The Bull and Bear Case for 2025

How high will markets go?

It was an especially festive New Year’s for investors. The S&P 500 soared by 23 percent in 2024 to cap the best two-year run in a quarter-century, a rally that even many of Wall Street’s biggest bulls failed to predict.

This year, market veterans expect to see solid gains — but no repeat, DealBook’s Bernhard Warner reports. Why? There’s uncertainty — about the Trump administration’s economic agenda, inflation and the Fed’s next move on interest rates — amid concerns that investor fervor has made some stocks, especially those tied to the artificial intelligence boom, too pricey.

What experts are predicting: They see the benchmark index climbing to just below 6,700 by the end of 2025, according to FactSet, for a gain of about 13 percent from Tuesday’s close.

If analysts’ models are correct, it would mark a third consecutive year of double-digit annual gains for the S&P 500. The futures market on Thursday points to a gain at the opening bell.

The bull case for markets goes something like this: Consumers will continue to spend — but not so much that they re-accelerate inflation — and companies will again invest robustly in R.&D., buoying corporate profit and economic growth.

G.D.P. has held up, defying gloomy predictions that high U.S. interest rates would lead to recession. Some economists see no reason America’s strong run won’t last.

“If the conditions that led to U.S. exceptionalism from both the economic and market front in 2024 continue to persist, then the U.S. economy will continue to surprise on the upside,” Joe Davis, global chief economist at Vanguard, told DealBook.

One contributing factor: American companies have boosted productivity gains over the past few years, he said, aided in part by their adoption of cloud computing and, more recently, artificial intelligence, to automate operations and make their staff more efficient.

Some Trump policies could lift stocks, too. A “pro-business tax and regulatory plan” from the Trump administration could also spur corporate spending and lift profit, Jeffrey Roach, chief economist at LPL Financial, wrote in a Dec. 23 research report.

Despite the decent outlook, Wall Street sees warning signs. Analysts and economists have repeatedly told DealBook that President-elect Donald Trump’s policies — especially his threats to impose tariffs on trading partners — could create a stark divide between victors and laggards.

“I would expect there to be real dispersion between different economies, different stocks, different everything in 2025,” David Seif, chief economist for developed markets at Nomura, told DealBook. “Especially in the United States, a lot of those winners and losers will be determined by the policies that President-elect Trump implements.”

The standout winners since Trump’s re-election are the dollar and crypto. Bitcoin has soared nearly 40 percent during the past two months on hopes that his administration will be friendlier to the industry.

And the dollar index rose 7.6 percent in the fourth quarter as global investors foresee Trump’s “America first” economic vision disrupting global trade and reigniting inflation. (During his first term, Trump often grumbled about the strong dollar and America’s trade deficit.)

The seeming losers: Sovereign bonds have suffered, with the yield on the 10-year Treasury note jumping since Election Day. Clean-energy stocks have also skidded as investors worry that Trump will repeal or roll back the Inflation Reduction Act, President Biden’s signature climate policy, putting billions of dollars worth of tax credits in doubt.

Here’s how Wall Street sees 2025 shaping up:

Watch out for inflation. Several economists warned that Trump’s vision of stimulating growth by slashing red tape and extending tax cuts, combined with potential crackdowns on immigration and imposing new tariffs, could lead to higher prices, squeezing consumers and companies.

“A one-time tariff boost” would have the effect of raising the core Personal Consumption Expenditures Price Index by roughly a third of a percentage point by year-end, David Mericle, a Goldman Sachs economist, wrote in a research note this week.

Politics is another factor. Seeing a re-emerging inflation risk, the Fed last month lowered its 2025 forecast for rate cuts to two, from the four it had forecast in September. That shift has added volatility to the stock and bond markets, with the S&P 500 down nearly 3 percent since the central bank’s latest policy decision on Dec. 18.

Wall Street will also be watching whether Trump can pass his full agenda through a Republican-controlled Congress with a debt-ceiling battle looming.

“As excited as people want to be about pro-growth policies like deregulation or changes to the tax code, et cetera, the reality is that there’s elements of this that are going to be very hard to kick on,” Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, told DealBook. “Politics is still politics.”

HERE’S WHAT’S HAPPENING

Investigators look for links between the New Orleans attack and the Las Vegas explosion. President Biden said that the Army veteran who rammed a pickup truck into a crowd on Bourbon Street on Wednesday and killed at least 15 was “inspired” by the Islamic State terrorist organization. Local and federal law enforcement officials are examining whether the incident had any ties to the detonation of a Tesla Cybertruck outside a Trump hotel in Las Vegas. No link has been found so far, other than that both vehicles had been rented via the Turo app.

Chinese hackers are said to have infiltrated Treasury Department sanctions systems. A breach of several Treasury offices was most likely related to figuring out whom Washington would target with new financial sanctions, The Washington Post reports. The full extent of the hack is still being assessed and it has added to tension between the United States and China.

