A more complex equity landscape and the potential for Fed policy shifts mean investors will need to be nimble in 2025.
December 2, 2024
By Kelly Bogdanova and Thomas Garretson, CFA
There are normally multiple uncertainties facing the market at any given time, but for 2025 there are also unusual complexities that could impact performance, potentially generating volatility and opportunities.
There is little doubt in our minds that market participants will pay much closer attention to Washington, D.C. in 2025. This is despite the fact we see little-to-no evidence that Washington policies are key drivers of U.S. equity returns over time.
In addition to the pro-growth tax and regulatory policies likely coming from the Trump administration and Republican-led Congress, the market will potentially need to contend with the most aggressive tariff policies in almost 100 years. This makes the Fed’s job of forecasting inflation and GDP growth, and properly calibrating interest rates, more complex. Tariff unknowns, including how various trading partners will respond, complicate industry and stock selections.
Net-net, RBC Global Asset Management Inc.’s Chief Economist Eric Lascelles anticipates President-elect Donald Trump’s policies will slightly boost economic growth during the year, all else equal. He forecasts 2.3 percent GDP growth in 2025, which assumes actual tariff rates get watered down compared to Trump’s original proposal for 60 percent tariffs on Chinese goods and 10 percent tariffs on other countries’ goods. Lascelles’ GDP forecast is higher than the 1.9 percent Bloomberg consensus forecast.
The gap between 2.3 percent and 1.9 percent GDP growth matters for S&P 500 profits – the mother’s milk of the market – and impacts whether sector profits and returns broaden out further beyond the Magnificent 7 stocks. Following outsized U.S. equity gains for two years driven largely by resilient economic growth and strong Magnificent 7 profits, the 14.6 percent year-over-year consensus earnings growth estimate for 2025 seems robust to us. We think it would take 2.3 percent or better GDP growth to achieve it, and would need more than just tech-oriented stocks to carry the load. The 14.6 percent earnings growth rate translates into $276 in earnings per share – higher than RBC Capital Markets’ forecast of $271 per share, which implies a roughly 10 percent S&P 500 price return in 2025.
The bar chart shows S&P 500 year-over-year earnings growth for 2022 and 2023, and consensus estimates for 2024 through 2026. For 2022, actual earnings growth was 4.8%, and for 2023 it was 1.5%. For 2024, the consensus estimate is for 9% growth, followed by 14.6% in 2025 and 13.1% in 2026.
Source – Refinitiv I/B/E/S; data as of 11/22/24
We’re constructive about U.S. equities yet vigilant due to the complexities. Investors should keep return expectations in check, and we recommend starting the year without major sector Overweights. We think the market will provide opportunities to take advantage of sector and industry dislocations in 2025. Be nimble.
The Fed could pause rate cuts sooner rather than later. We expect the Fed’s bias to remain toward further rate reductions through Q1 2025 as questions about the true health of the labour market linger. But in our view, the incoming Trump administration’s pro-growth policies risk overheating an already-robust U.S. economy, and with that, fueling concerns about another inflationary episode. We believe the Fed will continue the rate-cut cycle into Q1 before pausing at a policy rate around 4.25 percent.
The potential for a rate hike in 2025 exists. Though the likelihood of a rate hike may not be great, similar to the late 1990s, the Fed could remain in a relatively constant state of calibration based on how the economy develops. Rising inflation would be the most likely candidate to spur policymakers back into action, though further economic momentum could also cause policymakers to pull back on the reins.
We think the shape of the Treasury yield curve will tell investors all they need to know in 2025. A flat yield curve will be a key gauge of whether the Fed is successfully keeping the economy, inflation, and the labour market in balance. Should the yield curve invert again because short-term yields are rising, it could indicate the market expects the Fed to raise rates to offset growth and inflation pressures. Just as we see the Fed holding rates at 4.25 percent in 2025, we expect the 10-year Treasury yield to trade around similar levels next year, but the range of outcomes is large.
