Equity and bond markets are set for gains in 2025 but the big uncertainty for investors will be the policy choices of incoming US president Donald Trump, say Wall Street strategists.
Ten major banks surveyed by the Financial Times, including Goldman Sachs, Bank of America and HSBC, are on average upbeat on next year, with many of 2024’s themes set to continue.
But they admit that Trump’s arrival in the White House next month and how he implements plans such as trade tariffs and tax cuts will be key for the direction of financial markets.
Meanwhile, banks will also be aiming to avoid a repeat of last year, where many predicted a looming recession that failed to materialise.
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Bonds
Strategists expect US government bond yields to fall as inflation retreats in the first half of next year, but uncertainty around what Trump will do immediately after taking office has led to a range of views on what happens after that.
On average, strategists expect the US 10-year yield to fall to around 4.1 per cent from current levels of around 4.49 per cent. Morgan Stanley has set out a more bullish base case of 3.6 per cent, but Deutsche Bank expects yields to climb to 4.7 per cent. Yields fall as prices rise.
The Federal Reserve will be “walking a tightrope” next year ahead of Trump’s administration kicking into gear, said Vishwanath Tirupattur, global director of fixed income research at Morgan Stanley.
The US bank expects the Fed to keep cutting borrowing costs until the middle of next year before inflationary forces from wide-ranging tariffs “force a pause” in rate cuts.
In contrast, Deutsche Bank said the market was too optimistic and its own base case relied on “current political realities” of fiscal easing, deregulation, tighter immigration controls and across-the board tariffs. All of these measures point to upward pressure on inflation, it added.
The Fed is already showing it is slowing the pace of rate cuts. Its decision this month was viewed as a “hawkish” cut, as it scaled back expectations for further reductions next year and incorporated assumptions about Trump’s planned policies into its forecasts.
Equities
In the equity market, banks expect the benchmark S&P 500 index to reach fresh highs next year, but most believe it will underperform its historical annual average of 11 per cent.
Nine of the 10 banks expect the index, which has soared 23 per cent this year to around 5,930, to climb by roughly 10 per cent in 2025 to around 6,550 points. Société Générale expects it to fall to 5,800.
Deutsche Bank expects it to climb as high as 7,000 points on the back of the persistent strength of the US economy, although it said the timing of potential shifts in policy under the incoming president will be key to how the market performs.
The bank is confident that a rally driven by investors’ huge appetite for artificial intelligence stocks will persist. “Valuations are unambiguously high but likely to sustain and maybe even go higher,” said Bankim Chadha, Deutsche’s chief US equities strategist.
But other analysts said they are waiting for signs that the technology will lead to a revenue uplift for companies.
Drew Pettit, an analyst at Citigroup, said there were “examples of [investor] exuberance” that could mean a more negative outcome in 2025, with uncertainty over Trump’s policies potentially weighing further on the index. “We expect more volatility. It is not going to be a comfortable ride,” he said.
Banks also expect European equities to rise, with potential tailwinds if European Central Bank cuts rates more quickly, there is an end to the war in Ukraine or the political situations in France and Germany start to stabilise.
Five of the 10 banks surveyed expected European equities to rise next year. While few were bearish, UBS is alone in expecting the market to turn negative next year.
Gerry Fowler, head of European equity strategy at the Swiss bank, said the market was cheap but would trade sideways next year.
“Europe seems to have stalled,” he said. “There are very few investors that are optimistic . . . 2025 is shaping up to be a challenging [year] for Europe.”
Currencies
More than half of the banks surveyed expect Trump’s policies to drive the dollar even higher next year, despite the president-elect raising concerns about what this means for America’s competitiveness against its trading partners.
Deutsche Bank expects the dollar to reach parity against the euro, which experienced the largest decline of any G10 currency in the immediate aftermath of November’s US presidential election. The dollar has already jumped from $1.11 against the euro to less than $1.04 since the end of September.
Kamakshya Trivedi, head of global foreign exchange, interest rates and emerging markets strategy at Goldman Sachs, said that Trump’s preference for tariffs as a policy measure helped lift spot prices.
“President Trump will have no compunction about large tariff increases . . . We expect the policy mix of tariff hikes and tax cuts will lend significant support to the dollar over the coming year,” Trivedi said.
BofA expects the greenback to strengthen in early 2025 but weaken back to $1.10 by the end of next year as Trump’s rhetoric is translated into hard policy, with the market responding to the expectations of a “perfect storm of tariffs” rather than implemented policies.
“We know tariffs are coming, but we don’t know what they’ll be,” said Kamal Sharma, senior FX strategist at BofA. “The ball is in Trump’s court.”
Gold
The haven asset is widely expected to continue its ascent following a stunning year on the back of the war in Ukraine and the Middle East. Analysts expect demand from central banks and fears of inflation and fiscal profligacy to be the driving forces next year.
Goldman Sachs and BofA expect the commodity to climb nearly 13 per cent to $3,000 per troy ounce, though this would be less than half the gain seen this year. On average, major banks expect an 8 per cent rise to $2,860.
Only Morgan Stanley has bet that prices will remain at around current levels, with strategists expecting China’s weak economy to be a headwind for bullion demand.
Oil
Although producer group Opec+ has set out plans this month to delay production increases to support prices, banks still expect Brent to slide further to around $70 per barrel by the end of next year, from around $72.80 on Friday afternoon.
Kim Fustier, HSBC’s head of European oil and gas research, said the cartel’s moves were unlikely to shift the direction of prices. “Non-OPEC production is set to grow faster than demand over 2025-26, leaving the group no space to unwind its cuts,” she said.
But Goldman Sachs, which has set a forecast of $76 per barrel, said that commercial stocks were visibly down in recent months and prices would benefit from strategic restocking in the US and China next year.
Additional reporting by Ray Douglas in London
