2025 is shaping up to be a transformative year for markets, with the U.S. presidential election behind us and President-elect Donald Trump’s policies expected to set the tone for economic and sectoral dynamics. The outlook remains cautiously optimistic, but investors must navigate a landscape rife with opportunities and risks. Here we offer a concise breakdown of our market outlook for the new year; the full report from Grey Ledge Advisors is attached at the end of this article.
Economic and Sectoral Highlights
Energy Sector: Traditional energy companies will thrive under deregulation, boosting profitability in oil and gas. However, renewable energy projects may face challenges with reduced infrastructure funding.
Financial Sector: Deregulation and a steeper yield curve will favor banks, driving improved net interest margins. The deal-making environment also looks ripe, but systemic risks persist due to reduced oversight.
Industrial and Manufacturing: With proposed corporate tax cuts to 15% and tariff protections, domestic manufacturers will benefit. However, increased input costs from tariffs could disrupt companies reliant on global supply chains.
Small Caps: Small-cap companies stand to gain disproportionately from tariff protections and lower taxes while trading at a significant valuation discount to large caps.
Japan’s Market Opportunities: A unique investment destination, Japan combines stable inflation, corporate governance reforms, and innovative sectors like semiconductors, robotics, and advanced materials to attract global investors.
Key Themes in Technology
AI Revolution: Advances in AI are reshaping industries, driving efficiency and innovation. Companies investing in AI are expected to gain first-mover advantages.
Cybersecurity Challenges: The rise of AI-driven cyberattacks demands significant investment in robust cybersecurity measures, creating opportunities in this critical sector.
Macroeconomic Landscape
Federal Reserve: Persistent inflation, hovering at 3.5%, complicates the Fed’s balancing act between rate cuts and economic growth.
Trade Policies: Aggressive tariffs may bolster domestic industries but could stoke inflation and disrupt global trade.
Geopolitical Risks: Escalating regional conflicts and shifting global alliances could disrupt capital markets in unexpected ways. While trade tensions dominate headlines, geopolitical unpredictability may create ripple effects on currency stability, commodity pricing, and cross-border investments.
Key Risks to Watch
Inflation and Unemployment: Persistent inflation and rising unemployment (projected at 4.5%) signal an economic slowdown.
Debt Refinancing: Higher refinancing costs could drive increased default risks for speculative-grade firms.
Market Valuations: Elevated equity valuations heighten correction risks if earnings fall short.
Household Debt: Increasing debt levels may weigh on consumer spending, dampening growth.
Closing Thoughts
The year 2025 presents a dual narrative of opportunities and challenges. Sectors like technology, energy, and small caps offer significant upside potential. However, investors must remain vigilant against macroeconomic risks and geopolitical shocks. With careful positioning and a focus on resilience, portfolios can be aligned to capitalize on emerging trends while mitigating downside risks.
To read the complete Market Outlook Report, please download the report here: Market Outlook 2025
By Brant Walker, Chief Investment Strategist
“Now is always the hardest time to invest, especially when the market is exhibiting schizophrenic behavior.”
This statement could apply to virtually any period in the last three-and-a-half years, starting with the impact of the COVID-19 pandemic and its associated disruptions. Before we take a look at the first half of 2023, it will be useful to review the market trends that have characterized this uncertain period and what they mean for current and forward-looking investing climates.
How we got here
The year 2020 started on a high note, with the S&P 500 index closing 2019 with a stellar total return of 28.9%. Then the potential gravity of the coronavirus became clear in February 2020. In five short weeks, the S&P lost 33 percent of its value, bottoming out on March 16th.
Around that time, the federal government began rapidly printing money to buttress businesses that had to shut down and employees that were ordered to stay home, many of whom lost their jobs. This infusion of cash buoyed the market, and stocks finished the year up 16.3%.
The year 2021 was also an excellent time for stocks due to continued money creation and the wide distribution of COVID-19 vaccines, which helped restore a sense of normalcy and optimism. The S&P 500 index again finished strong, with a 27% gain for the year.
The following year, reality set in. The elevated money creation of the previous two years led to excess demand, driving inflation to a 40 year high of over 9%. The Federal Reserve reacted, perhaps belatedly, by raising interest rates from zero to where they stand today, at just over 5%. The stock market acted as it often does in a period of sharply rising rates and dropped, tumbling 19.5%.
