Will investors be bracing for a dynamic and potentially turbulent market environment as President-elect Donald Trump prepares to take office in 2025?
Policies on tariffs, deregulation, and interest rates, combined with ongoing global economic challenges, are expected to create opportunities and risks for portfolios worldwide.
If you are an investor, or considering becoming one, here is what you should watch in the year ahead.
Market Outlook: A Mixed Bag for Investors
Trump’s return to the White House will most likely bring a blend of bullish and bearish forces to markets.
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Deregulation
With a lighter regulatory framework, such industries as financial services, technology, and energy stand to benefit considerably.
Don’t be surprised if the Trump administration’s policies spur mergers and acquisitions. They should also boost the performance of small- and mid-cap companies.
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Tariffs
Tariffs are taxes or duties imposed by a government on imported or exported goods to regulate trade, protect domestic industries, or generate revenue.
Trump’s proposed tariffs on imports from Canada, Mexico, and China could increase costs for US businesses and consumers, potentially dragging down equities and fueling inflation. He also said he would consider taxing imports from Europe.
As an investor, you will need to carefully evaluate these opposing forces to navigate the changing landscape.
In an article published by Financial Planning, Rob Burgess wrote:
“The return of President-elect Donald Trump to the White House will be a major concern for all investors in 2025. Experts say his policies will likely create a mixed bag for markets. Many are excited by the prospects of deregulation in several industries. And while these sectors stand to benefit from a lighter governmental touch, Trump’s preoccupation with inherently inflationary tariffs will likely create chaos in other areas.”
Federal Reserve and Interest Rates
In 2024, the Federal Reserve (the Fed), America’s central bank, reduced the benchmark federal funds rate by a total of 1 percentage point (100 basis points).
In 2025, it will face the challenge of balancing economic growth with inflationary pressures.
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Investments – Growth and Uncertainty
A rate cut will most likely benefit growth-focused investments. However, don’t be surprised if there is growing market volatility due to uncertainty surrounding the Fed’s next moves.
Investors should pay close attention to Fed statements and economic indicators. Statements by Fed Chair Jeremy Powell and other central bank members will heavily influence sectors like technology, industrials, and financials.
The Role of U.S. Exceptionalism
The US has been and still is outperforming its global peers, such as the European Union, UK, Australasia, and Japan for several years. America’s economic growth has been driven by consumer spending and a resilient labor market, especially post-pandemic.
This relative strength, coupled with potential corporate tax cuts, could boost earnings and keep U.S. equities attractive compared to those of its main economic rivals.
However, you and other investors should remain cautious. High valuation metrics, such as the *Shiller P/E ratio, suggest a risk of overvaluation in some sectors.
* The Shiller P/E ratio measures a stock’s price against its average inflation-adjusted earnings over 10 years, highlighting long-term valuation trends.
Small- and Mid-Cap Stock Investments
With deregulation and mergers expected to dominate, small- and mid-cap companies may see renewed growth. Small-cap companies are valued between $300 million and $2 billion, while mid-cap companies are valued between $2 billion and $10 billion.
These sectors, which have lagged behind large-cap giants in recent years, are poised for a resurgence as investors seek undervalued opportunities in a broadening market.
Navigating Volatility: Key Strategies for 2025
To help you navigate the uncertainties of 2025, here are some key strategies that can strengthen your investment approach and protect your portfolio.
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Diversify
Spread investments across sectors and regions to minimize risk. In this case, not placing all your eggs in one basket really holds true.
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Focus on Growth Areas
*Cyclical sectors, like financials, technology, and industrials are expected to fare especially well over the next four years.
* Cyclical sectors are those that grow or slump with the economy. They do well during periods of economic growth and tend to underperform during downturns.
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Hedge Against Inflation
“To hedge” means to reduce or offset the risk of financial loss in an investment. Consider assets like gold, Treasury Inflation-Protected Securities (TIPS), or cryptocurrencies to protect against rising costs.
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Adopt Active Management
With volatility on the rise, stock-picking strategies may outperform passive approaches in 2025. In other words, you will probably be better off with a hands-on approach; keep a close eye on your investments and be ready to make changes whenever necessary.
Investments in 2025 – Conclusion
2025 will be a pivotal year for investors. Fed decisions, global economic conditions, and Trump-era policies will create both significant opportunities and notable risks.
The best way to improve your chances of succeeding in this evolving market environment is by staying informed and being adaptable.