By Steve Garmhausen

U.S. stocks have had a rip-roaring couple of years, riding a wave of stabilizing and then falling interest rates, AI innovation, and resilient consumer demand. For this week's Barron's Advisor Big Q, we asked wealth management investment professionals to peer into their crystal balls and tell us what they see in 2025 for the economy and for investments.

Brian Huckstep, chief investment officer, Advyzon Investment Management: We're tempering expectations a bit for 2025. U.S. equities tend on average to rise three out of four years and fall one out of every four years. We've had a really good run in 2023 and 2024: The S&P 500 was up 26% in 2023, and it's up 28% year to date, compared with the long-run average of about 10%. History teaches us that after that kind of run we tend to have a pullback. And valuations are high, which is another indicator that it may be more likely that we underperform that 10% long-run average next year.

One reason we're a little concerned about next year is that federal policy with the new president is very much unknown. We did have four years of Trump in the past, and things were terrific, but some of that was fueled by borrowing. And that's our second risk: Borrowing is higher than ever, and there are limits to how high the U.S. debt can go. The market will not bear an infinite debt level, and there will be ramifications. We've already passed the point where that interest burden on the debt exceeds what we're spending for defense on an annual basis.

Finally, if deportations truly do happen, that will be a negative for the economy. The press says there are 10 million people living illegally in the country. If you remove people from our country, especially millions of people, there will be an impact on consumption. It would impact consumer staples stocks in particular.

On the positive side, momentum is a powerful thing. And interest rates in general are dropping. Finally, we don't know for sure how much artificial intelligence is going to add to U.S. GDP, but you certainly can't deny that most AI innovation is happening in the U.S.

Sinead Colton Grant, chief investment officer, BNY Wealth: Our central case is that the U.S. economy continues to lead the rest of the developed world. We're expecting growth as high as 2.5%, and we think that the U.S. consumer is going to continue to drive that forward. We see the landscape with interest rates moving lower.

All of that feeds through to our positive outlook on stocks. We are overweight U.S. large-caps. We think artificial intelligence is a productivity-step change. We see earnings for the S&P 500 increasing between 10% and 15% next year, and the S&P would go up with it. The upper end of our forecast for the S&P by the end of 2025 is 6600 and then we think it moves higher again in 2026. So we're positive on equities, and we don't think that they're overvalued, because we've seen significant margin expansion. Over the past number of years, the bulk of margin expansion in the S&P has come from tech. Tech is not all we like. We also like financials and industrials, for example. But we don't think tech looks overvalued.

Brent Coggins, chief investment officer, Triad Wealth Partners: We think the U.S. is going to outperform international next year by double digits. That American exceptionalism is just here to stay. And I think the dollar is going to continue to stay strong relative to the euro. There's more political uncertainty abroad than here in the U.S. You look at what's happening in France, South Korea, and so on. Here at least we know what to expect. We have a former president coming back, and there's a level of comfort in that we kind of know what to expect.

We also believe that rate-cut expectations are much too aggressive. The labor market's still strong. We're still expecting a lot of growth. Things seem to be going just fine. We're now entering legacy time for Fed Chairman Powell. You're probably going to hear the Fed say things like "data dependent" quite a bit in 2025. I think Powell and company are going to want to wait and see on cutting rates. The market is pricing in four rate cuts by this time next year, but we think we're only going to get two: one this month and another one in the summer.

Finally, we think 2025 is going to be one of the most interesting years for small-caps. They've always been volatile, but that's just going to get exacerbated this year. Valuations and earnings growth expectations are essentially priced to perfection. Can small-caps deliver? That's the big question. They're obviously major beneficiaries of a Trump presidency, but they're very prone to higher interest rates. The area to watch most closely within small-caps is healthcare. Biotech is the largest industry within that sector, and Robert Kennedy Jr. being picked to lead Health and Human Services has created a ton of uncertainty for healthcare stocks, and biotech in particular.

Kristian Kerr, head of macro strategy, LPL Financial: We expect the economy to cool in 2025 due to moderating consumer spending, a softer labor market, and sticky inflationary pressures. Our fair-value target range for the S&P 500 is 6275 to 6375 . We expect modest stock market gains in 2025 supported by a relatively stable economy, solid corporate profits, and a Fed that is no longer hawkish, as well as some potential deregulation tailwinds. With stocks pricing in a lot of good news, positive surprises may be tougher to come by, so a repeat of the strong market performance in 2024 is unlikely in our view. With the bull market another year older, interest-rate risk rising, valuations elevated, positive sentiment at record extremes by some measures, and still-significant geopolitical threats, we expect volatility to be a lot more prevalent in 2025.

As far as bonds, with risks roughly balanced for bonds over the next year we see 10-year Treasury yields remaining in a 3.75% to 4.25% range. We think investors should stay focused on income generation and look to take advantage of the favorable interest-rate environment to secure historically attractive yields in portfolios. We believe investors should avoid large exposure to longer-term maturities that are more interest-rate sensitive and instead concentrate on intermediate-term maturities, which better balance risks but still offer attractive income potential.

Write to advisor.editors@barrons.com

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December 11, 2024 14:06 ET (19:06 GMT)

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