Market Update January 2025
January 31, 2025
Heading into 2025, there were three main drivers expected to boost US stocks this year, including actions by the Federal Reserve, new presidential administration policy initiatives, and continued technological advances in artificial intelligence. Within the first month of the new year, all three of these drivers have had their own set of challenges.
Prior to the December 2024 FOMC meeting, investors expected a significant easing cycle from the Federal Reserve for 2025. Rate cuts alone would have boosted equity prices higher. Today, expectations have changed, and further rate cuts are likely off the table. The good news is that the Federal Reserve believes the economy is on solid footing, the labor market is strong, and inflation has stabilized at a more modest level. Given the easing cycle is on pause for now, rate cuts are no longer considered to be a primary driver for US stocks this year.
The new presidential administration has significant implications for US economic growth and inflation. One of the most positive developments we have seen is the new agency in the government called the Department of Government Efficiency. The focus of this department is to eliminate excessive government spending. This could potentially help reduce the trillions of dollars of debt we have as a country today. The new administration pro-growth policies including less regulation, lower corporate taxes and more US focused business initiatives are expected to lead to further growth and bolster equity prices in 2025. Concerns around the administration’s agenda tied to tariff and immigration battles may create some near-term market volatility.
Artificial intelligence (AI) continues to represent one of the most transformative forces we have ever seen. We expect AI to continue to drive stock prices higher this year and over the longer term. The development of AI is still in its early adoption phase. Part of that phase is having new entrants come into the market. Recently, China, who wasn’t known to be in the game, suddenly appeared with a product that has a meaningfully lower cost structure. We will be publishing a more detailed explanation of our thoughts around this in the next market update, since many of the individual stock positions we own are tied to AI. It is our belief that the introduction of new players and the impact on pricing is a normal part of the growth phase in any major disruptive technological advancement.
Overall, we believe 2025 will be a positive year for US equities. Given the unknowns surrounding tariffs, immigration and policy responses from the Federal Reserve, we expect the pathway higher to be met with some periods of volatility. We expect broader market gains, including banks, health care, technology and US small company stocks to perform well bolstered by innovation and policies driven by the new administration.