10 Things Investors Should Watch Out For in 2025 – Technologist

It’s January, and as we head into the New Year, I have 10 things that investors need to really watch out for in 2025:

• Resilience Is the Name of the Game
• The Consumer Is Still King
• Productivity Is Up
• Politics and the Markets Align
• We Will Probably See New Tariffs
• Prepare for More Volatility
• The Bull Market Still Has Legs
• Dividends Might Come Back in Style
• Bonds Are Back
• The Earnings Engine Is Accelerating

Let’s dive in.

1. Resilience Is the Name of the Game

As an investor, I’m always thinking about the economy and how that relates to investments. When I look at 2024, I think the economy and the stock market showed such resiliency because we were faced with so many uncertainties.

We had the election, which was an unprecedented election. We had someone drop out a few months prior when going against someone who used to be president — just very uncertain times. We were talking about recession and inflation for the whole year. How was the Fed going to control inflation and how much were they going to lower the interest rate? There was a whole lot to worry about all of last year.

Yet we ended up with almost 3% GDP growth. Again, lots of resiliency for the economy and the stock market. The S&P 500 was up about 25%.

It was a really resilient year. And I see a lot of that carrying into 2025.

2. The Consumer Is Still King

I think the second thing here, part of that resiliency, is the consumer is king.

In the United States, if we think about the labor force and we think about the behavior of the U.S. consumer, it’s fascinating.

First of all, we have 160 million people working in the United States. Americans want jobs and they have jobs. There are two things about that. Our savings rate is relatively low right now — even lower than historical norms. Usually, we’re saving about 6%. Right now we’re only saving about 4%. That means 96% of what we earn, that 160 million people, is getting spent. That’s what we saw last year and I see that continuing into this year.

The other thing that’s important is we’ve started to see wages outpace inflation. We had a period of time there where wages were going up much slower, so people were feeling like we were in a recession, even though we weren’t. The consumer is spending and wages are going up faster than inflation now, that’s good.

The consumer continues to play a really important role. We know that 70% of the U.S. economy is the U.S. consumer and consumer spending. I think that continues and it’s important to note for this year moving forward.

3. Productivity Is Up

The third part is productivity.

If we think productivity is on the rise, what propels it? It is how much we can get done in the same amount of hours of work. If we can continue to do more work in the same amount of time, then this economy accelerates.

We had a massive acceleration in productivity back when the internet became mainstream (think about the 1990s) and we flourished for about 10 years. We had double-digit productivity growth.

Then for over a decade, we barely had any productivity growth in the United States. It was 1% a year, 1%, 1.1%. We weren’t getting better faster in this U.S. economy for a very long time.

About two years ago, that started to change. You could say we’re more efficient today because we work from home. You can call it the advent of artificial intelligence, making everything a little faster and more efficient. For the last two years, we’ve seen 2 to 2.5% productivity growth. Now, that may not sound like a whole lot, but that’s more than double what we were running for over a decade.

More productivity means a better shot for the U.S. economy to continue to accelerate. If we can do that, it’s a really big deal for the market, the economy and for investors.

4. Politics and the Markets Align

The next one where I’m looking in 2025, I think of Washington as kind of an unlikely ally with the market.

Last year, we had an election. There was lots of uncertainty around it. People are always worried about well, what comes next? There’s all this uncertainty.

But if you look back at the presidential cycle, we’ve got four years. You’ve got the election year, the inauguration year, where we are today, then you’ve got the post-midterms, and then you’ve got the fourth year of the cycle. If you go back over the course of history and look at and see how the markets have done during those four years on average, we’re in the second-best year for stocks.

The election is over, we know who’s going to be in the White House, we know what Congress looks like. On average, that second year of the presidential cycle, we’ve seen about 11% growth on average for the S&P 500. That’s a strong indicator. We’ve got some historical tailwinds, and I think it’s a good thing for 2025.

5. We Will Probably See New Tariffs

Now, with politics, the first question that I’ve been getting, and I think that’s important just to visit here for a minute in 2025, is the worry about tariffs. Well, if we have tariffs, doesn’t that mean we have inflation?

If a brand new tariff is 20% more expensive and it’s coming in from another country, then who pays for that? Doesn’t that mean we’re going to get inflation? And that’s scary because we had a really rough time with inflation over the last couple of years.

But the system doesn’t necessarily work that way. What countries can do and companies in other countries can do is they can bear either some of that cost or most of that cost. So they choose to take less profit and lower their prices, knowing the goods will come into the United States and then the tariff goes up, making it more expensive. But because they reduce their cost, not all that much gets passed on to the U.S. consumer. So that remains to be seen, but what I look at and how I look at it is that there’s a lot of bark about tariffs and the whole world’s going be tariffed, every good coming to the United States. That’s probably not going to be the case.

There probably won’t be giant blanket of tariffs, it’ll probably more specific. So sure, there are going be new tariffs on Chinese goods, probably, very likely, but we may not see tariffs for everything coming out of the European Union.

I look at the tariff situation as not great for inflation, maybe not nearly as bad as we thought. We already have tariffs from countries like China. And I don’t think we need to run out and stockpile prior to tariffs (Clark agrees), because I think they’re going to be a little more benign, a little more bark than bite in 2025.

6. Prepare for More Volatility

Volatility has been sleeping. I want to remind investors that the stock market is never supposed to be an escalator. It’s not meant to just slowly go up and we get our nice average 10%. That’s 1% a month. It doesn’t work that way. To get that great of a rate of return, it comes with a little bit of consternation, it comes with some pain. It’s much more like a roller coaster that ultimately, over time, goes up. And that’s what makes it hard.