Bank of America and Citigroup quit a major financial alliance for climate change. The departures from the Net-Zero Banking Alliance come after Goldman Sachs and Wells Fargo left the grouping, and follow increasing pressure on corporate efforts to overtly focus on environmental causes following Donald Trump’s election win. Both banks said they would continue to work with clients to meet their customers’ climate goals.

Elon Musk gets more backing for his legal fight against OpenAI. Prominent artificial intelligence researchers, including the pioneering scientist Geoffrey Hinton, signed a friend-of-the-court brief supporting Musk’s lawsuit seeking to prevent the ChatGPT creator from shedding its nonprofit status. The attorney general for Delaware, where OpenAI is based, said she would step in if she determines the company was breaking the law in changing its corporate structure.

The Musk-MAGA fight over immigration

A split on immigration between President-elect Donald Trump’s supporters erupted during the holidays, with right-wing conservatives squaring off against Elon Musk and the tech industry over preferential visas for highly skilled workers.

The fight appears to have calmed down for now. But it highlights how Musk could be a corrective on issues that have bipartisan support among many business leaders, especially in Silicon Valley.

A recap: The far-right activist Laura Loomer criticized Trump’s pick of Sriram Krishnan, a venture capitalist, as an adviser on artificial intelligence as “disturbing.” She warned about the potential influence that the India-born Krishnan could have on immigration policy — and accused Musk and his tech allies of using their influence with Trump to benefit their companies.

The fight is all about the H-1B visa programs. Musk has railed against illegal immigration. But he has defended these specific visas, which allow skilled people like software engineers to work in the United States for up to three years (or six if extended) as crucial to American business and tech supremacy.

Musk’s Tesla and tech giants including Amazon and Google are among the biggest users of H-1Bs. Trump told The New York Post that he supported the program as well, though his businesses have tended to use a similar program for unskilled workers.

Silicon Valley has defended visas for skilled workers for years. Tech investors including Scott Sandell, the executive chairman of the venture capital firm New Enterprise Associates, have long pushed for policies that make it easier to hire talent from around the world. Immigrants or their children account for 49 percent of V.C.-backed U.S. companies, Sandell told DealBook before the recent fight, and ultimately create jobs for Americans.

Critics say H-1B visas are used to take jobs away from Americans and to lower wages. Steve Bannon, a longtime Trump ally, has called for American workers to replace those on H-1Bs.

And there are some in the Trump administration who may fight back. Trump has chosen Stephen Miller, the hard-liner who oversaw an immigration crackdown during his first administration, as his deputy chief of staff this time. Miller has railed against H1-B visas and pushed for restrictions on illegal immigration that also slowed legal immigration.

Tech leaders are pinning their hopes on Musk. After the election, Aaron Levie, the C.E.O. of the cloud storage company Box who backed Vice President Kamala Harris, publicly called for updating immigration policy and suggested that the Tesla chief could help. (Musk replied on X, “I agree.”)

Sandell said that Musk — himself an immigrant, whose companies have employed many as well — understands the value that such workers bring. “There’s no doubt he’s constructive, and he understands exactly how it works, so he’ll be a big positive,” Sandell told DealBook.

Europe’s latest energy crunch

Europeans awoke on Thursday to an unwelcome bit of déjà vu: Natural gas prices were hovering around a 14-month high, after Russia turned off a key supply pipeline to the continent on New Year’s Day.

That has put Europe in an energy crunch even as parts of the eurozone were already flirting with recession.

The closure was expected, but it still jolted energy markets. President Volodymyr Zelensky of Ukraine had warned that Kyiv would not renew a transit agreement that allowed Russia to send natural gas to Europe through a pipeline that crosses its territory.

In the past two days, Europe’s benchmark gas price hit a level last reached in October 2023, according to Bloomberg.

Watch for aftereffects. “European gas storage ended 2024 at its lowest year-end level in three years, and the recent increase in prices is set to add further to inflationary pressures,” Henry Allen, a markets strategist at Deutsche Bank, wrote in a research note on Thursday.

It’s also a potential blow to the Kremlin’s war machine, with some analysts forecasting that the closure could deprive Russia of about $6.5 billion a year in revenue.

THE SPEED READ

Deals

• Nippon Steel is said to have offered the U.S. government the right to veto any potential cuts to production capacity at U.S. Steel, in a new effort to win approval for its $15 billion acquisition of the company. (Reuters)

• The number of venture capital firms investing in U.S. start-ups fell last year to 6,175, down 25 percent from 2021, as the biggest funds amass a larger share of investor money. (FT)

Politics and policy

• House Republicans plan to make it harder to replace Representative Mike Johnson as speaker — provided he wins a vote on Friday to keep his post. (Axios, WSJ)

• The plethora of billionaires picked to join the next Trump administration have raised concerns about their complex potential conflicts of interest. (Business Insider)

Best of the rest

• During the first Trump administration, companies publicly defended the importance of the U.S.-China trade relationship. They’re not doing so this time. (WSJ)

• New year, new generation: Meet Gen Beta, children born starting in 2025. (Axios)

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