In 2024, US growth surprised on the upside and going into 2025, the economy seems to be in a good place. Concerns about a recession have eased, inflation is moving closer to 2%, and the labour market has stabilised. The Bank of America (BofA) forecasts 2.5% growth in the first quarter, with an average of 2.3% for the year. However, there are also caveats for the US market outlook.

Inflation is expected to stay sticky, with core Personal Consumption Expenditure (PCE), the Federal Reserve’s preferred benchmark index to measure underlying inflation, forecast to come in at 2.8% by the end of 2025.

J.P. Morgan Asset Management cautions that the US economy’s momentum is downshifting into a “more normal pace”. “While this alone is unlikely to trigger a recession, it does leave the economy more vulnerable to shocks, including those from significant policy changes that might be coming from Washington this coming year,” their market outlook states. After an estimated annual growth of 2.3% in 2024, J.P. Morgan AM expects real GDP to expand 2.1% year-over-year in 2025.

Goldman Sachs Research sees three key policy changes that might affect the economy. As per David Mericle, chief US economist in Goldman Sachs Research, these are: increased tariffs on imports from China and on autos by 3 to 4 percentage points; lower net immigration due to tighter policy (750,000 per year compared to pre-pandemic average of 1 million per year); full extension of 2017 tax cuts and modest additional tax cuts.

“The drag from tariffs and reduced immigration will likely appear earlier in 2025, while tax cuts will likely boost spending with a longer delay,” Mericle writes.

However, the investment experts caution that policy forecasts are still highly speculative at this point. The new US administration will bring more clarity over the coming months, which might reshape the outlook.

US Market Outlook: Equities

The head of BofA Global Research, Candace Browning, expects many of the anticipated policy shifts to be positive for US equities, “but a lot depends on their timing and how the rest of the world responds.”

The BofA Global Research economists expect US equities to start the year strong and end 2025 with the S&P 500 at 6,666 points. 

Other investment managers are equally bullish. Deutsche Bank Wealth Management forecasts the S&P 500 is 6,500 points at the end of 2025. „Both current market indicators and historical data show that the upward trend on the US stock market may not end for some time yet,” says Global CIO Christian Nolting.

J.P. Morgan AM expects “extraordinary earnings growth will settle at still-elevated levels for mega-cap tech while reaccelerating in other areas of the market. This broadening, coupled with resilient economic fundamentals, policy tailwinds and secular trends, should support a more inclusive rally in the year ahead.”

US Market Outlook: Bonds

Since September 2024, the Federal Reserve has cut interest rates by 100 basis points. For 2025, the Fed’s path remains uncertain, with officials waiting to see how the new Trump administration will affect the economy. A new round of tariffs could push inflation up that is still above the Fed’s annual goal of 2%. Economists say it could also slow the economy and reduce employment.

Julius Bär expects the Fed to continue the easing cycle. „The Fed has less room to cut now and could rather risk being too fast next year, triggering a new credit cycle. All in all, the policy combination for next year suggests that longer-term yields are unlikely to fall very quickly. Corporate credit is the segment that is going to benefit from this set-up,” says Dario Messi, Head of Fixed Income Research at Julius Baer.

“If US growth does deteriorate over the next 12 months, the Fed may have to cut more aggressively than expected, meaning a lower terminal interest rate,” opines Steve Ellis, Fidelity International’s Global CIO for Fixed Income. “With credit spreads currently tight, there is a risk-reward case for adding US duration with a bias towards holding higher quality credit,” opines Steve Ellis, Fidelity International’s Global CIO for Fixed Income.

Christopher Koslowski, Senior Fixed Income & FX Strategist, Vontobel sees a supportive environment for high-yield bonds given the improving US economic outlook: “As growth accelerates, corporate earnings tend to improve, reducing default risks. Consequently, companies issuing high-yield bonds may experience better financial health, potentially leading to credit rating upgrades,” he says.