Near-Term Forecast for Stocks and the US Dollar
Stocks continue to be under pressure currently, even with upside pops from time to time, and the near-term forecast is for continued downside. The US Dollar could reverse to the downside at any time regardless of interest rates, but the financial forces out there do want the US Dollar the strongest of all global currencies. Even if the USD moves lower, global currencies will move lower too, keeping King Dollar the preferred currency long-term.
Global Inflationary Risks
US exporters are likely to face retaliatory duties if widespread tariffs are enacted, potentially igniting a new trade war that could be inflationary. Higher tariffs would likely increase the cost of goods in American stores, potentially leading to higher wages demands. Concerns that such a scenario could limit the Federal Reserve’s ability to reduce interest rates have already spooked bond markets, pushing up government borrowing costs.
If tariffs are broadly implemented, the US dollar could appreciate more, which might import inflation to other countries. Many goods bought on wholesale markets are priced in dollars, and a stronger dollar would make them more expensive. This could lead to price hikes for various products. If other nations retaliate with tariffs on US imports, it could also increase consumer prices. These factors may influence future interest rate decisions.
Potential Impact on Equity Portfolios in 2025
Tariffs could encourage manufacturers to focus more on the US domestic market, benefiting companies like General Motors and Ford. Tariffs on large Chinese e-commerce firms might boost Amazon and retailers with strong online platforms, such as Walmart. Smaller US companies could also gain from stronger domestic supply chains.
The Federal Reserve and Interest Rates
If the Federal Reserve takes a cautious approach to rate cuts, the elevated interest rate environment may benefit US financial institutions by boosting net interest margins, with banks like Wells Fargo, Bank of America, and smaller lenders potentially reaping the rewards. Additionally deregulation in the financial sector could make it easier for banks to lend more money in the short term, though this could expose them to greater risks in the long term, particularly in the event of another financial shock. A reduction in regulatory oversight could also spur mergers and acquisitions, benefitting major investment banks like Goldman Sachs and JP Morgan.
Defense Spending and Aerospace Stocks
Increased defense spending across NATO is forecasted to benefit companies with military contracts, including aerospace stocks like Lockheed Martin, Raytheon Missiles, and Northrop Grumman, as new investments bolster military forces.
The Gig Economy
Gig economy companies have faced challenges with regulations that make it harder for businesses to classify workers as independent contractors. However, lighter labor market regulations could benefit companies like Uber and DoorDash, which rely on large numbers of self-employed workers.
Inflation Concerns The Bond Market & The Magnificent Seven
The bond market is increasingly concerned that widespread tariffs could reignite inflation and push up consumer prices, limiting the Federal Reserve’s ability to reduce interest rates. This is particularly worrying for growth stocks, especially in the tech sector, where a higher interest rate environment can diminish the value of future earnings. These concerns are impacting the Magnificent Seven tech companies on Wall Street, though if tariffs are less severe than expected and don’t significantly drive up consumer prices, the tech sector may experience a rebound.
Energy Oil Gas
Increased US drilling could help lower oil prices. The America First agenda is likely to prioritize energy independence, continuing the trend of increasing drilling permits. This is expected to boost major energy companies like ConocoPhillips, Chevron, and Exxon Mobil, along with oilfield service providers like Schlumberger and equipment suppliers like Baker Hughes. However while crude oil prices may rise due to new supply concerns, including tougher sanctions on Russia, a boost in US oil production could eventually help lower global prices. In the short term though, energy companies may remain cautious about ramping up production to maintain profitability.
Gold Prices To Remain Strong
Geopolitical risks especially in the Middle East and the ongoing Russia-Ukraine conflict continue to fuel uncertainty. In such times gold tends to perform well, as seen in its strong performance in 2024. While returns may not continue at the same pace, the uncertain global outlook and growing central bank purchases, particularly from emerging markets, are likely to keep gold supported.
Bond Prices Under Pressure
Bond prices have been under pressure and may continue to face challenges. However bond investors should stay focused on their long-term objectives, as short-term volatility is to be expected. It’s a good idea for investors to review their portfolios and ensure the balance between stocks and bonds still aligns with their investment goals.
Asset Reallocation in 2025
Rebalancing is an essential long-term investment strategy. It involves selling assets that have performed well and purchasing those that haven’t. While this may seem counterintuitive, it’s uncommon for top-performing assets to maintain strong returns over the long term. Regular rebalancing helps ensure your portfolio remains aligned with your long-term investment goals. Renewed investment trends to review and potentially invest in 2025 are renewable energy, solar, lithium, battery technology, infrastructure, basic materials, emerging markets, and healthcare biotechnology on a select case by case basis.
