What’s the outlook for the economy and the two-year-old equity bull market after President Donald Trump’s shocking political comeback and a Republican sweep of Congress? “Firing on most cylinders,” says renowned economist Allen Sinai, PhD. Whatever your politics, the Trump administration’s pro-growth, business-friendly agenda will help propel the economic expansion this year and next. And while stock market returns won’t be as robust as the well-over-20% gains in each of the past two years, stocks will continue to hit new highs.
But Dr. Sinai warns investors to brace for plenty of volatility as President Trump’s protectionist and potentially inflationary tax reductions and spending plans, including import tariffs and mass reductions of immigrants, are absorbed by Wall Street and global markets.
Here’s what Dr. Sinai sees ahead for 2025 and beyond…
A year ago, I again told Bottom Line readers no recession, but perhaps a daunting “soft landing.” To fight inflation, the Federal Reserve had hiked interest rates at the fastest pace in 40 years. When economic growth started to slow and inflation cooled off, the Fed reversed its policies, attempting to reduce interest rates at just the right pace to sustain the expansion.
Well…so far, mission accomplished!
Forget about a soft landing—it turns out the plane isn’t landing at all. The economic expansion is alive and well and likely to continue in the coming year. Solidly rising income because of a still-strong jobs market and low unemployment mean that American consumers will keep it up, earning and spending strongly while inflation remains essentially in check. The Fed intends to keep a good thing going and preempt any possible trouble in the labor market and employment by continuing to reduce short-term interest rates, although by less and only gradually.
My forecast is another one or two quarter-point reductions over the year, some 50 basis points, to 3.875% on the federal funds rate and nearly one percentage point reductions in most other short-term interest rates.
Important to this upbeat forecast are catalysts provided by two of President Trump’s signature policies, with assists from the Republican-controlled Congress and the ongoing Big “T” Wave of technological change, key to the economy’s stellar performance. Trump policies should be highly stimulative to the economy and company earnings and will keep the stock market chugging higher. They include…
Tax cuts. At year-end, the Tax Cuts and Jobs Act of 2017 (TCJA), the largest Tax Code overhaul since the Reagan era, is scheduled to sunset. Not only is Congress likely to extend the TCJA—which reduced the corporate tax rate to 21%…almost doubled the standard deduction…expanded the child tax credit…and limited deductions for state and local taxes—but I expect additional cuts. Corporate tax rates may fall as low as 15% for domestic manufacturers, the lowest since the 1930s, setting the stage for improved profit margins and capital investments. There is also the possibility of individual tax exemptions for cash tips, overtime pay and Social Security benefits.
Deregulation. The White House plans to roll back many Federal regulatory policies and restrictions through executive actions and replacing heads of the Securities Exchange Commission (SEC), the Food and Drug Administration (FDA) and the Federal Trade Commission (FTC). This should boost profitability in industries such as energy, technology and banking by reducing costs of compliance and removing impediments for mergers and acquisitions.
Pro-Business Administration and Congress. Not quantifiable is a pro-business attitude and leaning by the Administration and Congress—leading to heretofore unexpected and unforeseen actions that can aid business profits, keep interest rates low and the stock market positive in the near- to intermediate-term.
The odds of recession in 2025 are now just 5%, but despite this, investors should be aware of major shocks that could disrupt the economy enough to slow growth and trigger downward swings in the economy and stock market.
Shock: Higher tariffs set off a full-blown trade war. This is the biggest concern. US tariffs are a charge on foreign products brought in across our borders. The Draconian levels of tariffs President Trump has proposed—60% or more on all imports from China and as much as 20% across the board on imports from elsewhere—have downsides that can outweigh the benefits. Tariffs are costs that companies will at least partially pass on to other businesses and then to consumers, raising price levels and the inflation rate. Other countries likely would retaliate with steep tariffs on US goods, costs that can reduce US exports and real GDP.
Shock: A mass crackdown on illegal immigration that could cause labor shortages. About two-thirds of US crop-farm workers are foreign-born, and 42% aren’t legally authorized to work in the US. President Trump’s plan for their deportation and restraints on future immigration will impair industries such as health care, home services, construction and agriculture, slowing production and raising prices on food, elder-care, and other goods and services.
