After 2 years of positive stock market returns, the S&P 500® (
“With the economy growing and earnings rising, stocks may perform well,” suggests Naveen Malwal, institutional portfolio manager with Strategic Advisers, LLC. “But it’s also a good time to be thoughtful about how you invest. Risk management could be a significant focus in 2025. Even if the market rises, it may experience bouts of volatility. So there are plenty of reasons to think about your strategy differently.”
Are we due for a downturn?
Stocks have posted strong performance for the last 2 years, but long-running success does not necessarily mean that the market is approaching its peak, or that a downturn is especially likely.
“In 2024, we saw a full year of economic and earnings growth,” says Malwal. “So far, I’m not seeing any signs of that slowing down.”
Malwal focuses on key economic indicators—corporate profits, the job market, and consumer spending, among others—to gauge the overall health of the economy.
“What I’m seeing is generally positive,” he says. “We have a strong job market that’s supporting consumer spending, which fuels economic growth. To me, that feels like a very constructive economic backdrop.”
The US stock market is also experiencing higher-than-average prices (relative to earnings), which has led some to wonder whether those valuations may have to come down in 2025. Not necessarily, according to Malwal. While higher-than-average valuations have, in the past, led to slightly lower-than-average returns, they have not historically resulted in a sharp contraction.
“High valuations may mean more modest returns in 2025,” says Malwal. “But that is likely not a reason on its own to run away from the market.”
Malwal isn’t concerned about the length of the current expansionary period, either. Though it’s been 2 years since the S&P 500 posted a negative annual return and almost 5 since our last recession, Malwal notes that this does not necessarily mean a downturn is imminent. “The average length of an expansionary period between recessions has been 7 years,” says Malwal. “And you have to remember that is an average—meaning an expansionary period can go on for longer. In fact, the last span of time between recessions, from 2008 to 2020, was almost 12 years.”
Expect uncertainty, but keep it in context
Nevertheless, there are several factors that could challenge investors' patience and resolve as the year progresses.
Tariffs
The Trump administration has proposed applying 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 begin in early February but were delayed for one month after last-minute negotiations. Tariffs affecting the EU have been floated, but not articulated in detail.
It’s unclear how long these tariffs might last or what impact they might have on the economy. There is a possibility that certain goods or industries may be exempt from certain regulations. Perhaps the tariffs won’t be put into effect at all. Should they stick around, however, investors may see slower economic growth and higher inflation in the short term, though much depends on how importers and manufacturers elect to defray the cost of the tariffs—whether they choose to absorb the cost themselves or pass them on to the consumer by raising prices.
Inflation
Though inflation has decreased from its high point in 2022, it remains a persistent issue, and the potential disruption to supply chains and inventories that may result from tariffs could push prices higher. Much will depend on the Federal Reserve, which recently paused its interest rate cuts. Malwal sees this as a “wait-and-see” move.
“Pausing allows the Federal Reserve to see if the current rates are enough to bring inflation down further, toward the Fed’s target, which is under 3%,” says Malwal. If they see the economy start to slow or detect trouble in the job market, that might encourage them to cut further. But if for some reason inflation began to accelerate more broadly, the Fed will have the option to raise rates again to combat it. “I don’t believe inflation is headed back up to the levels we saw a few years ago, but it may be more persistent than some investors are expecting.”
Policy changes
The new administration is considering a number of policies that could potentially affect the rate and direction of economic growth, inflation, and bond yields. This includes fiscal policy moves, such as extending the personal and corporate tax rates enacted by the 2017 Tax Cuts and Jobs Act, as well as things like deregulation and changes to immigration policy.
Malwal believes that making changes to your portfolio in the present in reaction to policies whose effects may not be felt for several years could be detrimental to the growth of your portfolio and suggests taking a more long-term view.
“Whenever there’s a change of administration, investors begin to wonder how policy may impact the economy or earnings,” says Malwal. “But what we’ve found over the long run is that the economy and the profit cycle tend to run on their own. Historically, we haven’t seen a strong relationship between election cycles and business cycles.”
Take steps to manage your risk
A good way to navigate uncertainty is to take steps to help ensure your portfolio is diversified. By reducing concentration in any particular stock, sector, theme, or market, investors may find that they are less affected by short-term volatility.
Still, Malwal observes potential for growth in stocks in the year ahead.
"Risks are inherent in any investment,” says Malwal. “Plenty of investors avoided the stock market in 2023 because of concerns around the economy. And again in 2024 because of 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 Strategic Advisers approaching investing in 2025?
“We are looking at our diversified portfolios and leaning a bit more toward stocks because this type of environment has historically benefited stocks more than bonds,” says Malwal.
Bonds can potentially help to manage some of the expected volatility among stocks. “Bonds can serve as a source of stability and a source of income, and may help you remain confident in your plan even when things are challenging,” says Malwal. “This may be especially true this year, as bond yields have reached their highest levels in over 15 years.”
Consult your financial professional
If you’re concerned about what’s on the horizon, you may want to consider working with a financial professional who can act as a sounding board for those concerns. Having a professional available to validate your feelings and provide a second opinion on any moves you may wish to make could help you make more-informed decisions.