Riverfront Capital Strategies' Market Outlook 2025
Friday, December 20, 2024
Looking back on 2024, it clearly echoed many of the themes from 2023. There were some brief economic growth scares along the way, but by and large the broader economy continued to defy expectations and surprised once again to the upside. Stocks continued their strong performance as powerful trends in artificial intelligence and technology proceeded unabated and largely overshadowed other factors like election uncertainty, continued geopolitical tension, and some rich stock valuation levels. After the election, the anticipation of potentially market-friendly policies from the incoming administration also helped to bolster stocks. The bond market, in contrast, experienced another lackluster year. While the Federal Reserve (Fed) initiated a long-awaited easing cycle, policy ambiguity and uneasiness over rising debt levels led to increased volatility in bonds, but no clear directional trend.
As we look ahead to 2025, we remain cautiously optimistic. Cautious because we know that no market environment is ever permanent, and that change is always potentially around the corner. Optimistic because we recognize constructive long-term technology trends are in place. Plus, potential tax policy and deregulation efforts in 2025 could provide some semblance of a tailwind — particularly from an economic perspective.
Economy
Steady Progress but Complexities Remain
The economy will likely downshift throughout 2025, as consumer spending slows from recent breakneck speeds. The labor market has also shown signs of a shift. The quits rate fell as workers are less inclined to switch jobs and the average workweek for private payrolls has declined, suggesting weaker labor demand. The unemployment rate should stay relatively low but should inch up in the coming quarters. The strength of wealthier consumers keeps inflation stubbornly above the Fed’s target, indicating the Fed will not likely cut as much as investors originally hoped.
We could see some upticks in the Fed’s preferred inflation metric, the Personal Consumption Expenditure (PCE) price deflator, but overall inflation should remain contained.
Slower payroll growth and fewer hours worked imply the economy will slow at a measured pace, barring any exogenous shock. Positive signs from businesses about to release pent-up demand for capital expenditures plus favorable fiscal and monetary policy should partially offset softness in some areas of the economy. Economic bifurcation will likely continue in 2025 as those who have the means to spend will likely do so, crowding out others. Demographics will also be an interesting area to monitor as millennials are just entering their peak earnings and spending years.
WHAT WE EXPECT:
1. Bifurcated Economy – In response, consider staying diversified. Varying impacts of complexities and market shifts may make asset allocation more challenging.
2. Slow-down In Consumer Spending – In response, consider staying invested. But be prepared for bouts of volatility.
3. Inflationary Pressures Could Reemerge – In response, consider favoring U.S. cyclical equity sectors and intermediate maturities within fixed income for potential strong U.S. dollar and elevated interest rates.
Bond Market
Higher for Longer Continues?
Bond yields are expected to remain elevated, with the 10-year Treasury yield likely to remain in a range between 3.75% and 4.25% in 2025. Over the next 12 months, we see roughly equal upside and downside risks to yields as markets grapple with the true impacts of budget deficits, increasing Treasury supply and the scope of the Fed’s current easing cycle. For fixed income investors, a focus on income generation and managing interest rate sensitivity is advised. We believe the most attractive opportunities lie in the five-year maturity range.
WHAT WE EXPECT:
1. Range Bound Yield Environment – In response, consider identifying strategies to generate income, such as mortgage securities and preferreds.
2. Rate Uncertainty – In response, consider managing interest rate risk by focusing on intermediate-maturities five years out or less.
Stock Market
A Measured Approach to 2025
Expect more modest stock market gains in 2025 supported by a stable economy, solid corporate profits, and a Fed that is no longer hawkish, and some potential deregulation tailwinds. With stocks pricing in a lot of good news, positive surprises may be tougher to come by, so a repeat of the strong market performance in 2024 is unlikely. With the bull market another year older, interest rate risk rising, valuations elevated, and still significant geopolitical threats, expect volatility to be more prevalent in 2025. LPL Research estimates fair value on the S&P 500 at year-end 2025 at 6,275–6,375, based on a price to-earnings (P/E) ratio of 23 times the LPL Research forecast for 2026 S&P 500 EPS of $275. Upside could potentially come from lower interest rates, productivity gains, or prospects for tax cuts in 2026.
