As we look ahead to 2025, we know the scars of high inflation in 2022 and the higher interest rates that came with it are still with us. We’ve seen it in global elections, where incumbents have been rejected across the political spectrum. We’ve seen it in consumer sentiment surveys, which have improved but remain well below pre-pandemic levels despite 3.0% annualized real GDP growth over the last two years. And we’ve seen it among the market pundits, who have spent much of the last two years touting the high risk of a recession and the market declines recessions bring.
Fortunately, whatever the global mood, markets (and your Carson Investment Research team) have been able to tune out much of the noise. The S&P 500 has now gained more than 25% for two years in a row, something we have not seen since the 1990s. The U.S. economy has just seen two solid years of growth. In fact, real GDP has grown at an annualized pace of 3.0% over the last two years (through the third quarter of 2024), which is faster than the 2017-2019 pace of 2.8%.Things played out largely as we expected in 2024, as we continued to fade the numerous recession calls and maintained an overweight recommendation to stocks that has been in place since late 2022.
What Lies Ahead?
Our proprietary Carson Leading Economic Index (LEI) for the U.S. never pointed to recession at any point over the last two years, and it’s still in strong territory as we start 2025 (in contrast to other popular leading economic indicators). The Carson LEI includes more than 20 components that capture the dynamics of the U.S. economy, including consumption, housing, business and manufacturing activity, sentiment and financial markets. We populate an LEI for 28 other countries as well and aggregate it all together to get a picture of the global economy as well as major regions. Right now, the U.S. stands tall above almost every other major economy in the world.
The economy is on solid footing right now—thanks to strong income growth, solid household balance sheets and strong recent labor productivity growth. That does not mean there aren’t potential risks. Elevated interest rates, even in the face of Fed cuts, could be a big risk to the economy. Higher rates are mostly a function of stronger growth expectations, but it’s hurting sectors like housing, manufacturing and investment spending.
There’s a lot of policy uncertainty ahead, both on the monetary and fiscal side. The Fed is expected to cut rates, but they’re going to follow the data, and the pace of cuts is uncertain. On the fiscal side, the incoming Trump administration and Congress will have to work out the details of tax policy, and the administration will have to finalize a strategy around tariffs.
Overall, economic strengths clearly outweigh areas of weakness, and the opportunities likely have a higher probability of coming to fruition than the threats. We believe that economic momentum, an easing Federal Reserve and pro-growth fiscal policy will continue in 2025, but we may also get a lift in the national mood that economists call “animal spirits.” With that, here’s our forecast:
We believe there is currently an opportunity for a virtuous cycle of economic activity that can help sustain strong economic growth, but the opportunity is also easily squandered, making a potential policy mistake a key risk for the expansion not achieving its full potential. That could result in more volatile markets in 2025 than what we saw in 2024.
We discuss all of this and much more in the Carson Investment Research’s Outlook ’25: Animal Spirits. The good news is our team once again sees no recession on the horizon and a likely continuation of a young two-year old bull market, but that is only part of any outlook. At the end of the day, what matters is how our views translate to portfolio decisions.
The outlook is an important tool for us, as it solidifies and articulates our team’s views and forms the baseline for our portfolio management and advice recommendations. You won’t have to dig far to see how our Carson House Views are woven throughout, making it convenient to access advice and insights that align with a consistent market narrative. Hopefully, it’s a useful tool for you, too, as you work with your financial advisor to navigate the markets in 2025.
Sonu Varghese and Ryan Detrick are non-registered affiliates of Cetera Advisor Networks, LLC.
