Can the Market Momentum Last in 2025?

PUBLISHED DECEMBER 2024

Now that the smoke from the 2024 election has dissipated, the path forward to 2025 is becoming somewhat clearer for investors, especially regarding White House policies that could affect markets over the next four years. Less clear is whether markets can sustain the ebullient upward march we’ve experienced in 2024. The final weeks of 2024, though, weren’t promising.

Arguments can be made both for and against positive market forecasts in the coming months, with several factors at play. 

First, the Federal Reserve will remain in the hot seat as markets continue to price in additional rate cuts, at least into the first quarter of 2025. However, the Fed is still grappling with stubbornly high inflation and mixed economic data as it makes rate-cut decisions. Markets may pull back sharply if the Fed decides to go against expectations with rate cuts.

Second, the conversation around the Tax Cuts and Jobs Act will grow this year, especially as we near the act’s expiration date of Dec. 31. It seems reasonable to expect Congress to extend at a minimum, although it would be a political loss if the Republican-controlled legislature cannot get the votes to make the cuts permanent.

Extending the act would likely keep several key provisions—including tax brackets and rates, estate tax limits, standard deductions, etc.—in place for a few years, making personal tax planning a bit easier, at least in the mid-term. It would also lengthen favorable business-tax policies such as the reduced corporate tax rate and the pass-through of the business income deduction, good news for earnings and, ultimately, stockholders.

The Global Factor

Geopolitics are a wild card for 2025, just as they have been for the past few years. The Trump administration is expected to implement tariffs, which could raise already-heightened tensions with China. Conflict in the Middle East seems to have calmed somewhat, although hostilities can flare at any time in the region. Fortunately, we should see reduced political strife closer to home, although there will likely be heated discussion around proposed policies as the new administration finds its footing.

Finally, markets were downright euphoric in 2024—sometimes puzzlingly so I would expect them to come back down to earth in early 2025 as the new administration takes office and opposing parties dig in in Washington. A lot of plans and schemes will fall through or be diluted, and there is a lot more opportunity for disappointment than additional positive surprises.

Chances are good that your portfolio is out of whack after the market’s most recent run-up. My suggestion would be to rebalance to your natural risk level and exposures at the start of the year before politics and policies have the chance to sway markets to the negative. After all, the time to fix a leaky roof is on a sunny day. And while it’s not raining yet, we know the clouds will start to gather at some point. It’s simply a question of when.

I also recommend taking advantage of higher yields while they are still available. We haven’t had the alternative of using high-quality bonds as a source of return for a while, so incorporating fixed income into your portfolio might be a good move. There will be immense pressure for the Fed to continue to lower rates in the new year and it is likely that yields will decline. The time to lock in higher yields is now.

The fundamentals continue to apply no matter what direction markets move in the coming year. Investors were rewarded for the patience and discipline they showed in 2024, and the momentum from the past few months should carry us into 2025. Staying engaged and focused should be the foundation of your investing approach. Continue to diversify, seek out low fees, and avoid personal volatility. Above all, rely on your financial adviser to answer questions and concerns if volatility should arise.     

AE Wealth Management is an SEC Registered Investment Adviser located in Topeka, Kan. Registration does not denote any level of skill or qualification. Information regarding the RIA offering the investment advisory services can be found at https://brokercheck.finra.org/. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. The personal opinions expressed by Tom Siomades are his alone and may not be those of AE Wealth Management or the firm providing this report to you. This information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. None of the information contained herein shall constitute an offer to sell or solicit any offer to buy a security or insurance product.