Strategic Investment Insights for 2025: Navigating Growth and Volatility

The investment landscape for 2025 is set to transform due to technological advancements, geopolitical shifts, and changing consumer behavior. Digital transformation, driven by AI, machine learning, and automation, will create significant opportunities in technology, healthcare, finance, and education. ESG criteria will become pivotal, with investments flowing into renewable energy and sustainable sectors. Geopolitical dynamics will present both risks and opportunities, requiring investors to monitor global tensions and trade policies. Economic volatility, influenced by inflation and interest rate changes, necessitates proactive risk management and portfolio diversification across asset classes. Success will depend on balancing growth optimism with cautious risk awareness.

Key Takeaways

• The stock market has been on a roll with positive returns over the last two years, and the current trends are hinting at even more growth on the horizon!

• But hold on, it might be a smart move to revisit your investment strategy, as we could see some market ups and downs this year.

• Think about embracing risk management strategies in 2025, like diversifying your portfolio or chatting with a financial expert to ease your worries.

After two fantastic years of stock market gains, the S&P 500® (.SPX) kicked off 2025 with a bang, closing January with an impressive 2.7% gain!1 Despite early signs of robust economic growth, short-term volatility from AI stocks and uncertainties about policies from the new administration in Washington have got some investors wondering if this year will be a wild ride compared to previous years.

With the economy booming and earnings climbing, stocks could be in for a stellar performance. However, it's also the perfect time to give your investment approach a good once-over. Risk management could be a major theme in 2025. Even if the market is on the rise, it might hit some bumpy patches. So, there are plenty of reasons to rethink your strategy.

Are we due for a downturn?

Stocks have been shining bright over the past two years, but continued success doesn't necessarily mean the market is at its peak or a downturn is looming.

In 2024, we enjoyed a full year of economic and earnings growth. Right now, there's no sign of a slowdown.

I keep an eye on key economic indicators—corporate profits, the job market, and consumer spending, to name a few—to gauge the overall health of the economy.

What I see is mostly positive. We have a strong job market fueling consumer spending, which in turn drives economic growth. To me, this paints a very promising economic picture.

The US stock market is also seeing higher-than-average prices (relative to earnings), which has led some to wonder if these valuations might need to dip in 2025. However, historically, higher-than-average valuations haven't necessarily led to a sharp drop.

High valuations might mean more modest returns in 2025. But that's no reason to shy away from the market.

I'm not worried about the length of the current expansionary period. Even though it's been two years since the S&P 500 posted a negative annual return and almost five since our last recession, I believe this doesn't necessarily signal an imminent downturn. The average length of an expansionary period between recessions has been seven years. It's important to remember that this is an average—meaning an expansionary period can last even longer. In fact, the last stretch between recessions, from 2008 to 2020, lasted nearly 12 years.

Expect uncertainty, but keep it in context

Nevertheless, several factors could test investors' patience and resolve as the year unfolds.

Tariffs

The Trump administration has proposed a 25% tariff on goods from Canada and Mexico (excluding oil, which is subject to a 10% tariff) and a 10% tariff on imports from China. These were set to start in early February but were postponed for a month due to last-minute negotiations. Tariffs affecting the EU have been suggested but not detailed.

It's unclear how long these tariffs might last or what impact they might have on the economy. There's a possibility that certain goods or industries may be exempt from certain regulations. Maybe the tariffs won't be implemented at all. However, if they stick around, investors might see slower economic growth and higher inflation in the short term, depending on how importers and manufacturers choose to absorb or pass on the tariff costs by raising prices.

Inflation

Though inflation has eased from its peak in 2022, it remains a persistent issue, and potential disruptions to supply chains and inventories due to tariffs could drive prices higher. Much will depend on the Federal Reserve, which recently paused its interest rate cuts. I see this as a “wait-and-see” approach.

Pausing allows the Federal Reserve to determine if the current rates are sufficient to further reduce inflation toward the Fed’s target, which is below 3%. If economic slowing or job market issues arise, further cuts might be encouraged. Conversely, if inflation were to accelerate, the Fed could raise rates again to combat it. I don't anticipate inflation returning to previous high levels, but it may be more persistent than some investors expect.

Policy changes

The new administration is considering various policies that could potentially impact the rate and direction of economic growth, inflation, and bond yields. This includes fiscal policy measures, like extending the personal and corporate tax rates enacted by the 2017 Tax Cuts and Jobs Act, as well as deregulation and changes to immigration policy.

I believe that making changes to your portfolio now in reaction to policies whose effects may not be felt for several years could be detrimental to your portfolio's growth, suggesting a more long-term perspective.

Whenever there's a change in administration, investors start speculating on how policy may impact the economy or earnings. However, historically, the economy and the profit cycle tend to operate independently. We haven't observed a strong correlation between election cycles and business cycles over the long term.

Take steps to manage your risk

A smart way to navigate uncertainty is to ensure your portfolio is diversified. By reducing concentration in any specific stock, sector, theme, or market, investors might find themselves less affected by short-term volatility.

Nonetheless, I see potential for growth in stocks in the coming year.

Risks are inherent in any investment. Many investors avoided the stock market in 2023 due to economic concerns and again in 2024 due to election uncertainty and international affairs. Yet, the S&P 500 rose over 25% each of those years, including dividends.

So how is the investment team at Black Investors Coalition approaching investing in 2025?

We're examining our diversified portfolios and slightly favoring stocks, as this environment has historically benefited stocks more than bonds.

Bonds can potentially help manage some of the expected volatility among stocks. They can serve as a source of stability and income, helping you maintain confidence in your plan even during challenging times. This may be particularly true this year, as bond yields have reached their highest levels in over 15 years.

Consult your financial professional

If you're concerned about future developments, consider working with a financial professional who can provide guidance and reassurance. Having a professional available to validate your feelings and offer a second opinion on any actions you may wish to take could assist in making more informed decisions.