Last year, we had very little volatility. The average year for the stock market over the course of economic history has a 16% drawdown, more than 10% correction. Not quite a full bear market, but that’s the average drawdown over the course of time. Last year, the biggest drawdown we had was only 8.5%.

We have low volatility years, then we have really volatile years. But last year was a low volatility year and the year before was pretty low volatility too. So I think that it’s a good reminder that volatility has kind of been sleeping. I think investors should be prepared to have some hiccups in 2025. And just as a reminder, that’s part of the game.

7. The Bull Market Still Has Legs

The next piece of this has to do with the market, specifically the bull market. The bull is not that old, meaning that we had a bull market in 2023. We had another bull market in 2024.

If you watch financial television like I do, I’ll see 50 people a day talking about how it was such a good two years. That means that 2025 can’t be a good year in the stock market. And I think that’s the wrong way to look at it. We had tons of stretches that are three, four, five, six, seven years in a row where stocks really do well.

Now, it’s not that we don’t have some drawbacks during those periods of time. It’s just that just because the market has done well, doesn’t mean it can’t continue to do well. As you hear people talk about how it’s already been good, they say it can’t be good this year. That’s not necessarily the case.

Momentum is the market’s friend very often. I think of the statistics around all-time highs last year. In 2024, we saw 57 new highs in the S&P 500. I remember after the fifth one, people say, wait a minute, we’re at all-time high, we can’t have any more of these. And then after the 20th, well, we can’t have any more of these.

Well, there’s a reason you have a good year in the stock market because things are going well. The economy is doing well. Company earnings are growing. We get this flywheel effect — and that momentum can continue.

Yes, it stands to reason that the market could slow down and not have as good of a year, but it doesn’t mean we have to have a bad year. The average bull market lasts for five years. We’re only two years in, only about 26 months in. So, by historical measures, this bull market just isn’t that old.

8. Dividends Might Come Back in Style

The next part of this is to look at dividend contribution. Investing is pretty simple. We’re all kind of after the same thing, which is total return. If you’re conservative, you want a total return. If you’re aggressive, you want a total return. You just want your money to grow. And that formula is really simple. It’s just growth plus income. You either get some appreciation, the value goes up, or you get some cash flow. You get some rent, you get some dividends, you get interest. And you put those two together, growth and income, and that’s your total return.

When you look at the S&P 500, the stock market in general, over the course of economic history, that 10% number we hear (and it’s really more like 11%), only 60% of that is from the price of the stock market going up. The other 40% of that, not insignificant at all, is the cash flow that gets reinvested from dividends that come from stocks in the S&P 500.

Now, over the past decade, we’ve seen the lowest dividend contribution to returns we’ve seen in a very long time. It’s only been about 12 to 13% of the total return. I worry sometimes that investors kind of start thinking dividends don’t matter. It’s really all about growth. The equation is still growth plus income. Not every investor needs to think about dividends, but it’s a big part of how stocks have done well to reinvest those dividends.

Particularly for retirees who are looking for cash flow, they need to spend their retirement money. Retirees often get a lot of comfort from spending the dividends, saying, “Hey, I’m not taking my principal because I’m spending the dividends.” I think we could see a reversion to the mean — markets tend to pendulum — I would not forget dividends in 2025.

9. Bonds Are Back

Now, speaking of getting income, the part of a balanced portfolio, we’ve talked about stocks, real estate, and commodities; these are all great categories that we should be looking at. But one of them is fixed-income bonds, and bonds are not there to appreciate a whole lot. Bonds are really there for the income.

We had a really rough stretch five years ago back when interest rates were essentially at zero. The 10 year U.S. Treasury bond only paid 1%, and there was a period of time it was way less than 1%.

Bonds are off the bench and the reason is that yields are back to a much more normal level. The 10-year Treasury started this year at around 4.5%. It is now up to almost 4.75%, meaning that interest rates on the 10 year government bond are paying between 4.5 and 5%. There’s a saying in the bond world: “Yield is destiny.” This means that over the course of five and 10 years, you’re much more likely to get a total return about where you start with whatever your yield is.

So if you’re investing in bonds and they’re at 1%, there is a good chance over time, you’re going to get 1%. Here we are at 4.5 to 5%. So I think bonds are back to much more normal levels. People could wrap their heads around 4-5%, particularly when we’re owning them for steady income and stability when the stock market goes haywire. Bonds are off the bench and I think that’s important to note here in 2025.

10. The Earnings Engine Is Accelerating

I would put this as number one because it’s the most important, but I’ll put it as number 10 because it’s the capstone. We think about all the emotions that drive the markets, we think about politics and government and elections, and then earnings reports, and then we have economics reports and the jobs numbers. It’s endless variables.

What really drives markets, what so many of us have in our 401(k), exposure to the S&P 500 or other funds that have exposure to it, is not the stock market. It’s the companies that make up the stock market. We own those companies. And those companies are there to make a profit and grow those profits. And that’s what’s called earnings.

You hear a lot about the P/E Ratio. The common denominator of PE is earnings, price to earnings. What are we paying for those earnings? And it’s a rough stock market run when earnings are down from year to year or flat from year to year.

Fortunately, if you look at consensus from dozens and dozens and dozens of Wall Street firms, and research firms and strategy firms that are looking at all the different components of the market. they’re trying to measure, hey, where do we think companies are going to be earnings wise? Are they going to be up 1%, down 5%, up 5%?

Right now earnings estimates for this year are up 13% from last year. It doesn’t mean the market’s going to be up 13%, but it’s just a very nice undercurrent to have companies churning out 10 to 15% more in earnings and profits than they did last year. That is the bedrock of the equity markets. And it’s a good outlook.

This content was originally published on the Ask an Advisor show on the Clark Howard Podcast. Listen or watch to learn more about the things investors should know in 2025. New shows air every Tuesday!

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