Investing in 2025: A Delicate Balance

As we step into 2025, markets are navigating a delicate balance between optimism and caution.

The past year saw remarkable gains, with the S&P 500 posting its best two-year performance since the late 1990s.

The Federal Reserve’s rate cuts, a soft landing for the economy, and the relentless momentum of AI-driven growth created a backdrop of economic stability and investor confidence.

But as analysts at the Sevens Report point out, the year ahead starts with great expectations, and the stakes are higher than ever.

Key Events in January

A handful of critical events in January will determine whether the optimism of 2024 carries over or gives way to disappointment.

1. Speaker of the House Election (January 3)
   This political event holds economic implications and will be a litmus test for Republican unity and their ability to pass pro-growth measures. The endorsement of Speaker Johnson by President-elect Donald Trump heightens the stakes. A smooth election could reinforce market confidence, while a contentious process could signal fractures.

2. January Jobs Report (January 10)
   The labor market data consistently shapes investor sentiment. A weak report may stoke fears of an economic slowdown, while a strong one could reduce expectations for further Federal Reserve rate cuts, potentially weighing on stocks. The ideal outcome would be moderate job growth that assuages both growth fears and inflation.

3. Corporate Earnings Season (Begins January 13)
   This may be the most consequential earnings period in years, with expectations for 2025 earnings growth at roughly 15%, more than double the historical average. If earnings fall short or guidance indicates a slowdown, markets may face renewed volatility.

4. Consumer Price Index (CPI) Release (January 15)
   After receding in 2024, inflation has shown signs of rebounding. The January CPI report will shape inflation expectations for the year ahead. A lower-than-expected reading could rejuvenate hopes for monetary easing, while a hotter number would raise fears of persistent inflation.

5. Federal Reserve Policy Meeting (January 29)
   While no rate cuts are expected, the meeting’s tone will be critical. Market optimism relies on the Fed maintaining a dovish stance. Any hint of pausing the rate cuts would be viewed negatively.

Conclusion

As January unfolds, the markets are at a crossroads with strong earnings, moderating inflation, and Fed support being crucial. Early events will set the tone for the year—a smooth start could rekindle the rally of 2024, while missteps may amplify late December’s pullback.