Stock and bond markets are expected to rise in 2025, but the big uncertainty for investors will be President-elect Donald Trump’s policy choices, Wall Street strategists say.
On average, the 10 largest banks surveyed by the Financial Times, including Goldman Sachs, Bank of America and HSBC, have positive outlooks for next year, with many of the themes for 2024 expected to continue.
But they acknowledge that when President Trump arrives in the White House next month, how he implements his plans, including trade tariffs and tax cuts, will be key to the direction of financial markets.
Meanwhile, banks will also aim to avoid a repeat of last year, when many predicted a recession but it did not materialize.
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bond
Strategists expect U.S. Treasury yields to fall in the first half of next year as inflation recedes, but there is uncertainty about what President Trump will do immediately after taking office, and there are mixed views on what will happen next. be.
On average, strategists expect the yield on the 10-year U.S. Treasury note to fall to about 4.1% from current levels of about 4.49%. Deutsche Bank expects yields to rise to 4.7%, while Morgan Stanley has a more bullish base case of 3.6%. As prices rise, yields fall.
Vishwanath Tirupattur, global director of fixed income research at Morgan Stanley, said the Fed will be walking a “tightrope” next year as the Trump administration takes off.
The U.S. bank expects the Fed to continue reducing borrowing costs through the middle of next year, before the inflationary impact of widespread tariffs forces a “pause” in rate cuts.
Deutsche Bank, by contrast, said markets were too optimistic and its base case depended on “current political realities” such as fiscal easing, deregulation, tighter immigration controls and across-the-board tariffs. It added that all of these measures indicate upward pressure on inflation.
The Fed has already indicated it is slowing the pace of rate cuts. This month’s decision is considered a “hawkish” cut because it set back expectations for additional cuts next year and factored into the forecast assumptions about President Trump’s planned policies.
stock
In the stock market, banks expect the benchmark S&P 500 index to reach new highs next year, but most expect the index to fall below its historical average of 11% a year.
Nine out of 10 banks expect the index to rise about 10% to about 6,550 points in 2025, after rising 23% this year to about 5,930 points. Societe Generale expects that number to fall to 5,800.
Deutsche Bank expects the stock to rise to 7,000 points on the back of continued strength in the U.S. economy, but said the timing of potential policy changes under the next president will be key to market trends. Ta.
The bank believes that the rally will continue due to strong investor demand for artificial intelligence stocks. “Valuations are obviously high, but they’re likely to stay that way and potentially even rise,” said Bankim Chadha, chief U.S. equity strategist at Deutsche.
But other analysts said they were waiting for signs that the technology could lead to increased profits for companies.
Citigroup analyst Drew Pettit said uncertainty surrounding President Trump’s policies could weigh on the index further and could mean even more negative results in 2025. He said there were “examples of enthusiasm”. “We expect volatility to rise further. It’s not going to be a comfortable ride,” he said.
The bank also expects European stocks to rise on potential tailwinds if the European Central Bank cuts interest rates more quickly, the Ukraine war ends, and the political situation in France and Germany begins to stabilize. are.
Five of the 10 banks surveyed predicted that European stocks would rise next year. Few took a bearish view, but only UBS predicted the market would turn negative next year.
Jerry Fowler, head of European equity strategy at Swiss Bank, said the market was cheap but expected to remain flat next year.
“Europe seems to be stalling,” he said. “Few investors are optimistic… 2025 is shaping up to be a challenging year for Europe.”
currency
Despite expressing concerns about how the next president will affect U.S. competitiveness vis-à-vis trading partners, more than half of the banks surveyed said President Trump’s policies will reduce their dollar value next year. is expected to rise further.
Deutsche Bank expects the dollar to reach parity against the euro, which experienced the biggest decline among G10 currencies in the immediate aftermath of the US presidential election in November. The dollar has already soared against the euro from $1.11 to less than $1.04 since the end of September.
Trump’s preference for tariffs as a policy tool has led to higher spot prices, said Kamaksha Trivedi, head of global foreign exchange, rates and emerging markets strategy at Goldman Sachs.
“President Trump will have no qualms about significantly raising tariffs. Trivedi expects a combination of tariff hikes and tax cuts to provide significant support to the dollar next year.
BofA predicts that while President Trump’s rhetoric translates into hard-line policy and markets react to expectations for a “perfect tariff storm” rather than policy implementation, the U.S. dollar will appreciate in early 2025, but by the end of next year. We expect it to fall to $1.10.
“We know there will be tariffs, but we don’t know what they will be,” said Kamal Sharma, senior currency strategist at BofA. “The ball is in Trump’s court.”
gold
After a great year on the back of wars in Ukraine and the Middle East, this safe-haven asset is widely expected to continue rising. Analysts expect demand from central banks and concerns about inflation and fiscal waste to be the driving force next year.
Goldman Sachs and BofA expect the commodity to rise nearly 13% to $3,000 a troy ounce, less than half the gains seen this year. On average, major banks expect a rise of 8% to $2,860.
Only Morgan Stanley expects prices to remain near current levels, and strategists expect China’s economic weakness to be a headwind for bullion demand.
oil
Producer group OPEC+ announced plans this month to delay production increases to support prices, but banks still expect Brent to rise further from around $72.80 on Friday afternoon to around $70 per barrel by the end of next year. I expect it to fall.
Kim Fastier, head of European oil and gas research at HSBC, said the cartel’s moves were unlikely to change the direction of prices. “With non-OPEC production expected to grow faster than demand into 2025-26, the group has no room to ease production cuts,” he said.
However, Goldman Sachs has set a forecast of $76 per barrel, with commercial inventories falling visibly in recent months, and prices expected to rise next year due to strategic inventory replenishment in the US and China. He said he would benefit from this.
Additional reporting by Ray Douglas in London