Shock: The “debt bomb” explodes. The US Treasury has been issuing debt at a furious pace since 2017 to fund soaring deficits, partly due to trillions of dollars in revenue lost from the TCJA tax cuts. Just paying the interest on the existing debt cost taxpayers $882 billion last year. The potential extension of the TCJA will exacerbate the problem and drive yields up on long-term Treasuries. Higher yields dampen spending because they make borrowing, particularly housing, more expensive and put downward pressure on stock prices.
Shock: Conflicts in the Middle East and Ukraine worsen. My forecast is based on the geopolitical status of these hotspots remaining the same or improving. It will be a major negative for the economy and the stock market if a Ukraine–Russian peace deal fails to materialize and the US is drawn in more deeply…or war in the Middle East escalates.
Shock: A new Department of Government Efficiency (DOGE) actually helps bring about reduced costs of government through efficiencies, job cuts and reform of government agencies. This outside advisory group, run by entrepreneurs and business persons, could well provide ideas and bring about and motivate actions that will reduce the size of the federal government, its expenditures and ballooning debt—truly disruptive but also long needed. This would be a plus for inflation, produce lower interest rates, help profits and fuel a bigger-than-expected bull market in stocks.
Gross Domestic Product: Real GDP should be 2.6% this year, then ease to near 2% growth in 2026. These gains will be driven mainly by strong consumer spending, as well as federal government spending in areas such as defense. The economic expansion should continue, but at a slower pace.
Inflation: The Labor Department’s Consumer Price Index (CPI), which measures a basket of common goods and services including energy and food costs, should bounce up and down, averaging about 3% by year-end 2025, about the same as last year.
Unemployment: The labor market will remain historically tight with the unemployment rate still quite low but rising to 4.5%, versus 4.1% last November. Workers will continue to demand and get higher pay from companies trying to fill jobs. The average hourly wage for private-sector workers is likely to rise by 5% in 2025, well above the long-term annual average.
Including dividends, the Dow-Jones Industrial Average is expected to return about 11% and the Standard & Poor’s broader 500 common stock index, 9%. From a historical perspective, stock valuations are stretched, especially after two years of gains well over 20%. But much of those gains came from a handful of large technology firms, the mega-caps. This year’s rise should broaden out, powered by lower corporate taxes, lower short-term interest rates and stellar corporate profits. The earnings of S&P 500 companies will rise 10% or more, on average, quite strong but at a lesser pace than last year. Profit margins will remain high thanks to artificial intelligence (AI) and other digital technologies that are saving costs and increasing efficiency across virtually every industry. Best stock sectors now…
Health care/pharmaceuticals. This has been the worst-performing sector of the S&P 500 for the past few years, leaving many high-quality names undervalued. Rapid innovation in medical technology and drug development for an aging population will drive growth.
Consumer discretionary. Investors should favor retailers who appeal to value-conscious consumers and whose stocks trade at low prices relative to expected earnings growth.
Technology (new) companies. The huge wave of AI-driven technological change will continue to propel new companies’ stock prices higher in one of the biggest waves of technological change ever in US history.
Stock sectors to avoid now…
Housing. The weakness in this sector will continue because 30-year fixed mortgage rates will remain in the 7%-to-8% range. That puts single-family housing out of reach for many buyers and leaves homeowners “locked-in,” unwilling to sell their houses and move because it means trading in their current interest rate for a much higher one.
Bonds look unattractive relative to stocks. Annual returns for the total bond market likely will be negative. Massive federal government deficit spending will keep long-term bond yields high, pushing down prices. I expect the yield on the 10-year US Treasury bill to hit 5.25% or more by year-end 2025.
For conservative investors: Last year, holding cash in high-yield money-market accounts was a great alternative to bonds. But yields on bank deposit accounts will continue to come down this year on the Fed’s preemptive easing, so you are better off owning shorter-term—up to five years duration—high-quality fixed-income securities, which offer both yield and the potential for some capital appreciation.