Yields across the fixed income landscape are likely to remain well above historical averages. Economic optimism has pushed credit market valuations to historically extreme levels while fewer rate cuts in the pipeline mean that cash and short-duration securities should offer attractive income. However, we would remain biased toward increasing duration, and reducing credit risk exposure, throughout 2025.
The chart shows average Bloomberg consensus forecasts for U.S. policy interest rate and various Treasury bond maturities at the end of 2025, with bars indicating the range of estimates by analysts surveyed. The federal funds rate: average, 3.3%; minimum, 2.5%; maximum, 4.25%. Two-year Treasury yield: average, 3.2%; minimum, 1.9%; maximum, 4.15%. Five-year Treasury yield: average, 3.4%; minimum, 2.5%; maximum, 4.1%. Ten-year Treasury yield: average, 3.8%; minimum, 3.0%; maximum, 4.75%. Thirty-year Treasury yield: average, 4.0%; minimum, 3.2%; maximum, 5.1%.
Source – RBC Wealth Management, Bloomberg Consensus Analyst Survey for November 2025
View the full Global Insight 2025 Outlook here
We want to talk about your financial future.
This publication has been issued by RBC’s Wealth Management international division in the United Kingdom and the Channel Islands which is comprised of an international network of RBC® companies located in these jurisdictions and includes RBC Europe Limited and Royal Bank of Canada (Channel Islands) Limited. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by RBC’s Wealth Management international division.
This publication has been compiled from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, the value of investments and income arising can go down, future returns are not guaranteed, and an investor may not get back the amount originally invested. Countries throughout the world have their own laws regulating the types of securities and other investment products and services which may be offered to their residents, as well as the process for doing so. As a result, any securities or services discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.
This material is prepared for general circulation and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law none of the entities which comprise the international division of RBC Wealth Management nor any of their affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Wealth Management.
Clients of RBC Europe Limited may be entitled to compensation from the UK Financial Services Compensation Scheme (FSCS) if it cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. For further information about the compensation provided by the FSCS scheme (including the amounts covered and eligibility to claim) please refer to the FSCS website FSCS.org.uk. Please note only compensation related queries should be directed to the FSCS. Royal Bank of Canada (Channel Islands) Limited is not covered by the UK Financial Services Compensation Scheme.
RBC Europe Limited is registered in England and Wales with company number 995939. Its registered office is 100 Bishopsgate, London EC2N 4AA. RBC Europe Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Royal Bank of Canada (Channel Islands) Limited (“the Bank”) is regulated by the Jersey Financial Services Commission in the conduct of deposit taking, fund services and investment business in Jersey. The Bank’s general terms and conditions are updated from time to time and can be found at https://www.rbcwealthmanagement.com/en-eu/terms-and-conditions. Registered office: Gaspé House, 66-72 Esplanade, St. Helier, Jersey JE2 3QT, Channel Islands. Deposits made with Royal Bank of Canada (Channel Islands) Limited in Jersey are not covered by the UK Financial Services Compensation Scheme. Royal Bank of Canada (Channel Islands) Limited is a participant in the Jersey Bank Depositors Compensation Scheme. The Scheme offers protection for ‘eligible deposits’ up to £50,000 per individual claimant, subject to certain limitations. The maximum total amount of compensation is capped at £100,000,000 in any 5 year period. Full details of the Scheme and banking groups covered are available on the Government of Jersey’s website http://www.gov.je/dcs or on request.
Investment services offered by the Bank are not covered by an investor compensation scheme as there is currently no such scheme operating in Jersey, however ‘eligible deposits’ held pursuant to investment services may be protected under the Bank Depositors Compensation Scheme described above – for more information see the Bank’s general terms and conditions. Some of the products that the Bank might recommend to you could be registered overseas and may be covered by a local compensation scheme. Your investment counsellor will provide you with the details of any overseas compensation schemes (where applicable) at the time of making an investment recommendation.
Copies of the latest audited accounts are available upon request from the registered office. ® / ™ Trademark(s) of Royal Bank of Canada. Used under licence.