Stock Investors, Here’s the State of Play for 2025
For stock investors, the handoff for 2025 is as good as it gets, with a strong economy and record profits expected. However, there are significant potential headwinds that could impact the market.
On the positive side, the economy is expected to continue growing at a rate of 3%, with record profits expected for a second year in a row. Undervalued sectors such as healthcare, materials, and industrials are expected to see significant profit increases, with earnings growth estimates ranging from 18% to 21%.
Profit margins are also expected to remain near a record 12%, meaning that corporate America is keeping a large portion of its revenues as profits.
However, there are four potential headwinds that could impact the market. The Federal Reserve may make a policy error by refusing to cut rates, which could lead to a deterioration in the job market. The Trump administration’s business-friendly policies may be countered by tariffs that are too high and hurt growth. The tech sector may experience a collapse of the AI story, leading to lower valuation levels for technology stocks. Finally, the bond vigilantes may revolt against higher spending, forcing interest rates higher.
As 2025 begins, rising long-end bond yields pose the biggest challenge to the bull market. While there is no uniform “threshold” for 10-year yields that would automatically cause stocks to correct, a move above 4.75% could trigger a “deeper correction” in equities, and above 5% could be a “bull market threat.”