2025 market and economic outlook: Why signs point to guarded optimism

As we look ahead to 2025, we believe U.S. economic conditions will likely remain stable, which could contribute to S&P 500 Index profits growing for the fifth consecutive year. Notably, normalized inflation and potentially lower interest rates could lift asset prices higher.

On the margins, Republican control in Washington may lead to slightly lower taxes, less regulation and a business-friendly environment. However, an increasingly volatile global landscape, escalating tariff threats, elevated asset valuations and risks that fiscal/monetary policies fall short of expectations all point to guarded investor optimism in 2025 after two years of exceptionally strong U.S. stock returns.

Here are our top projections for the U.S. economy and financial markets:

The economy

We forecast U.S. economic growth to slow in 2025. Our view, however, is not based on expectations of seriously deteriorating conditions but rather a healthy moderation in consumer spending that should move growth closer to the economy's “sustainable pace” of growth.

Here are our key projections:

• Real gross domestic product (GDP) growth will continue to normalize. Real GDP will likely slow to 2.0% in 2025 from roughly 3.0% in 2024. Fundamentals remain very supportive of activity, in our view, but consumers are running low on the excess savings built up during the pandemic period.
• Consumer financial health is still key and supportive. Over the last several quarters, consumer spending has been supported by solid job growth, elevated wage gains and excess savings. We currently forecast real consumer spending to grow at a 2.5% rate in 2025 versus an anticipated 2.9% rate for 2024. That said, a deceleration would be a healthy "evolution" rather than a concern.
• Inflation should continue to decelerate, though there could be impediments. Inflation should decline at an accelerated pace during the first half of 2025 as annualized comparisons become easier. Still, tariff actions or further turmoil in the Middle East stand as key potential wild cards, in our view.
• Federal Reserve monetary policy remains critical. We believe the most likely path for Fed policy is one in which officials cut the central bank's overnight lending rate gradually over the course of the year. However, potential U.S. tariffs on imports and impacts on growth and inflation could complicate this view.
• Tariffs are our central concern entering 2025. The eventual size and scope of tariffs, as proposed by the incoming presidential administration, stand as the most important “known unknown” facing the 2025 outlook. We believe most of the proposed tariffs are likely to be negotiation starters and related to objectives such as border enforcement or illegal drug flows (primarily in the case of Mexico and Canada). Tariffs on goods from China, however, are likely to endure, thus offering some residual upside inflation pressure. Depending on the magnitude, items affected, and countries targeted, tariffs could have adverse implications for inflation and real economic growth.

The markets

We see a favorable market backdrop in 2025, but one that may require a more patient and disciplined investment approach. Firm economic conditions, near-normal inflation, broadening profit growth, strong secular themes across technology and growth-focused fiscal policies could see stocks finish the year higher than current levels, albeit with periods of volatility throughout the year.

Here are our key projections:

• While the environment is favorable, investors should prepare for the possibility of a range of outcomes. The S&P 500 could see high single-digit to mid-double-digit returns in 2025 in our more favorable scenarios. However, stock valuations are elevated, and there is a risk that profit growth assumptions disappoint, particularly if results miss lofty expectations within the technology sector or tariffs contribute to curbing activity more than we expect. In a less favorable scenario for growth and inflation, and after two years of very strong stock returns, the S&P 500 could finish the year flat-to-lower. This range of outcomes argues for an investment strategy that keeps expectations and risk closely aligned.
• Corporate profit growth is expected to broaden. We see S&P 500 profits growing by between 10.0% and 15.0% over 2024 levels, driven by continued strength in the technology space and also by a wider set of companies and industries benefiting from firm economic activity and easier year-over-year comparisons. All 11 S&P 500 sectors are projected to see positive earnings per share growth in 2025. If sectors such as information technology and communication services continue to see strong earnings trends in 2025 (which we believe they will) and other sectors contribute positively to the profit narrative, U.S. stocks are positioned for another solid year of performance, in our opinion.
• Big Tech remains influential but also consider opportunities elsewhere. An artificial intelligence (AI) “gold rush” has pushed the valuations of mega-cap technology companies into rarified air. However, investors should consider broadening their horizons to non-tech cyclicals that could benefit from less regulation and pro-growth fiscal policies or have strong attributes of shareholder yield. Investors may also want to selectively take advantage of potential weaknesses in technology and look beyond broad sectors and down into industries for opportunities.
• A new presidential administration offers benefits and risks. Sorting through potential changes to tax policy, regulation, trade policies and immigration should keep markets busy in 2025. Less regulation and the extension of expiring provisions in the 2017 Tax Cuts and Jobs Act (in addition to lowering certain taxes) could be modestly stimulative and positive for asset prices. Yet, broad tariff implementations could dampen economic growth and put upward pressure on inflation, which would likely be a market negative.
• Investors may be well served by sticking to the basics. Consider focusing on a diversified investment approach, shading portfolios toward the U.S., incorporating strategies that focus on security selection and yield, and preparing for an eventful year ahead.

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Start 2025 strong with your financial advisor

While it's impossible to predict the future, connecting with your Ameriprise financial advisor in the new year can give you more confidence as you navigate what's ahead. They can help you make sense of economic and market developments and provide personalized recommendations to take advantage of the current environment.