Navigating market risks and opportunities in 2025

2025 has been off to an eventful start for equities markets, and that volatility will continue. Eric Johnston, Cantor’s Chief Equity and Macro Strategist, assesses the year ahead for markets, predicting significant tailwinds attached to strong economic data, while also noting potential risks could appear on the horizon.

A range of factors are converging to create what we think will be a volatile time for equity markets in 2025.

Record-high equity valuations, rising interest rates, inflation risks, changes in public policy, and geopolitical implications will all steer the markets in multiple directions through the year.

Nevertheless, amid the volatility, an environment still exists for investors to profit.

Valuations spell Volatility

Since the pandemic, retail investors have poured over a trillion dollars into equities markets, resulting in record-high portfolio allocation.

The S&P is currently trading at a forward price-to-earnings (P/E) multiple of 22 times earnings, which is significantly high compared to historical averages.

It should come as no surprise that investor nervousness would set in from the heightened level of associated risks. That means any potential for bad news could spook retail investors to sell, causing heightened market volatility.

Risks Abound

Valuations aside – inflation poses a major risk, having remained above 2% for the last four years.

Even with the Federal Reserve cutting rates by approximately 100 basis points in Q4 2024, inflationary metrics continue to rise. To this end, we anticipate a pause in rate changes for the next 6-9 months, keeping on theme with their January decisions to hold rates steady.

Another potential risk revolves around the 10-year yield, currently sitting at 4.63%.

A move to 5% – a distinct possibility- could lead to significant issues for equities markets, as asset allocators move money from equities to bonds. And with the 10-year yield hovering in its current range, we could also see higher mortgage rates, subsequently affecting housing construction and dampening home buying.

Lastly, there is the U.S. political landscape.

The new presidential administration’s pro-growth policies along with tariff and immigration policy changes will have a significant impact on the future direction of markets across asset classes. While the exact impact remains unclear, this certainly does present a possibility for inflation reacceleration.

Growth Ahead…

Despite these risks, there are also potential upsides for the markets.

Several tailwinds are anticipated throughout the year that will positively impact the equities market, particularly the current administration’s pro-growth policies. The potential for deregulation and tax cuts could also fuel economic growth.

As a result, we anticipate accelerated economic growth within the first half of 2025. The new administration also heralds strong optimism for small and large businesses alike, creating more positions and increasing hiring.

Positive sentiment is already evident among consumers, as demonstrated by retail sales – the Johnson Redbook weekly data recently reached some of the highest levels in the last year¹.

Looking beyond domestic indicators – tremendous opportunities exist abroad.

One place to watch is China, an equity market historically unloved by investors. However, in 2025, the national government will continue implementing its federal stimulus program aimed at kickstarting the economy through monetary policies and property measures.

This program is already underway, targeting housing and boosting GDP growth. Progress is already being made as some of the recent consumer growth data has been strong.

To sum it up…

The complex yet dynamic equities market we are currently navigating will remain through the rest of the year.

And while this environment may appear daunting for investors, there are opportunities amidst the challenges. Indeed, elevated valuations, stubborn inflation, and changes in monetary and domestic policies could fuel the volatility, necessitating additional caution when navigating the markets.

Yet, there are bright spots to be found – such as the domino effects of pro-growth policies and emerging, international opportunities.

1. “U.S. Redbook Year-over-Year.” Investing.com. Accessed Jan 23,2025. https://www.investing.com/economic-calendar/redbook-911.

For Important Disclosures, see: Disclaimer – Cantor | Cantor