Familiar themes define our outlook for 2025. Global central banks are battling inflation while supporting employment, companies are pursuing revenue growth while controlling costs, and mounting debt and geopolitical tensions threaten long-term stability. Against this background, two forces loom large: the convention-shattering approach of the incoming administration, and the transformative impact of generative AI.

Investors aren’t sure whether all this will make them better or worse off. And when investors lack conviction, they tend to demand higher returns for taking on risk. This typically shows up in rising long-term interest rates and higher volatility. Indeed, the 10-year Treasury yield has risen approximately 1% since the Fed started lowering short-term interest rates in September. This dynamic is extremely rare: The only other time since 1981 that rates rose in the three months following a Fed cut was in 1998.[iv] That was also the only time stocks gained 20%+ more than two years in a row. 

Could interest rates stay higher for longer? In large part, the rise in longer-term rates reflects the potentially inflationary impact of proposed trade, energy, and immigration policies over the short term. Another factor is the exceptional resilience of the U.S. economy. Employment is solid, consumer sentiment is strong, businesses are more optimistic about spending and hiring, and earnings growth is surpassing expectations. Meanwhile, higher U.S. interest rates have contributed to a 7% appreciation of the dollar since September, consistent with previous periods of global realignment.[v] As markets adjust to these evolving dynamics, the investment landscape becomes more complex but not necessarily less promising.

We remain constructive for 2025. The world continues to experience reverberations from the pandemic response, with pro-growth policies likely to dominate. In particular, the U.S. economy has demonstrated remarkable resilience. American consumers are in good financial shape, bolstered by prudent spending habits, stable employment, and moderating price pressures. Companies are growing profits while improving productivity. This momentum matters. Looking ahead, policy shifts could significantly influence healthcare and technology sectors, while infrastructure investment remains critical to growth.

However, this optimism is largely reflected in current stock prices. The S&P 500 has delivered an impressive 70% return from its low in October 2022 through 2024.[vi] Markets rarely move in one direction for an extended period of time. Given the combination of relatively muted volatility and elevated valuations, we expect that headlines will periodically shake market confidence throughout 2025. However, we believe any downturn is likely to be short-lived unless an external shock disrupts the strong underlying fundamentals.

The Path Forward. Like most sequels, 2025 begins with familiar characters: resilient consumers, productive companies, pro-growth policies, and U.S. exceptionalism. In our view, the recurring challenges include high valuations and policy uncertainty. While these may create periodic volatility, strong fundamentals should help markets navigate the headwinds. Patience and selectivity should be rewarded in the year ahead.