How Stock Investors Should Prepare for 2025

With stocks soaring thanks to powerful earnings growth, a strong economy, disinflation, and interest rate cuts from the Federal Reserve, 2024 brought investors plenty to be thankful for.

Analysts expect many of those tailwinds to continue in 2025, but they caution that investors shouldn’t expect a repeat of the 2024 playbook. Critically, fiscal policy could add to the uncertainty across US markets.

Here’s what changes investors can expect in the new year, and how strategists suggest investors might adapt.

A Broadening Market

In 2024, the stock market’s returns were again driven by a small handful of mega-cap tech companies, even as the rally began to broaden under the hood and earnings grew across sectors. With tech valuations now looking stretched, analysts expect the rotation into other sectors to gain steam in 2025.

“Broadening earnings growth should result in the ability to identify more winners,” says Seth Meyer, global head of client portfolio management at Janus Henderson Investors. “Your recipe for success in the next 12 months will be finding good companies at relative discounts and letting them outperform.”

Jim Caron, CIO of the portfolio solutions group at Morgan Stanley Investment Management, says he’s increasing allocations to market segments outside of large-cap tech, like indexes that include mid-cap stocks, or the equal-weighted S&P 500 Index rather than the capitalization-weighted index. “What we really start to go after are different factors for earnings and profitability,” he says. He points to cyclical sectors like industrials and housing as good candidates for earnings growth in 2025.

Watch for More M&A

Marci McGregor, head of portfolio strategy for the chief investment office at Merrill and Bank of America Private Bank, says she expects an easier environment for mergers and acquisitions this year. She thinks the prospect of additional rate cuts from the Fed will make the M&A process smoother. And a new administration in Washington will likely usher in a looser regulatory backdrop. That could boost small- and mid-cap stocks “in a more sustained way.”

Uncertainty in Washington

While the 2024 presidential election results sent stocks soaring, an uncertain policy outlook means it’s more difficult to determine the picture for assets across the spectrum. “Fiscal policy is where all the action is going to be in 2025,” says Caron. “It’s going to be about taxes, tariffs, deficit, all of these things.”

President-elect Donald Trump campaigned with proposals to boost the domestic economy, like lower corporate taxes and tariffs on foreign goods. Analysts generally agree those policies could exacerbate inflation, depending on their implementation. For example, Caron says that if tariffs are not as broad as expected, the “deleterious effect on the markets may not be as sharp.”

Clarity on Fed Policy

While fiscal policy remains uncertain, the path of monetary policy is much clearer now than it was this time last year. “I think the biggest difference between Jan. 1, 2024, and Jan. 1, 2025, is that we know where the Fed wants to take policy,” says Meyer. Last January, it was a question of when the Fed would cut interest rates, but now he says it’s a question of “how much.”

The Fed delivered a final rate cut of the year at its December meeting and reduced its forecast to just two cuts in 2025, down from the four they expected in September. Chair Jerome Powell told reporters that “we see ourselves as still on track to continue to cut,” despite higher inflationary pressures and policy unknowns in the year ahead.

Meyer emphasizes that fewer cuts aren’t necessarily bad, thanks to the opportunities higher rates create in fixed-income markets, which can provide price appreciation if rates come down and attractive yields if rates remain steady. Investors “shouldn’t fret [rates that are] higher for longer,” he says. “They should actually be taking advantage of these yields by leaning in … you’re protected in a lot of different scenarios economically by buying bonds today.”

Brace for Volatility

McGregor says investors shouldn’t expect another year of relatively smooth sailing in the stock market like 2024. Even including pullbacks in April, August, November, and December, equity investors enjoyed a relatively steady ride higher over the year as the market broke one record after another.

2025 could be a different story. “It’s likely markets will need to digest these gains,” McGregor says. “Healthy bull markets have pullbacks and pauses.” She thinks investors shouldn’t be surprised to see a few 5% pullbacks, or even a 10% pullback, in 2025—par for the course in equities markets. She views those pullbacks as buying opportunities.