Our 10 investing themes for 2025

Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

• The U.S. economy is poised for its fifth year of expansion
• The 10-year Treasury yield should remain range-bound in 2025
• Fundamentals remain supportive of U.S. equities, but gains should be more muted

2024 was a banner year—with equities soaring to new heights and the economy maintaining growth at a healthy pace. I mean, who could complain with another year of 25% gains for the S&P 500, a 15+% return on a 60/40 portfolio, and economic growth likely to clock in at an above-potential rate of 2.7%! As we turn the page on 2024 and look ahead into 2025, the key question on investors' minds is: can 2024’s positive momentum in the economy and financial markets continue into 2025? In many ways, that is the million-dollar question! With that question in mind and the challenges that lie ahead, we were inspired to use classic TV game shows to articulate how we see the economy and financial markets unfolding in 2025. Please join us on Monday, January 6 at 4PM EST for our webinar Ten Themes for 2025: Come On Down!  Here is a quick preview: 

1. Too Much Optimism? | Consumer, business, and investor confidence have surged following the 2024 election—and that exuberance is reflected in valuations. With uncertainties stemming from the new administration’s policy initiatives (i.e., taxes and tariffs) and equity markets priced to perfection, there is little room for error regarding economic and earnings disappointments—particularly if the Federal Reserve (Fed) is unable to cut interest rates further should inflation surprise to the upside. This will likely lead to higher volatility in 2025.
2. The US Economic Expansion Continues | Just like in the game show ‘Deal or No Deal’, the recessionary ‘bad cases’ have been taken off the board. What’s left is a resilient consumer, steady job growth, fiscal spending from legislation like the Inflation Reduction Act and the CHIPs Act, along with continued investments in transformative areas like artificial intelligence. These positive factors should sustain growth in 2025, with the economy likely to achieve its fifth consecutive year of growth. We expect the economy to grow 2.4% in 2025.
3. Stop Fretting About The Number Of Fed Rate Cuts | Although the Fed is expected to cut rates twice in 2025, investors should focus more on the results the Fed achieves (i.e., a continuation of the expansion and further disinflation) rather than the number of rate cuts. While the potential inflationary impact of tariffs could alter the Fed’s rate path, cash yields north of 4% remain attractive for fixed income investors.
4. Steeper Yield Curve Ahead | Short-term interest rates are anchored to Fed policy so as the Fed cuts rates two additional times in 2025, shorter-maturity yields will track policy rates lower leading to a steeper yield curve. Different cross-currents (i.e., growth, inflation, and deficit dynamics) will sway longer-maturity yields—but ultimately, we expect the 10-year Treasury yield to remain range-bound in 2025.
5. Dial Back Equity Performance Expectations | Equity market fundamentals (i.e., a strong economy, positive earnings growth, and robust corporate activity) remain healthy. However, expectations need to be dialed back due to high valuations and the potential complacency of investors. While we still see upside (our 2025 S&P 500 target is 6,375), the gains in 2025 should be more muted than the last two years.
6. Mid Caps Are Poised To Have Their Moment | While large caps have dominated over the last two years and small caps benefited from aggressive Fed rate cut expectations, mid-caps may be the sweet spot in 2025—benefiting from solid earnings growth, attractive valuations, revenues insulated from tariffs, higher quality companies (that have earnings) and less exposure to floating rate debt.
7. Three Sectors To Watch In 2025 | Our favored sectors stand head and shoulders above the rest with compelling long-term macro themes (i.e., AI investments, ongoing government spending, and aging demographics)  and the best earnings potential in 2025. The three sectors at the top of our list are: Technology, Industrials, and Health Care.
8. International Markets Remain The ‘Weakest Link’ | US equities are likely to once again be the top performer in the global equity market—driven by superior economic growth, higher earnings growth, more dynamic leadership, and greater exposure to preferred sectors. But keep an eye on Japan, which is benefiting from an improved economy and a shift away from deflation.
9. Next Stage Of Bull Market May Be More Challenging  | The market gains over the last few years will be hard to repeat in 2025, particularly in an environment of stretched valuations. Investors will need to be discerning, focusing on quality and fundamentals as the third year of a bull market should bring more volatility and muted returns. Given the shifting landscape, active management should prove its worth.
10. Importance Of Asset Allocation | In a year of elevated uncertainties, the importance of asset allocation and a diversified portfolio cannot be overstated—particularly as net worth has soared to record highs. Having a clear strategy, sticking with a long-term approach, and building a balanced and resilient portfolio will help grow your wealth and ride out any volatility that comes along the way.

View as PDF

All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Committee, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices and peer groups are not available for direct investment. Any investor who attempts to mimic the performance of an index or peer group would incur fees and expenses that would reduce returns. No investment strategy can guarantee success. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss.