2025 Investment Outlook

Key Takeaways: 

1. Growth will slow unless labor productivity can increase. 

2. Inflation is making a comeback. 

3. A higher debt burden limits the Federal Reserve’s options. 

Market Overview: 

Our investment framework utilizes a four-quadrant approach based on the incremental rate of change in GDP and inflation. The most probable market regime for 2025 is economic inflation, characterized by slowing growth and rising inflation, creating a risk-off environment. In such conditions based on backtesting, defensive assets with high dividends, value-oriented investments over growth stocks, and short-duration bonds tend to perform better. 

To learn more about our investment framework, please visit our website. 

Investment Process: 

Our risk management strategy is centered around tracking growth, inflation, and policy shifts. Monitoring these variables allows us to position portfolios for the highest risk-adjusted returns. Let’s analyze these factors in greater detail. 

Growth Outlook: 

The U.S. economy is expected to slow significantly, with GDP growth projected to decelerate to approximately 2.4% in 2025 and further down to 1.7% in 2026. This slowdown is attributed to persistent economic challenges, including high interest rates, inflationary pressures, and a weakening labor market. 

Consumer spending, a primary driver of economic activity, is also expected to lose momentum, with projected growth of only 3.1% in 2025 and 2.3% in 2026. As household savings dwindle and real wage growth remains sluggish, many consumers are tightening their budgets, further restraining economic expansion. 

Additionally, geopolitical uncertainty and potential policy shifts—including trade tariffs, spending cuts, and restrictive immigration measures—pose further risks to economic growth. These factors could disrupt supply chains, increase business costs, and weaken investment confidence. However, potential deregulation, tax cuts, and increased liquidity under the new administration may offset some of these challenges. Furthermore, the continued adoption of artificial intelligence could extend economic growth beyond current expectations. 

Inflation Outlook: 

Contrary to the belief that inflation will gradually align with the Federal Reserve’s 2% target, our research indicates the opposite. Inflation is likely to rise over the intermediate horizon due to increasing base effects and external pressures. 

Energy costs are expected to climb due to geopolitical tensions and OPEC+ production cuts, driving up fuel and transportation expenses. Escalating wage demands may force businesses to pass costs onto consumers, further entrenching inflationary pressures. Supply chain disruptions, including shipping delays in the Red Sea and semiconductor shortages, could push prices higher across multiple sectors. 

Government spending and potential Federal Reserve rate cuts may also stimulate demand at a time when inflation remains elevated. Housing costs continue to rise due to limited supply, and new tariffs on imports could further increase consumer prices. Given these factors, inflation is likely to remain above target in the near term. 

Policy Outlook: 

Given these conditions, the Federal Reserve is expected to adopt a "wait-and-see" approach in the first quarter of 2025. Because of the uncertainty of scope, timing, and changes to fiscal policy, the Fed may need to await further fiscal policy decisions before making additional monetary adjustments. 

President-elect Donald Trump has nominated Scott Bessent to succeed Janet Yellen as U.S. Secretary of the Treasury. His nomination suggests a potential shift toward economic policies focused on tax reductions and protectionist trade measures aimed at bolstering domestic industries. 

If the goal remains to achieve a 2% inflation rate, policymakers will face pressure to balance market volatility and inflation risks. Many of Bessent’s proposals could introduce additional inflationary considerations for the Fed. The nation’s high debt burden may also restrict the Fed’s ability to implement an accommodative monetary policy without exacerbating inflationary pressures. 

CFC Portfolios: 

Looking ahead to early 2025, four key factors that our research team will be watching:  

1. consumer spending ability 

2. how current economic numbers compare to last year's figures 

3. the availability of credit.  

4. policy shifts and reactions to changes 

We adjust portfolio allocations by observing markets' reactions to the changing environment. The overall economic situation in the US remains positive, and markets continue to support the current trend levels for assets we currently own.  

For our clients, we are actively reviewing portfolios and making necessary adjustments in response to evolving market conditions. 

We offer complimentary portfolio reviews for non-clients interested in understanding how we are positioning portfolios to help investors reach their financial goals. We analyze key risks, assess economic impacts on investments, and contrast portfolio strategies with current market data. If you would like to schedule a review, please contact us.