2025 Market Outlook

As we enter 2025, the economic backdrop provides reasons for optimism across asset classes. Inflationary pressures have eased, enabling the Federal Reserve to pivot toward a more accommodative stance, which supports growth in housing, business investment, and corporate earnings. U.S. equities are poised for another strong year, with gains expected to broaden across sectors and market capitalizations. Meanwhile, fixed income markets remain attractive, offering opportunities for both income and total return. In our view, investors who remain disciplined and diversified should be well-positioned to navigate market challenges and capitalize on opportunities in the year ahead.

NOTE: The following commentary is provided for informational purposes only and should not be construed as investment advice. The opinions and forecasts reflect the research, subjective judgments, and assumptions of the commentator and are not a guarantee of future results. 

Economic Overview

The outlook for 2025 in our view is decidedly bullish for the U.S. economy and equities. Progress on reducing inflationary pressures allowed the Federal Reserve (the Fed) to begin to ease its foot off the brakes of the U.S. economy in late 2024. We expect the Fed to maintain its focus on both parts of its dual mandate: achieving full employment while keeping inflation in check. This suggests that further rate cuts could come in 2025 if inflation continues to moderate toward the Fed’s 2% target.

With borrowing and financing costs easing, we look for a rebound in new and existing home sales as many would-be homeowners have been priced out of the market by high mortgage rates. An upturn in home sales would also benefit other sectors due to knock-on demand for household furnishings, appliances, and landscaping as well as demand for the labor services required to outfit these homes.

We expect to see resilience in business fixed investment demand as the lighter regulatory touch expected of the incoming Trump Administration could allow for faster uptake of technologies and less red tape for business innovation and expansion. Although tariff policy and the impact of those higher taxes on consumption and inflation are a concern, we believe further review and feedback from Congress and business leaders may temper some of the promises made on the campaign trail.

In 2024 the equity market was led higher by cyclical sectors, and in particular from strong gains in the communications services, technology, consumer discretionary and financial sectors. We expect those stocks to continue to do well even as gains broaden to other sectors (such as industrials) and to small- and mid-cap stocks. We believe that artificial intelligence could benefit companies in all eleven sectors to better serve the needs of business and customers. We continue to favor U.S. equities while maintaining meaningful exposure to foreign developed and emerging market indexes.

Against that economic and interest rate backdrop, we expect corporate revenues and earnings to continue to grow over the course of 2025. We expect earnings for the S&P 500 companies to reach $275/share, 10% higher than the $250 figure we expected for 2024. Based on our assumption of a P/E multiple of 25.8x, that puts our year-end price target for the S&P 500 at $7100, about 17% higher from its closing level of $6090 on Dec. 6, 2024.1

Markets don’t move up in a straight line and setbacks are likely, but those with patience and perseverance should see gains over the intermediate and long term.

Research Perspective

Entering 2025, OAM Research continues to stress the need for diversification in portfolios. The trajectory of the economy, coupled with policy direction from the new administration, are likely to contribute to elevated market volatility and increased dispersion across asset classes.

U.S. equity valuations remain extended on a historical basis, but this premium is primarily driven by a handful of mega-cap growth stocks that have outperformed. However, we see the potential for broader market leadership in 2025, which could present the potential for opportunities in areas like large-cap value and small-cap equities. We believe skilled, active managers – using both long-only and long/short strategies – may be well-positioned seek to navigate these shifts. International developed and emerging market equities face headwinds from slowing global growth and the potential for higher tariffs. However, depressed valuations may already reflect these risks. We believe international stocks are positioned to benefit from mean reversion in 2025.

Interest rates remain elevated even as the Fed continues its cutting cycle, and the total return outlook for core fixed income, in our view, appears to be favorable. We also believe investors can take advantage of high current yields on investment grade bonds while benefiting from capital appreciation as the Fed likely lowers rates in 2025. High yield credit spreads are historically tight and don’t appear to adequately reflect potential risks, therefore OAM Research recommends a higher quality bias in fixed income portfolios. Investors searching for more yield may consider allocating to experienced managers within the private credit space, where yields remain attractive.*

OAM Research believes that diversifying strategies will continue to play an important role in portfolio construction. Real assets, given their objective of yield, inflation protection, and defensive characteristics, are likely to remain in favor. Event driven strategies such as merger arbitrage continue to deliver diversification benefits, and the potential for renewed M&A activity stemming from less regulation could catalyze more opportunities.**

Fixed Income and Municipal Commentary

Economic developments in the fourth quarter of 2024 have tipped the scales against the Fed continuing to ease at an accelerated pace as they did at their September meeting.

October’s CPI rose a little more than expected, and retail sales were better than expected, too. Real GDP grew at a solid 2.8% annual rate in the third quarter fueled by strong consumption and strong capital equipment spending, all accompanied by inflation sliding back toward 2%. Subsequently, Fed members are still pointing to rate cuts, but at a slower pace.

Economic data may be noisy due to effects from Hurricanes Helene and Milton, nonetheless, we believe data will still support our long-held view that the U.S. economy remains resilient. Our view remains one of a soft landing for the economy where the unemployment rates moves slightly higher, but ends up below 5% in this business cycle.

Despite peak economic growth and interest rates behind us for this cycle, fixed-income remains an attractive asset class into 2025. As the Fed continues its gradual rate-cutting cycle, the Federal Reserve benchmark interest rate is still at its 18 year highs

Fixed income credit remains in demand as strong technical factors are still in the driver’s seat as supply has eased off the earlier record pace and equities are at all-time highs. The core driver for this demand is simply attractive all-in yields and so it is unlikely to subside even as spreads move to levels that are near all-time tights.

Although corporate spread remains tight, our taxable team sees strong potential in sectors like bank and finance companies, which have the potential to benefit from a steeper yield curve.

There are no positions in the portfolio with any credit or sustainability concerns through the market cycle. Capital preservation continues to be our foremost priority followed by providing a suitable and predictable income.

As long-term investors, we continue to position portfolios to be dependable components of an overall asset allocation. We remain focused on seeking to produce income, not over-reaching for yield, and taking advantage of opportunities presented by the market.

If you have questions about our 2025 Outlook, reach out to your Oppenheimer financial advisor, who can discuss how the market landscape may affect your investments.