S. productivity growth has surged, rising from a tick over 1% annually to more than 2% over the past two years.
This renewed momentum is reminiscent of the late 1990s when the internet revolutionized efficiency and output. With AI applications and automation enabling businesses to accomplish more with less, it appears the groundwork is being laid for another productivity-driven boom—an essential indicator of sustained economic vitality.
Unlikely Allies: The Federal Government And Financial Markets
Politics may not always jive with the fiscal ecosystem and vice versa, but history shows many examples of substantial market gains in the first 365 days of a new presidential term. In fact, the S&P 500 has delivered an average return of 11% during inaugural years over the past 50 years—the second-best of the four-year presidential cycle. Why? Reduced political uncertainty seems to calm investor’s nerves.
There’s already a buzz around two market-friendly themes in 2025—tax cuts and deregulation. Both have the potential to drive investor optimism. With the executive and legislative branches now controlled by the same party, the political landscape may provide less friction against the swift implementation of commerce-supportive, private-sector-focused policies, creating favorable conditions for market growth.
Tariffs On The Horizon?
A tariff is often associated with inflation by virtue of its function as a government-imposed tax or duty on imported or exported goods. If the price of an item increases 20% overnight, somebody has to pay for it. Typically, the consumer is the one stuck with the bill, although at times, the company or companies involved can absorb the cost.
Markets will be closely watching the incoming administration’s specific tariff strategy. A more targeted approach vs. blanket, across-the-board increases could cause vastly different reactions, retaliations, and countermeasures. For example, focusing on Chinese products to bolster national security and shift supply chains back to the U.S. may lead to repercussions that are distinct from those resulting from tariffs imposed on the European Union or Mexico. The impact of the former could be more bark than bite, given that the U.S. has significantly reduced its dependence on Chinese imports over the past decade. The latter scenarios appear less likely but could be wielded as bargaining chips to gain leverage in trade and immigration negotiations among allies.
Volatility Has Been Sleeping
The most prevalent analysis and valuations point to continued strength and allow for optimism. However, it may not be wise to expect the extreme stability of the past two years to become commonplace. Historically, peak-to-trough declines are characteristic of the annual lifecycle. On average, the S&P 500 experiences annual drawdowns of over 16%. By comparison, 2023 and 2024 saw maximum declines of just 10% and 8.5%, respectively.
Market pullbacks or corrections aren’t cause for panic but are a reality. Over the last 50 years, the S&P 500 has experienced approximately two 5% pullbacks annually, one 10% correction every two years, and a decline of 15% or higher about once every four years. Such a cycle suggests investors are overdue for more typical market swings than they saw in the past two years.
This Bull Isn’t That Old
At just twenty-six months, the current bull market is relatively young by historical standards. Over the past 50 years, bull market lengths have ranged from two to 11 years, with an average run lasting about five. Just because the market “has done well” doesn’t mean it can’t continue to do so. In other words, market history suggests this bull has more bucking to do before the rodeo’s finale.
Look At Dividend Contribution
In the 2010s and thus far in the 2020s, dividends have only accounted for 17% and 12% of total returns. For simplicity, Total Return = Price Change + Dividends. Outside of the 1990s tech run, this has been about the least significant period for dividends on record. Some believe this dynamic has created a void that favors quality, dividend-oriented names that could account for a greater share of overall total return moving forward.
Understanding dividend contribution provides valuable insight into long-term investing. A “reversion to the mean” could result in dividends again becoming a major player in investment performance. As income-focused strategies gain traction, dividends might play a more prominent role in shaping future portfolio returns.
Bonds Are Off The Bench
Bonds are stepping back into the game, offering real income and diversification in today’s market. With the 10-year U.S. Treasury yield climbing back above 4.5%, rates are near levels not seen since the mid-2000s (almost 20 years ago). This movement marks a notable recovery from the ultra-low-rate environment of the past decade. Remember that with bonds, “yield is destiny,” and yields in this range have historically provided fixed-income investors with decent returns while balancing portfolio risk. For investors seeking income and stability, understanding the historical context of these rates—and how they might fit into a well-rounded investment strategy—is more critical than ever.
The Earnings Engine Is Accelerating
Few factors drive U.S. equity markets over time as consistently as earnings growth. Seen as the bedrock on which all market growth is built, the significance of earnings-to-market performance is hard to overestimate. The 2025 forecast looks robust. Some project S&P 500 earnings per share (EPS) to grow by 13%, and others anticipate profit margins to expand to a record 13.7%, signaling improved efficiency across sectors.
High-margin sectors like technology and communications may lead the charge, but what’s more pivotal is how overall market performance impacts earnings and, in turn, Americans’ 401(k)s.
Bonus: Income Investing And Getting Paid To Wait
Nearly all permutations of stock market strategies—growth, momentum, or value investing—have produced inflation-beating results over time. Income investing can be added to that list, with the perk of investors getting paid to wait for growth. Furthermore, while growth is often inconsistent in shorter periods, income from stock dividends, bond interest, or real estate investment trust (REIT) distributions can provide a steady cushion for bumps along the way. This buffer can be especially valuable for retirees seeking reliable cash flow. In 2025, such income streams could be critical in helping investors weather volatility as they stay on track toward their financial goals.
Bottom Line
The lessons of 2024 and expectations for 2025 both point to a need for investors to practice continued patience despite stubborn inflation and fears of recession. When anxiety-inducing factors arise, such discipline can be a challenge. However, resisting the urge to panic led many investors to reap the benefits of a resilient U.S. market. Future projections suggest that deregulation, capital spending on innovative technology, and consumer strength and resilience could lead to further economic stamina and fortitude. However, the spoils of such a dynamic will only be available to those who participate.
The market’s new highs of the past couple of years may lead some to fear market pullbacks or corrections, but there is some reason to believe that the strength of U.S. markets might be in its earlier rather than later stages. A young bull tends to keep bucking.
It’s never easy to watch market ups and downs. Incorporating income investing into the bigger plan can sometimes soften the blow and allow for a less painful version of the necessary waiting game as investors navigate the natural, cyclical market volatility. The Army of American Productivity isn’t perfect, but it is resilient and productive. History shows that those who stay the course and march along with it typically benefit more than those who don’t.