Navigating 2025: cautious steps in a dynamic market
With the Fed scaling back expectations for further interest-rate cuts and the U.S. dollar’s recent rally, will U.S. stocks deliver the earnings growth the market is projecting? We discuss why a cautious investment strategy may be merited in 2025.

A 23.31% surge for the S&P 500 Index made 2024 a robust year for equities. For 2025, Wall Street analysts’ consensus projections suggest that the stock market is likely to rise for the third consecutive year, driven by ambitious earnings growth expectations. However, we believe that equity market performance may be more modest than anticipated with several economic factors at play.
Treading with caution
The new U.S. administration has signaled its desire to prioritize domestic economic concerns, creating the potential for near-term disruptions and some volatility for the equity markets. In our view, this would mean that analysts’ projection of 14.8% earnings growth for the S&P 500 Index in 2025 might be somewhat optimistic and, for that reason, we’re adopting a more cautious stance.
Additionally, two other factors may slow down earnings growth and the S&P 500 Index. The first is the continued strong performance of the U.S. dollar, which could weigh on earnings. The Wall Street Journal U.S. Dollar Index, which measures the value of the U.S. dollar against a basket of major currencies, rose 7.20% in the last three months of 2024. This trend of the U.S. dollar strengthening relative to other currencies has continued so far in 2025.
In our view, the U.S. dollar’s recent strength is unlikely to weaken anytime soon. A stronger dollar could reduce earnings for U.S. companies with significant overseas sales, as foreign consumers face higher prices for U.S. goods and services. This could hamper growth in revenues and profits, thereby applying some downward pressure on the S&P 500 Index.
U.S. dollar gains have historically constrained earnings growth
S&P 500 Index EPS growth (LHS) (%) vs. USD performance as measured by the WSJ USD Index (RHS), 2015–2024
Second, as the U.S. Federal Reserve (Fed) continues to cut benchmark interest rates―although at a slower pace than projected earlier―inflation may trend higher and remain elevated for some time to come.
In our view, these factors combined might constrain the earnings growth of S&P 500 Index companies, and the market could generate a negative overall return in 2025, if some or all of these risks escalate. The S&P 500 Index also looks expensive to us currently, trading at 25 times the consensus price-to-earnings ratio. This may hint that a correction may be in the cards, particularly for the Magnificent Seven, which accounted for 53.1%1 of the index's total return in 2024.
The United States remains a stable investment choice
While the U.S. markets may not experience a bull run in 2025, the United States remains our most preferred investment avenue. Improving jobs data and stable inflation are helping temper recession fears, consequently ensuring that U.S. equities remain attractive.
U.S. jobs growth remained positive throughout 2024
Month-over-month change in U.S. total nonfarm employment, seasonally adjusted, January 2024–December 2024
Our favorable view on the United States is also influenced by ongoing challenges in other markets, including China and Europe. In Europe, concerns are driven by the slowing automotive industry in Germany as it loses its grip on China, a major market for its cars. The United Kingdom is also grappling with slow growth and high inflation.
Meanwhile, China continues to face deflation worries amid its property sector woes. These headwinds are unlikely to be resolved soon, reinforcing our bullish view on the United States.
Fixed income: a steady outlook
Bonds are likely to have a decent year, and we maintain a flexible approach to our fixed-income exposure. The 10-year U.S. Treasury yield has been in the range of 4.00% to 5.00% for quite some time now, and we expect that to continue. Specific segments of the corporate bond market also look attractive, such as investment-grade corporate bonds, as they continue to yield in the higher end of the 4.00% to 5.00% range.2
Favoring longer-term investments with growth potential
While it remains possible that 2025 could result in negative performance for equity markets, individual stocks outside of the narrow group of large-cap growth stocks could still perform well. We believe there are select opportunities to own great businesses trading at a significant discount to the overall market. As a result, we take a bottom-up approach at the individual security level, seeking to identify companies with strong fundamentals that sell at a discount to intrinsic value, and have an identified catalyst to unlock that value.
In our experience, it may be more rewarding to make such well-informed investments with a long-term horizon of two years or more, allowing their growth story to unfold. The long-term mindset is also appealing to us as it offers a less competitive space, with the short-term investing segment seeing an influx of day traders and short-term investors. Overall, we believe the path to success in today’s environment continues to be driven by individual security selection and active portfolio management over general stock market exposure. We’ll continue this approach in 2025 amid evolving policies and economic factors.
1 S&P Dow Jones Indices, as of 12/31/24. 2 Bloomberg U.S. Aggregate Bond Index as of 12/31/24. The Bloomberg U.S. Aggregate Bond Index tracks the performance of U.S. investment-grade bonds in government, asset-backed, and corporate debt markets. It is not possible to invest directly in an index.
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