2025 Economic Update

Todd Scorzafava |

Dear Clients and Friends, 

Happy New Years from the WealthScorz Financial Group Team. We wish you all the best in 2025! Please see our outlook for 2025 and what we might expect from the economy and the markets.

Broadly speaking, Wall Street is bullish on the US economy, although markets will be looking for new economic date in Q1 and early Q2.

  • US Economy: Overall, we are optimistic for growth, with expectations of strong growth and moderate inflation. Analysts are cautious on inflation as details regarding tariƯs from various countries are still uncertain. With that said, we still favor the US given that it remains one the strongest economies in the world to date. Favoring the U.S. has helped our allocation in the past years.
     
  • Interest Rates: The Federal Reserve is expected to cut rates more slowly than anticipated, focusing on managing inflation. With current rates at 4.25%-4.50%, the FedWatch tool shows about a 65% chance of having the Fed rate between 375-425 by December, only cutting rates 1-2 times. As of 1/2/2025, markets see only a 20% chance of seeing rates below the 3.75%-4.00% range in 2025 according to bond market expectations. Thus, we anticipate bond market gains to largely come from coupons and have positioned the portfolio to take advantage of healthy yields across the market.

In addition, we expect volatility, largely driven by caution on inflation driven by tariƯ policy and slightly increasing inflation coming in November of last year. We remain cautiously optimistic on bond prices, especially given how we have entered 2025.

  • Stock Market: The AI-driven stock boom is expected to continue, with a broadening of gains across various sectors. With that said, history is showing us that another year of 20% returns is not likely after two years of 20%+ growth. Returns will largely be driven by earnings, as stocks have healthy earnings built into their valuations. Strong earnings growth could drive moderate returns, while those companies that miss might be punished more than gains made from positive news. Given valuation diƯerences between large and small-cap stocks, we are maintaining our overweight to small cap stocks going forward into 2025.
     
  • International Markets: bearish views on markets can potentially set us up for a surprise to the upside. While earnings growth may disappoint internationally, we may be lifted by lower valuations, especially relative to US stocks. According to Charles Schwab, not one of the top 45 economies are expected to be in recession.

Risks

All of this relatively rosy outlook comes with some risk. Our top two risks include:

  1. Market Pullback—while we expect a favorable outlook and the likelihood for the US to avoid recession, that scenario always remains possible. At the current stage, it doesn’t seem like the market is pricing in the probability of a recession. Although new data or unforeseen global events could aƯect this. On the flip side, there could be positive news to the upside as well.
     
  2. Trade wars—trade wars getting out of control could lead to higher inflation, which could hurt both stocks and bonds. While the economy could likely absorb moderate tariƯs on China, Canada and Mexico, excessive tariƯs could hurt the global economy going forward. As such, our emerging markets exposure remains “Ex-China” to avoid any eƯects of trade wars with the Chinese government.

Given this backdrop, we believe our clients can continue to benefit from their relative strategic asset allocations. While growth is expected to be strong and earnings are expected to have healthy growth in the US, current bond interest rates are favorable for those looking for income, and positions like commodities and materials can provide muted downside in case the economy underperforms. A balanced portfolio can give investors a smooth ride into 2025.

As always, we are here to help and will be reaching out to set up time to meet. Best of wished for a healthy prosperous 2025!

Best Regards, 

Todd Todd Scorzafava, CFP®, AIF® 
WealthScorz Financial Group Partner, 
Portfolio Manager Certified Financial 
Planner® Accredited Investment Fiduciary® 
P: 908.208.5378 
F: 640.333.5886 
E: tscorz@wealthscorz.com 
391 Springfield Ave, 
STE 1E Berkeley Heights, 
NJ, 07922