NEW YORK: US investors are preparing for a swathe of changes in 2025, from tariffs and deregulation to tax policy, that will ripple through markets as President-elect Donald Trump returns to the White House, putting the focus on whether the US economy can continue to outperform.
The changing of the guard in Washington has big implications for how stocks, bonds, and currencies fare in the new year and may require investors to rejig portfolios.
Forecasts call for another buoyant year for stocks, the dollar to maintain its recent strength over the coming months, and Treasury yields to march higher.
Investors largely expect US economic exceptionalism to persist in the new year, as robust consumer spending and a resilient labor market put US growth on a firmer footing than that of many of its developed market peers.
The US economy is expected to find further support from any potential tax reform, including a reduction in the corporate tax rate. Such tax cuts – which would need to pass Congress – could support company earnings and sentiment on stocks.
In contrast, although the euro-zone economy grew faster than anticipated in the third quarter, its outlook remains weak due to potential large tariffs from the Trump administration, escalating trade tensions with China, and low consumer confidence.
"We do expect US growth to outperform the rest of the world in 2025, on the back of potentially favorable monetary and fiscal policy," said Sonu Varghese, global macro strategist at Carson Group.
Front and center for investors in 2025 is how rapidly or deeply the US Federal Reserve can cut rates. The Fed cut rates in December, continuing reductions after a period of aggressive rate hikes, but indicated it would slow the pace of further cuts.
Stocks have been buoyed by expectations of easier monetary policy. But with benchmark Treasury yields rising sharply after the Fed meeting, the rate outlook threatens to undermine the momentum for stocks.
Dollar bears have taken a battering this year, and most FX market strategists forecast continued strength for the greenback.
Many of the factors that powered a 7% gain for the currency against a basket of peers this year, including relatively robust US economic growth and rising Treasury yields, are expected to continue supporting the dollar.
Investors got a taste on Wednesday of how quickly market stability can shift to turmoil. US stocks fell sharply after the Federal Reserve projected fewer interest-rate cuts than expected and as concerns grew about a potential partial government shutdown.— Reuters
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