5 things on the horizon for 2025

The S&P 500 marked its 56th all-time high of the year this week.

The “Magnificent 7” (+5.1%) fueled equity indices higher this week.¹ The S&P 500 (+0.8%) and NASDAQ 100 (+2.4%) both made gains, while smaller companies (Solactive 2000 -1.0%) took a step back.

In U.S. macro data, ISM figures showed the economy continuing to expand, and labor market indicators (ADP and jobless claims) came in slightly weaker than expectations. Federal Reserve Chair Powell spoke at the DealBook Conference midweek and said the U.S. economy is in remarkably good shape right now. One of his favorite barometers, the Beige Book, pointed to economic activity rising, employment levels flat to up and prices rising only at a modest pace in most districts.

In fixed income, the curve steepened. The 2-year (4.14%) stayed flat, while the 10-year (4.17%) rose 4 basis points (bps).

As we prepare to close out 2024, we take this as an opportunity to look forward to 2025. Below we highlight five themes we think have room to run in the year ahead.

5 themes for the year ahead

The labor market is likely to be firmer. The labor market has been in focus in the second half of 2024. The Sahm rule (three-month average unemployment rate rising 0.5% from its 12-month low) was triggered in July, and has never failed to coincide with a recession. At that point, the conversation quickly shifted to a slowdown in the labor market and the need for the Fed to react, quickly.

Since then, the unemployment rate has decreased by 10 bps to 4.2%, as the labor force stayed about the same size. We think continued enforcement at the border will keep migration subdued, and as a result will limit labor force growth. The downward pressure on the labor force should at the margin, tighten the labor market (more job opening relative to unemployed workers).

Even if the labor market tightens on the margin, our models suggest the Fed will still need to lower rates to support financial conditions. We still expect a 25-basis-point interest rate cut at the Fed’s meeting this month and more reductions into 2025. As such…

Cash yields are likely going to continue to fall. We said coming into 2024 that cash rates would move lower. That’s happened—and we believe the trend will continue in 2025. The federal funds rate, which sets the rate banks can lend money to each other overnight (and is the biggest input for cash rates), stands at 4.75%, down 75 bps this year so far. The market is pricing another 85 bps of cuts next year.

Lower interest rates, a renormalization of inventories and production, and easier comparables should act as tailwinds for the cohort in 2025.

M&A activity is set to pick up. With less than a month to go in the year, 2024 U.S. deal volume has already seen an uptick relative to last year (where activity was essentially frozen), and we think 2025 will be even more promising. The incoming administration and the markets’ expectations for a less onerous regulatory environment are helping to drive the recovery.

President-elect Trump has campaigned on deregulation. What does that mean? To start, he is likely to replace the leaders of multiple U.S. regulatory agencies, such as the FTC and the Justice Department’s antitrust division (where ~40% of the S&P 500 market cap is under investigation, and transactions of any size must be approved). Just this week, Trump announced Paul Atkins, who’s known for advocating for free-market policies, as Chair of the U.S. Securities and Exchange Commission (SEC).

The changes in these agencies and Washington are likely to usher in a period of deregulation, which could help to thaw frozen M&A, IPO and other financial market activity. 

As a backlog of deals stands ready to be cleared, increased private lending should help jump start transactions. The likely beneficiaries of a better environment for dealmakers? Wall Street banks, private equity and credit firms, and private business owners.

AI infrastructure buildout should continue. 2024 is the year where many of us started to use AI tools in our day-to-day lives. We don’t see any sign of that reversing in 2025. On the contrary, as we mentioned in our 2025 Outlook: Building on Strength, we are likely to use these tools even more frequently across broader use cases, and that requires power. For example, a standard Google search requires about 0.3 watt-hours of electricity, while a single ChatGPT query uses about 10x as much.

For data centers alone, electricity demand is projected to nearly triple by 2030. The grid may need to add up to 18 gigawatts—about equivalent to three New York City’s worth of power demand.