For stock investors the handoff for 2025 is about as good as it gets, but there are significant potential headwinds. Let’s review the state of play going into the new year. Here’s the good news first. Market tailwinds into 2025 First and foremost, there is a still-strong economy, with 3% GDP. Second, record profits are expected for a second year in 2025, and not just from the tech sector. Undervalued sectors like health care and materials and industrials are expected to see profit increases in the high teens. Earnings growth 2025 (estimates) Technology 21% Health Care 20% Industrials 19% Materials 18% Consumer Staples 5% Energy 4% Source: LSEG And it’s not profits that are up. Profit margins are expected to remain near a record 12%, which means corporate America is keeping a large portion of the revenues they take in as profits. .SPX YTD mountain S & P 500, YTD Stock markets 2025: Tailwinds Strong economy (3% GDP) Record corporate profits (up 15%) Record net profit margins (12%) Market headwinds into 2025 Here are the tailwinds. There are four of them. First, there is a risk the Federal Reserve, in an effort to keep combatting inflation, will make a policy error by refusing to cut rates and will pay less attention to its other mandate (job growth) and will allow the job market deteriorate. Second, the strengths of the Trump administration (business friendly, deregulation-oriented, M & A friendly, and tax relief-oriented) may be countered by tariffs that are too high and will hurt growth. Third, with tech prices near record highs, there is the potential for the collapse of the AI story, as investors may revolt against endless rounds of spending without demonstrable increases in earnings or productivity. A more likely scenario would see tech prices stagnate, even as profits continue to improve, which results in lower valuation levels for technology stocks, and (perhaps) higher valuations for undervalued sectors like health care and materials. Finally, there is the threat from the bond vigilantes revolting against higher spending and the possibility they could force interest rates higher. US10Y YTD mountain 10-year Treasury yield, YTD “As 2025 begins, rising long end bond yields pose the biggest challenge to the bull market,” Evercore ISI’s Julian Emanuel said in a recent note to clients. 10-year Treasury yields on Friday hit 4.63%, the highest levels since May. Emanuel noted that yield pressure is “agnostic” to stock prices, that is, pressure from bond yields on stocks can occur when equity markets valuations are high (as they were in 1994 and 2022), and when they are not (2018). Emanuel also noted that over the decades there has been no uniform “threshold” for 10 year yields that would automatically cause stocks to correct. However, with 10-year yields currently at 4.6%, he opined that a move above 4.75% could trigger a “deeper correction” in equities, and above 5% could be a “bull market threat.”
