Looking Ahead in 2025

Looking Ahead in 2025

Markets have adjusted expectations for Federal Reserve rate cuts, with odds now pointing to just one cut in 2025. Meanwhile, potential new tariffs under the Trump administration and ongoing monetary easing by the PBOC have reignited reflationary concerns. Yields have climbed, and the U.S. dollar has strengthened to new highs against all major currencies. These adjustments alone act as a form of self-induced tightening, dampening the likelihood of significant reflationary pressures taking hold.

While inflation risks seem contained, I am closely monitoring a different challenge: the health of U.S. consumers. Household leverage is increasing, which, while indicative of consumer confidence in future prospects, could also become a constraint on long-term growth. Nevertheless, the December jobs report offered reassurance, dispelling recession fears and highlighting continued strength in the U.S. labor market.

Overall, I believe that despite the Federal Reserve committee’s concerns, they are unlikely to feel the need to take further action, as the market has already adjusted by raising rates on the long end of the curve. The Fed put remains firmly in place, as demonstrated in September 2024 when the Fed cut rates by 50 basis points. This move clearly indicated the Fed’s prioritization of achieving a soft landing and avoiding a recession, even if it meant tolerating a modest resurgence of inflationary pressures.

This dynamic sets the stage for a relatively stable yield curve this year, as the market continues to adjust long-term rates independently. Meanwhile, the Fed’s willingness to step in if macroeconomic conditions weaken provides strong support for the equity market. With inflation risks moderated and the Fed effectively standing by as a safety net, we may see a balanced environment conducive to steady market performance in the coming months.

With the Fed put in place and inflation largely subdued, the onus now shifts to corporations to meet or exceed their earnings growth expectations. At current U.S. equity valuations, there is a fair degree of optimism priced in, but it remains within a reasonable range. In my view, the AI sector will continue its exponential ascent, with 2025 poised to deliver groundbreaking advancements, particularly in killer software applications that redefine industries.

Consider this: technological progress in the past was constrained by human limitations—a typical 8-hour workday and a processing capacity of about 20 pages of information per hour. In contrast, AI systems operate 24/7 with minimal downtime, processing information at speeds more than 10,000 times faster than humans. The compounding effect of this capability means we could see technological advancement occurring at a pace 30,000 times faster than ever before.

As we move into 2025, our focus will remain twofold: staying intellectually curious and alert to new breakthroughs in AI applications, while maintaining the discipline to navigate potential market exuberance. This balanced approach will ensure we capitalize on opportunities without being swept away by unsustainable hype.