2023 so far
After a brief but steep stock market loss in early 2020, followed by two years of strong returns, and another significant downturn in 2022, where are we today after the first two quarters of 2023? To date, the market has done another about face by returning close to 15 percent. Schizophrenic indeed.
We are dealing with an unusual combination of data points that will need to be carefully monitored and addressed as 2023 unfolds. First, the yield curve has been inverted for well over a year, meaning short-term interest rates (think money market funds and bank CDs) are higher than longer term interest rates. In normal times it would be the other way around.
Money funds now pay close to 5% and some short-term CD’s can be had for 5.5%. Long maturity U.S. Treasury bonds are yielding under 4%. This is due to the Federal Reserve trying to slow the economy and raise unemployment to get inflation back down to the 2% range.
Despite this effort, the economy remains resilient. The national unemployment rate is near a 40-year low, and inflation remains stubbornly above 2%. Fiscal policy in Washington is also hampering the Federal Reserve’s intention of lowering inflation, as government spending and new social programs continue to pour money into the system.
It may take more time than anticipated to get inflation down to target, and this is a risk to the markets — both stock and fixed income. Hence, we are approaching the second half of 2023 in a cautious stance.
The impact of AI
We also feel it is worthwhile to spend a few moments on artificial intelligence (AI). Some say the growing capabilities of AI have the potential to change the world, similar to the invention of electricity and the automobile. Time will tell, but we do know that a handful of technology stocks that are on the forefront of AI have appreciated rapidly due to current hype and their possible future potential.
The situation is similar to market behavior in 1999, when the internet was still in its infancy. Anything labeled internet, and any company that had .com attached to its name, soared in value. There’s a reason this trend was referred to as the “dot com bubble,” though. In March of 2000, the highly touted tech stocks came back to earth. Some took years or decades to recover to their 1999 highs. Some have never recovered.
The bubble also allowed a handful of companies to dominate the tech sector and drive the majority of market returns. A similar trend is happening today, with six stocks accounting for most of the year-to-date market return in the S&P 500. We don’t know exactly how the AI cycle will play itself out. History doesn’t always repeat,but it often rhymes.
Year-over-year market changes
The benchmark S&P 500 stock index has returned 19.6% for the year ending June 30, 2023. The benchmark iShares Core US Aggregate bond index ended the same period in negative territory, logging a -3.5% return. These returns are in stark contrast to calendar year 2022, when the S&P 500 logged a negative total return of 18.1% and the iShares Aggregate bond index lost 14.6%.
Usually, one would expect bonds to act as a buffer when stocks fell as much as they did in 2022. In calendar year 2022, both stock and bond markets began, in retrospect, at levels that would prove to be highs for the year. Both markets plummeted in sawtooth fashion before reaching their lows on or around November 1.
This was caused by the Federal Reserve lifting short-term interest rates from essentially zero to the 5% level that is prevailing today. Early in 2022 most market participants expected interest rates to stay near zero or increase on a much slower trajectory than what has actually happened, causing stocks and bonds to plummet.
Stocks have staged a strong recovery since last November as the market has become more comfortable with interest rates at 5% and the economy remains resilient. In addition, the labor market remains strong, and the unemployment rate sits near historic lows.
Economists have been predicting an economic recession for the better part of a year based on the “inverted” yield curve, where short-term interest rates are higher than long-term rates. Inverted yield curves often presage economic recessions as the Fed attempts to slow economic activity and cool inflation. Some market pundits have quipped that this is the most widely predicted recession that never happened, at least up until now.
Year-end forecast and expectations
Market performance in the back half of 2023 depends on several variables which are yet to unfold. The first and most prominent factor will be how far the Fed increases its interest rates before the economy and inflation cool to acceptable levels. Recent reports show the economy remains resilient, inflation is still too high, and job creation has been surprisingly strong.
Elevated government spending based on recent bills passed in Washington is complicating the Fed’s action to slow the economy. Common stocks are highly valued based on historical standards, particularly with short-term interest rates above 5% and potentially headed for 6%.
We may have to “thread the needle” in the back half of 2023 for the markets to remain resilient. Meaning inflation, the economy, and the labor market will need to cool without triggering a deep recession. We suspect the second half of 2023 may be more challenging than the first half.