Five key things for investors to consider in 2025

Investors never know what to expect from markets and the year ahead spans a particularly wide range of potential outcomes, particularly with a new administration in the White House. In this article, we highlight five things for investors to ponder for 2025.

Some investors may assume a smooth landing for the North American economy, in which higher-for-longer interest rates contain inflation without triggering a recession. Other investors may be concerned about a bumpy landing, in which unemployment continues to rise, business and consumer confidence falls and the economy sputters. And other scenarios could also play out, such as a holding pattern in which the economy does not decisively land one way or the other.

The key word here is scenarios. A simple but effective way to use scenarios is to form bull, bear and base cases for the North American economy. You can then simulate how different assets in your portfolio might perform in each case. The exercise will also prompt you to think about your investments as part of an asset class, rather than as individual holdings. Perhaps the biggest takeaway from this exercise is to compare your investments to your views. For example, if you mostly hold energy and mining stocks, your investments might need a bull case to perform well. Are you highly confident in the bull case for 2025? What would be your risk in the event of a bear case?

The trend of consumer prices is unclear, including everything from disinflation, where inflation continues to rise but at a lower and lower rate, to reflation, where inflation starts to rise at a higher and higher rate. Investors may want to be cautious about making strong directional calls. For example, an investor who expects reflation might increase their exposure to commodities to hedge higher prices, only be disappointed in the event of disinflation. As a counter example, a well-known economist and “perma-bear” has highlighted long-dated government bonds as a way for investors to benefit from lower inflation and rates. However, this scenario is far from certain. U.S. Treasury yields have already started to increase since the November election, pricing in the inflationary risk of the new administration’s tariff policies.

Again, investors can look to scenario analysis, to help them visualize how their portfolio might perform under disinflation, reflation or other scenarios. Investors may wish to pay close attention to their fixed-income exposure. The year 2022 serves as a stark reminder of what can happen to bonds, including the most widely-held index funds, when rates and inflation come in much higher than expected. Investors can use duration to check the interest-rate risk of their bond holdings. For example, a duration measure of 7.5 indicates an expected 7.5% decline in price for a 1% increase in interest rates. In terms of duration, short-term bonds are typically less than 5; mid-term bonds are typically between 5 and 10; and long-term bonds can extend to 15 or even longer. Bonds are not the only place to look for interest-rate risk. Stock sectors with high levels of debt, such as REITs, telcos and utilities, can also be highly sensitive to interest rates.

In recent years, investors have heard their fair share about interest rates from central banks, as well as from economists, journalists and other observers. What matters even more for investors is liquidity. This means, among other things, an expansion of the central bank’s balance sheet and an increase in the broad money supply.

In the latter part of 2024, the Federal Reserve cut interest rates but at the same time divested bonds from its balance sheet (tightening), rather than buying bonds and adding them to its balance sheet (easing). This matters for investors because easing means liquidity, as measured by the broad money supply. Think of liquidity like a tide of money coming into the system — and a strong tide lifts many boats.

High-risk assets like the NASDAQ and Bitcoin have been closely correlated to the M2 money supply. Intuitively, this makes sense: when investors have more money, they are more inclined to invest in riskier assets. The money supply does not move in isolation but as part of the business cycle. A confluence of bullish indicators would include an increase in the M2 money supply; an increase in the Purchasing Managers’ Index (PMI) above the neutral level of 50; and a decrease in the value of the U.S. dollar against global currencies, measured by the DXY index.  

During the U.S. election campaign, Donald Trump pledged at a Bitcoin conference in Nashville that, if elected, he would direct the U.S. government to retain the 200,000 Bitcoin it already owns and use this to form the basis of a national Bitcoin stockpile. An even bolder proposal has come from Senator Lummis of Wyoming, whose draft bill proposes that the United States not only keep its existing Bitcoin but also acquire up to an additional 1 million Bitcoin over a five-year period, to form a strategic Bitcoin reserve for the United States. This would make the United States a significant owner of Bitcoin, given that the total supply of the asset is capped at 21 million coins.

In the current monetary system, the U.S. has run deficits in good and bad times alike, accumulated debt and transferred the debt to the Federal Reserve’s balance sheet, which has largely expanded since the financial crisis of 2008–09, even with some periods of unwinding. Other wealthy nations have followed a similar pattern. This has created a cycle of deficit and debt, in which more and more currency is issued to service increasing levels of debt. Mindful of the risk of inflation, central banks have always kept gold reserves. Bitcoin is contending to be a form of “digital gold.” In this context, the proposed Lummis plan, whether adopted, diluted or discarded, could provide some early clues about Bitcoin’s potential role as a global reserve asset.

Partly because interest-rate policy has been supportive and liquidity abundant over the last decade, technology stocks have grown and become a bigger part of the U.S. stock market and many investors’ portfolios. This has created biases in portfolios that are very significant by historical standards — towards large-cap versus small-cap, growth versus value and the United States versus the rest of the world.

For some investors, U.S. technology firms have become an “everything” trade. The economy doesn’t matter because they provide essential services; global diversification doesn’t matter because they have customers around the world; and valuations don’t matter because they continue to grow at high levels of profitability. This is not to denigrate technology stocks, which have been a winning investment for over a decade. And, as mentioned above, a boost to liquidity would likely be positive for risk assets, including technology stocks. Yet technology stocks can also have their time in the shade, such as the “lost decade” of the 2000s. Investors may want to examine their exposure to U.S. technology stocks, including to what extent their portfolio could be affected by a period of moderate or lower returns.

Smooth versus bumpy landing: Investors face a wide range of outcomes for the economy, from a smooth to a bumpy landing. You can prepare for the year ahead with scenario analysis, where you simulate how your investments might perform in bull, bear and base cases for the economy.

Disinflation versus reflation: Investors face a wide range of outcomes for prices, including disinflation and reflation. Again, scenario analysis can help you understand how your investments might perform in periods of slow-rising and fast-rising price growth, among other scenarios.

Rates versus liquidity: Investors have heard a lot about interest rate cuts but liquidity matters even more. When money floods into the system, it has tended to lift asset prices, particularly for high-risk or speculative investments.

Bitcoin versus debt: The U.S. Congress may consider a bill to keep its existing Bitcoin and acquire additional Bitcoin over time, to form a strategic Bitcoin reserve for the United States. This could provide some clues about the potential role of Bitcoin as a global reserve asset.

Technology versus everything: Technology has become a larger part of the U.S. stock market and of many investors’ portfolios. Investors can check their overall exposure to U.S. technology stocks and determine if this exposure makes sense for them.