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We’ve all heard the saying that “change is the only constant in life” (and, as it turns out, in investing, too). And the last half of 2024 was chock-full of change — the US presidential (and global) elections, increasing geopolitical conflict, advancing AI developments, and the Federal Reserve’s pivot to lower interest rates.
For myself, change came in the form of an unexpected expansion of my role at Ellevest as Co-CEO. While it’s only been a few short weeks, I’ve already learned a lot about change. Whether it’s good or bad or something in between, change can feel hard and daunting. But ultimately, the consequences of change will depend on whether you embrace it, fear it, or run from it. While change is inevitable, how you handle, accommodate, and react to it can greatly influence its outcomes. In hindsight, the hardest times of change for me turned out to be my greatest learning and growth opportunities.
2025 is sure to be a year of change. Markets wrapped up 2024 with strong gains for the second year in a row. The S&P 500 was up 23% for the year, the Dow Jones Industrial Average (DJIA) up 13%, and the NASDAQ up 28% — fueled by lower inflation, a pivot to lower rates, and AI-related exuberance. Investors are entering the year optimistic about the health and stability of the economy and, to some extent, the new White House administration’s anticipated pro-business, lower-regulation policies.
Most believe we’ll see another year of market gains, although the path will be rocky. (Keep in mind for 2025 predictions that analysts grossly underestimated market performance in 2023 and 2024.) The chart below shows the annual performance of the S&P 500 (green bars) and the largest intra-year decline (red dots). On average, the market has dropped more than 13% sometime during a given year, even if the year ends up in positive territory. We’ve seen more than two consecutive years of strong market gains historically, but don’t be surprised if there are corrections and pullbacks along the way.
So what could change? A lot.
Reflecting on the major drivers of the economy and market behavior, the one big uncertainty facing investors this year is policy — specifically how President-elect Trump’s policy changes across the board will impact inflation, interest rates, the US dollar, corporate earnings, global trade relations, and more. Some policies have the potential to fuel growth, and others to stall it, so where we end up is anyone’s guess.
In my 2024 Market Outlook, I outlined five things to look for:
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Interest rates (lower)
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Inflation (tapering)
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AI everything everywhere
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Energy transition (accelerated)
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US-China tensions (eased through panda diplomacy)
Interestingly enough, these factors are still top of mind in 2025, but for vastly different underlying reasons.
Interest rates
While the Fed cut rates three times in 2024, it has signaled a slower and more gradual schedule of reductions, partly due to the uncertainty of President-elect Trump’s global trade and tariff policies and how they may impact the growth and stability of the economy. Future immigration policies could also impact the labor market — slowing growth, driving up costs (and thereby inflation), and impacting future Fed decisions. Plus, the possibility of additional tax cuts means more spending and a higher federal deficit, which could keep rates higher for longer.
Inflation
While inflation is expected to continue slowing in the months ahead, there’s potential for higher inflation if President-elect Trump follows through on across-the-board tariffs on US trading partners and on China. This could push prices up for consumers, leading to increased inflation. Tariffs could also lead to slower global trade and lower global growth if other countries impose retaliatory tariffs against the US.
AI everything, everywhere
The Magnificent 7 stocks drove 57% of the S&P 500’s return in 2024, a strong indicator of investors’ belief in the promise of AI. While some believe their influence is waning, it doesn’t mean the potential of AI has run its course, not by a long shot. Capital spending on AI continues at a rapid rate, and the adoption of advanced technology is expanding beyond large tech firms. President-elect Trump’s recent picks to lead technology policy and AI generally lean toward more innovation and less regulation.
Energy transition
2024 is expected to be the hottest year on record worldwide. President Biden’s Inflation Reduction Act (IRA) drove record investments in clean energy through a number of tax and other incentives, and investors now fear that a Trump presidency will put the brakes on energy transition. While the President-elect has been unequivocally clear that he is pro-oil and natural gas production, that doesn’t necessarily mean less investment in renewables. In fact, Trump’s selection to lead the newly created National Energy Council embraces an “all of the above” approach to energy independence.
US-China tensions
In 2024, two pairs of pandas were sent from China to the San Diego Zoo and to Washington, DC. As adorable and popular as they are, the power of panda diplomacy is limited. Trump’s hardline on China, particularly the implementation of tariffs, is sure to increase the two countries’ tensions, which have downstream effects on global trade and economies worldwide.
Taxes and deregulation
The two areas of greater certainty are taxes and business regulation. The tax cuts that were signed into law with the Tax Cuts and Jobs Act (TCJA) during Trump’s first presidency will most likely be extended. And the President-elect has signaled a move to deregulation, which may create a more favorable environment for capital markets and mergers and acquisition (M&A) activity.
How big a risk each of these factors presents depends upon what policies will change and by how much, what might stay the same, and what new policies may be established. The ways those affected by policy change react and adjust to the change will have real implications on the markets. The uncertainty and unpredictability of the new administration’s policies will be certain to drive up market volatility. Time to buckle up for 2025.
As we often say, we can’t control the markets, and we shouldn’t invest in anticipation of potential (and largely uncertain) changes. What we can do is manage change, and one of the best investing tools for that is a well diversified portfolio. We believe that investing through change and staying the course with a diversified portfolio is the key to long-term investing success.
Wishing our Ellevest community a healthy and joyful 2025.
Co-CEO and Chief Investment Officer Dr. Sylvia Kwan