Strong US Economy, AI Lead to Positive Outlook for 2025 Markets

Implications of Trump polices on tariffs and immigration remain significant unknowns.

The expectation of a broadening of strong corporate earnings, the continued emergence of artificial intelligence as a developing technology, and an improved global economic picture are contributing to positive forecasts favoring U.S. equities in 2025.

“We’re seeing animal spirits again,” says Ed Yardeni, president of Yardeni Research in Glen Head, New York. “We’re seeing a revival of optimism.”

Yardeni attributes some of the momentum to the election of President Donald Trump and the anticipation of more pro-business policies such as a further reduction of corporate tax rates, as well as increased deregulation.

But analysts and capital market strategists are also gauging risks and offsetting potentially business-friendly policy changes with growing uncertainties. They are tracking closely the potentially inflationary moves that tightened immigration policies and tariffs could usher in, along with ongoing geopolitical risks which could diminish the U.S. economy’s strength.

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Tim Murray, a capital markets strategist based in Baltimore with T. Rowe Price, is following an uptick in valuations, particularly among small- to mid-cap companies, but also in financials, in anticipation of earnings broadening. He sees further evidence in the recent showing a jump in optimism.

“Part of that is pent-up demand and pent-up activity that was held off because of the election,” he notes.

Inflation Still a Threat

With concerns about a recession mostly in the past, Murray’s attention is refocusing on inflation. He is tracking the three-month moving average of inflation, specifically, “super core” inflation, such as services excluding shelter, which has been accelerating since July, as it is a function of wage growth. He also calls the quits rate—the share of employees who voluntarily leave their jobs, excluding retirements—as a good forward-looking barometer and sees a strong correlation on a 12-month-lag basis between the quits rate and wage growth.

“The big tipping point investors have to be concerned about is that initially, if inflation turns out to be stickier than expected, that probably means the Fed[eral Reserve] does fewer cuts than they might have hoped,” he says. “If inflation reignites and starts moving up significantly again, then you’re back to a Fed hiking situation, and that has an implication for equities but also from a multi-asset standpoint.”

The potential for inflation in 2025 suggests the need to hedge for it, Murray says. He typically recommends bonds as a good hedge against recession risks, but they prove a poor hedge against inflation, which could make real assets more appealing in 2025.

“It’s still good for equities and particularly for commodity-oriented equities, so energy and materials and real estate,” he says, noting that REITS can be tricky in the short term, given their interest-rate sensitivity, but prove to be a good hedge in the long run. He also sees the benefit in shifting bond allocations to lower duration, as well as TIPS.

Wait and See on Policy Shifts

Regarding the implications of potential policy shifts, Murray sees a greater inflationary risk from changes in immigration—which could potentially cause wage hikes—than from tariffs.

“Just how serious tariffs will be is going to depend on how the negotiations go,” he says. “Tariffs tend to be a one-time bump in inflation unless tariffs continue to be ratcheted up, so immigration is actually a bigger concern.”

Stephanie Aliaga, a global market strategist with J.P. Morgan Asset Management in New York City, also expects an expansion of earnings growth, with increases in the low-to-mid double digits for the S&P 500 Index.

“We think that markets can continue to sustain this upward trajectory and that this bull market will tack on another year,” Aliaga says. “The good news is that there’s a lot more quality on the investment menu … relative to the last few [years].”

The acceleration of AI technology has fueled growth, especially in the U.S.

“The clear beneficiaries, other than the those that are raking in profits from it right now, are all U.S. companies, and we think it will likely continue,” Aliaga says. “Now, with that said, international has really lacked that clear catalyst, and expectations are weak and pressed there.”

In the long term, however, Aliaga anticipates an improved outlook for international equities over the next 10 to 15 years.

“The case for international is very clear,” she says, particularly in emerging markets in East Asian countries. “The dollar is poised for moderation and decline over the long term, and a lot of high-growth parts of the world are not necessarily in the U.S.”

US Economy’s ‘Robust’ Foundation

At the same time, Aliaga is also watching potential risks in the U.S. ushered in by tariffs.

“Recession risks are quite diminished or muted, but we’re entering this fog of uncertainty on the policy front,” Aliaga says. She recommends that investors parse through the noise and the headlines, maintaining an overweight bias to equities, keeping fixed-income allocations stable, tilting toward the shorter end of the curve on duration, and considering alternatives in different asset classes. “Broadly, the foundation for the economy still seems quite robust,” she adds.

Steven Meier, CIO for New York City’s five pension funds, takes a strategic view of markets with a 10-year investment outlook but, nonetheless, sees continued market strength in 2025.

“I’m cautiously optimistic for both the U.S. economy and U.S. financial markets,” Meier says.

Meier points to a resilient U.S. economy and to U.S. consumers that have weathered interest rate hikes. While he is following potential policy changes from the new administration, such as tariffs and immigration limits, he sees enthusiasm for a perceived pro-business stance with the potential for deregulation.

“Typically, the first year of an incoming administration is good for risk assets and good for stocks,” he says.

Looking ahead, Meier is wary that inflation could prove sticky and that concerns about deficit spending could mean a continued widening of term premia in Treasurys. He also projects the spread in valuation between U.S. and European equities’ valuations will narrow and that private markets could have an upswing. He expects potential gains for infrastructure related to decarbonization and digital infrastructure required for AI, such as data centers.

“A lighter regulatory touch and oversight in the states is going to be really positive for private equity, which has underperformed the last two years,” Meier says.

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Illinois Police Pension Narrows Private Markets Consultant Pick to Albourne, Callan

IPOPIF plans to allocate 20% of its portfolio to alternative investments, up from no current allocation to these asset classes.



The Illinois Police Officers’ Pension Investment Fund announce at a board of trustees meeting Friday that it has narrowed its selection for a private markets consultant to two firms, Albourne Partners Ltd. and Callan LLC. The consultant will help IPOPIF build a strategy to invest in the private markets.
 

The fund’s board interviewed four consultants, Verus Investments, Callan, Albourne and Wilshire Advisors LLC throughout the morning, before announcing its choice. A final decision is expected at the fund’s March 14 board meeting. 

“Following presentations by Albourne, Callan, Verus and Wilshire, the board directed staff to seek pricing clarification and options from Albourne and Callan,” a spokesperson for IPOPIF said.  

IPOPIF issued a request for proposals in September 2024 for this consultant. The fund is a consolidation of more than 300 local police pension funds, consolidated via a process that began in 2022 and was completed in December 2024.  

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The fund hired Greg Turk, an executive with years of experience in the private markets, as deputy CIO in July to help build out the strategy. According to the fund’s investment policy, IPOPIF is targeting a 20% private markets exposure: seven percentage points to private equity, five points each to both private credit and real estate, and three points to infrastructure.  

The fund managed $12.9 billion in assets as of November 30, 2024. The fund allocates 58.7% of its assets to a growth equity portfolio, 19.3% to risk mitigation strategies, 16.2% to fixed income and 5.8% to real assets.  

The fund’s long-term target allocation sees a 65% allocation to the growth equity portfolio, which includes the 7% private equity component; a 14% allocation to fixed income, including the 5% private credit allocation; 13% to risk mitigating strategies; and 8% to real assets, including 5% to real estate and 3% to infrastructure.  

Related Stories: 

IPOPIF Seeks Private Markets Consultant 

IPOPIF Searching for Emerging Markets Debt Manager 

Illinois Police Fund Finishes Consolidation of Local Pensions 

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