Regions market commentators foresee trends that could make 2025 a year of opportunity for investors with potential interest rate cuts, strong earnings growth and robust business investment.
“We’re cautiously optimistic about the economic growth coming forward and the U.S. having firm footing from an economic perspective and a growth perspective,” said Chief Investment Officer Alan McKnight.
However, there are more questions than answers as major changes are underway in Washington. As a new year approaches, we examine insights into the promise of rate cuts, trends in the labor force, dynamics at play in the bond markets and geopolitical tensions.
“I think some of the broad contours are coming into focus,” said Chief Economist Richard Moody. “Our base-case forecast for real GDP growth is to normalize back to that 2 percent trend. That’s our starting point, and I could come up with a set of policy decisions that would make me think growth was going to be higher than that and come up with some that make me think growth is going to be lower. First and foremost among those is tariffs.”
Trade Policy
Tariffs are a key part of the new administration’s agenda, and their impact will vary with timing and magnitude.
“With tariffs, there are only two possible outcomes: Either prices of goods and services go higher, or profit margins go lower,” explained Moody. “You could have some combination of the two, but on net, that’s lower growth and higher inflation.
“We’ll look to see how all of this plays out and what’s ultimately proposed.”
A Steadfast Fed
For the Federal Reserve, the path ahead includes walking a tightrope to stimulate the economy while keeping inflation in check.
“It’s a balancing act,” said McKnight. “You have a Fed that is going to be closely monitoring the fiscal situation.
“Inflation has been incredibly stubborn coming down — it has grinded lower, but I think that’s going to be top of mind. With their stated data dependency, the Fed will likely want to see inflation continue to come closer to their neutral rate. Given that, we believe the Fed will cut rates another 75 basis points by the end of 2025, including the possibility of a 25 bps rate cut at this December’s FOMC meeting.
“In the long run, you may see greater benefits from a more pro-growth administration and policy. But with some of the elements of that, and the way in which it’s executed, you could also see it causing inflation to remain higher for longer and the Fed is going to have to contend with that, particularly if they’re watching fiscal deficits and the national debt grow over the next 12 to 24 months.”
We believe the Fed will cut rates another 75 basis points by the end of 2025, including the possibility of a 25 bps rate cut at this December’s FOMC meeting.
Alan McKnight, Regions Chief Investment Officer
Labor Force Trends and the Economic Impact
Changes in the labor force often have an outsized effect on economic growth. With research showing an aging U.S. population and lower population growth, the supply of labor may begin to slow, and policy changes ahead may further apply the brakes.
“There’s a lot of talk about immigration reform,” said Moody. “The point I will make is that there are potential ramifications for labor supply growth.
“We have seen considerably faster labor supply growth in recent years and a big catalyst behind that has been foreign-born labor. This is not to say anything one way or the other about immigration reform, but to instead highlight that impacts to labor supply may be a consequence in terms of output growth and the price of labor.”
Caution in the Bond Market
In the bond market, there is more focus on deficits and long-term debt, as well as the inflationary pressures that tariffs and tax cuts could bring, whether in 2025 or later.
“Anything that leads to a larger budget deficit is likely going to lead to higher yields on longer-term Treasuries,” said Moody. “This adds further upward pressure on interest rates and that’s going to have adverse impacts. That has already been working to the detriment of the housing market.”
“We keep coming back to why we think there’s more volatility in the market,” said McKnight. “We think the market is very reactionary anytime we see something that doesn’t meet with the narrative of, ‘Everything is rosy and is going to go higher.’ In the bond market, the sentiment is, ‘Maybe we should be a little more concerned and in wait-and-see mode.’”
Factoring in Geopolitics
Geopolitical tensions will likely continue to cast a shadow over the global economy. The Russia-Ukraine conflict hit a grim 1,000-day milestone in November and cease-fire talks have stalled in the Israel-Hamas conflict.
“The current state of geopolitics adds more risk to the mix,” said McKnight. “Geopolitical tensions add risk in the short- to intermediate-term.”
The Importance of a Disciplined Approach
In such a dynamic environment, maintaining a long-term perspective is essential.
“Focus on what you can control,” said McKnight. “There is always a lot of noise in the markets, there will be even more in 2025. You have a new administration, with a new majority in Congress and a new mandate. It’s a situation where you’re transitioning, from an economic perspective. When new policies and new players appear, it creates a lot of noise in the system. That will have an impact both here and abroad.
“The best thing an investor can do is to avoid being reactive, minimize the noise and focus on what you can influence.
“In terms of asset allocation, continue to maintain exposure to equities and risk assets. Clip bond coupons because the return is better than it was three years ago across the board on an absolute basis and better than it’s been in quite some time.
“Having a diversified portfolio works in this environment. Diversification gives you the highest probability of success while also not allowing yourself to fall prey to the reactive nature of markets.”
The best thing an investor can do is to avoid being reactive, minimize the noise and focus on what you can influence.
Alan McKnight
More Investor Resources and Commentary
Access the most recent Regions Weekly Market Update call or view our weekly call schedule for Regions Wealth Management. You can find additional economic commentary and resources on Regions.com.
The next Weekly Market Update will be presented live on Friday, Dec. 13 at 11 a.m. CT / 12 p.m. ET as part of an ongoing weekly series hosted by Regions to share the latest insights on the markets. Participants may send questions in advance of the call to [email protected] so the panelists can address these questions during the live call. Participants are encouraged to dial in or join via WebEx 10-15 minutes in advance of the start time.
For additional information and a link to join this and upcoming calls, click on the Invitation for Weekly Market Update Calls.
In addition, McKnight regularly speaks with national media to share his views on market activity, the economic impact and Regions’ outlook moving forward. Upcoming interviews include:
- Thursday, Dec. 12 – CNBC Worldwide Exchange
- Wednesday, Dec. 18 – CNBC Money Movers
- Monday, Dec. 23 – Sirius XM’s The Business Briefing – Channel 132
Investing in securities involves risk, including possible loss of principal. The commentary and opinions expressed, are intended only for informational purposes, and are not formal or binding opinions of Regions Bank, its parent company Regions Financial Corporation, or its subsidiaries. This content is solely for information and educational purposes, and nothing contained constitutes an offer or solicitation to purchase any security, the recommendation of any particular security or strategy or a complete analysis of any security, company or industry or constitutes tax, accounting or legal advice. Information is based on sources believed to be reliable but is not guaranteed as to accuracy. Commentary and opinions provided reflect the judgment of the Speaker(s) as of the date of this presentation and are subject to change without notice. Statements may contain forward-looking statements based upon the reasonable expectations, estimates, projections and assumptions of the Speaker(s), but forward-looking statements are not guarantees of future performance and involve risks and uncertainties, which are difficult to predict. Investment ideas and strategies presented may not be suitable for all investors. No responsibility or liability is assumed for any loss that may directly or indirectly result from use of information, commentary or opinions. Only bank deposits are FDIC insured.
