My outlook for investing in 2025: 2-0-2-5

By Adam Baley

As we turn the calendar and start a new year, I like to reflect on where we are and plan for what lies ahead. 2024 largely came in line with what we had expected for a steady but solid economy. And 2025 looks to be more of the same. 

I find that acronyms help me remember large amounts of information, and I’ll share the one I use to frame expectations for the year to come. Well, it’s not actually an acronym, because there are no letters. It’s a numeronym. 

This coming year’s expectations are “2-0-2-5.”

2% – Real GDP (gross domestic product) growth

0% – Near 0% chance of a recession within the next 12 months

2% – Inflation

5% – Unemployment

Consumers remain in decent shape after nearly two consecutive years of wages rising faster than inflation. Moreover, consumers’ wealth holdings have also risen in value, and perhaps none more notable than home values. We remain near record levels for home prices and, with 40% of U.S. homes no longer having a mortgage, consumers have flexibility in their budgets to continue to spend, lifting GDP modestly from here.

If we were to get a recession, it would take a collapse in consumer spending, but with rising real wages, solid household finances and a steady job market, consumers remain on healthy footing.

The cyclical sectors of the economy reaffirm what we’re seeing from consumers. Residential investment, business investment, light-vehicle sales and business inventories are either just above or just below their long-term average. The pillars of our economy are not stretched.

A healthy consumer and stable economy leave little chance of recession in the next 12 months.

The Federal Reserve Board has been able to aggressively raise interest rates without pushing us into a recession nor upsetting the labor market. I will be the first to admit the Fed had a razor-thin chance of success – and they nailed it thus far. They have succeeded in cooling off an overheating economy without upsetting the apple cart. After the success of the Fed’s action, inflation is widely expected to trend toward 2%.

With that said, there is only so much the Fed can do with inflation and employment. Congress wields significantly more power over things like immigration and tariffs. Congress could be a wildcard in 2025.

If we choose to actively reduce our pool of able-bodied workers and create lasting job vacancies, that has the potential to simultaneously reduce GDP while causing inflation and unemployment to rise. The prospect of a second trade war carries the potential for tariff-induced inflation and lower economic output. If Congress chooses another trade war alongside mass deportations, it could upset today’s stable economy.

After a two-year stock market sprint, U.S. equities are expensive and trading at lofty valuations. With the 10 largest businesses making up much of the market cap and with trading at all-time highs, the math becomes difficult for those same companies to continue carrying markets higher. Look for market breadth to widen and the baton to be passed to the other 490 S&P businesses. Also, look for opportunities in non-U.S. companies as some are trading at relatively cheap prices and historically pay higher dividends.

Bonds and cash are offering more competition to stocks now that interest rates are higher. The prospect of the Fed pulling back in 2025 could be a tail wind for bond fund returns in the coming year. With stocks at all-time highs and bonds offering compelling yields, now’s a good time to make some risk-reduction changes in your portfolio.

As we enter 2025, today’s environment remains one of historically low interest rates, cooling inflation and rising profitability for corporate America. There’s still room for markets to move higher, but expect something more modest than the sprinters-like pace we set the past two years, and expect volatility to continue. 

Adam Baley is a vice president and investment advisor at Landaas & Company, LLC.