WHAT WE EXPECT:
1. Modest returns for equities with year-end S&P 500 fair value target range of 6,275– 6,375 – In response, consider staying invested at long-term target levels consistent with investor targets for equities and fixed income. Be prepared for more volatility.
2. Broadening earnings growth beyond mega-cap technology – In response, consider favoring growth style equities early in 2025 but watch for rotation to value later in the year.
3. Trump’s America-first agenda – In response, consider favoring U.S. equities in potential strong dollar environment, amid heightened risk for markets in China and Mexico.
Alternative Investments
Seizing Opportunities in a Changing Market
While the second half of 2024 was largely about policy shifts and a pick-up in volatility, 2025 is likely to be more about the impacts of lower rates and the changes in the political landscape. As the Fed has joined the rest of the world in cutting rates, the focus will now move to the size and length of the rate-cutting cycle. The difference between what the markets expect and what the Fed actually delivers, along with continued policy divergence across regions, should result in plenty of investment opportunities for alternative managers and strategies.
Lower interest rates and potential policy shifts will impact markets differently, creating both opportunities and risks. Equity market-neutral, global macro, and managed futures strategies are well-positioned to capitalize on increased volatility and market dispersion.
Geopolitics
The International Chessboard
As we embark on 2025, geopolitical uncertainty remains elevated. The conflict in Ukraine is approaching its three-year anniversary and continues to gradually escalate. Tensions in the Middle East remain high but have so far avoided a full-scale regional escalation. The recent political shift in the U.S. also introduces a new dynamic to the global stage, with important potential implications for trade relations and geopolitical alliances.
• In 2024, the U.S. and NATO provided and authorized the use of advanced weapons in Ukraine to deter Russian aggression, but Russia has seen these actions as a direct threat and an escalation of the conflict. Russia’s response has been to deploy advanced weaponry of its own in the battlefield and strengthen alliances with North Korea, Iran, and China. This could complicate diplomatic efforts in 2025, as Putin faces increasing internal pressure with the continued military buildup.
We remain positive on global macro and managed futures, which tend to perform well in higher volatility environments and can often deliver uncorrelated returns in times of uncertainty.
• The conflict between Iran and Israel in the Middle East has escalated from proxy attacks to direct military exchanges, with Iran seeking to destabilize the region and challenge U.S. influence. A potential U.S.-Saudi military pact could intensify tensions, but a broader diplomatic solution, possibly led by the new U.S. administration, offers hope for de-escalation. The threat of a nuclear-armed Iran remains a critical concern, and Israel’s restraint in avoiding strikes on Iranian nuclear sites has prevented a broader conflict, though the situation remains fluid.
• U.S. trade policy is likely to emerge as an important geopolitical tool under the incoming administration, given its intent to use tariff policy more widely. While these tariffs may only be used as leverage in trade and diplomatic negotiations, they could also trigger retaliatory actions from affected nations, and investors should be prepared for heightened volatility in relation to global trade in the year ahead.
In Conclusion
In summary, last year was great where the market is concerned. Next year should be good as well, but we expect a decline, maybe even a sharp decline, in the beginning of the year - so be prepared emotionally and make sure your proper investment objectives are in place! (if you have doubts or questions regarding your investment objectives, please give us a call) However, we feel cautiously optimistic that the bulls will continue to run in 2025. Remember, successful investing involves faith, patience and discipline.
As the holiday season approaches, we want to take a moment to express our heartfelt gratitude for your trust and partnership throughout the year. Your support and confidence in Riverfront Capital Strategies have been the cornerstone of our success, and for that, we are truly thankful.
This time of year reminds us of the importance of relationships, and we are grateful for the opportunity to serve you. Your loyalty and collaboration inspire us to continue striving for excellence in all that we do.
As we celebrate the spirit of Christmas—a season of giving, joy, and reflection—we hope you and your loved ones enjoy the warmth of togetherness and the magic of the season. May your holidays be filled with peace, happiness, and countless moments to cherish as we celebrate the coming of Jesus, our Savior!
Looking ahead to the new year, we are excited about continuing to serve you and growing our partnership. Thank you for allowing us to be part of your journey.
Wishing you a Merry Christmas and a prosperous New Year!
Jim Pannell, Managing Principal
Riverfront Capital Strategies
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
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