2025 Outlook, From an Institution Lens

Giving credence to the critical role that industry-leading investment research plays in the financial services sector, the 2025 Outlook: Pragmatic Optimism recaps the economic and market conditions of 2024 and provides LPL Research’s analyses, insights, and recommendations for 2025. From the pace that short-term interest rates decline to why the most attractive bond opportunities may be in the 5-year range to where the stock market, commodities, and currencies may be headed, the 2025 Outlook is designed to equip financial institutions and their executives with the strategic insights needed to position their clients and organizations for success.

Read on for high-level perspectives and be sure to register for a webinar cohosted by the authors of the report and LPL Institutions. Don't miss the opportunity as leadership from both teams shares in-depth analysis and perspective on the economy and markets as well as what it means for institutions going forward.

As LPL Research looks to 2025, we’re cautiously optimistic. We’re cautious because no market environment is ever permanent, yet optimistic since constructive long-term technology trends are in place. Plus, potential tax policy and deregulation efforts in 2025 could provide some tailwinds. While growth equity returns are not expected to be as robust in 2025, the investment environment should prove to be favorable for investors. 

Economy: Many Factors in Play, Labor Market is Key

From aggressive interest rate hikes a few years ago to combat inflation to rate cuts in Q3 of 2024 that ended one of the longest pauses in history, the economy has experienced significant shifts in a relatively short time frame. While consumer spending should begin to moderate from its prior break-neck speed, pent-up business spending (now that the election is over), favorable tax policy, and likely deregulation could help offset any softening from the consumer. Be on the lookout for upticks in inflation, especially as new policies are digested, and a slower pace of Federal Reserve (Fed) interest rate cuts than expected. The labor market, which has shown signs of cooling, remains key to how the economy ultimately lands. 

2025 Quarterly and Annual Forecasts¹

Key U.S. variables

Stock Market: Not Expecting a One-Way Street in 2025

It was another strong and impressive year for stocks. The market was driven higher by unwavering trends in technology, an enduring economy with moderating inflation, the delivery of Fed rate cuts, and the prospect of investor-friendly policies from the incoming administration. Should it all persist, our S&P 500 fair value target range in 2025 is 6,275 – 6,375. Factors that will help dictate 2025 stock market performance include:

• Avoiding recession. The stock market has historically delivered single-digit returns in the 12 months following an initial rate cut from the Fed. When recession has been avoided, the median gain has been closer to 11%.

Stocks Usually Go Higher After Fed Rate Cuts Begin 07²

When they don't, as in ’81, ’01, and ’07, recessions are usually to blame

• Upside potential. This could come from lower rates, productivity gains, and confirmation of market-friendly policies by the new administration.
• Downside risks. Including a much slower-than-expected economy, volatile interest rate policy, resurgent inflation, and more.

No matter what, don’t expect a one-way street higher. Even in non-recessionary periods, it’s commonplace for equity bull markets to undergo 10% corrections along the way. Be prepared for bouts of volatility and favor buying equities on market pullbacks. We expect equity returns to indeed be favorable in 2025, but not as robust as in 2024.

Bonds: Finding Opportunities

The bond market remains in flux after another volatile year. But as things calm, there should be opportunities in fixed income. Key considerations include:

• Range-bound yield environment. Ten-year Treasury yields should stay in the 3.75% to 4.25% range. The risks for yields are roughly equal, with potential upside pressures from fiscal deficits and Treasury supply, and downside risks from a Fed rate-cutting cycle that's more aggressive than anticipated.
• An income-centric approach is favored. Given the expected higher for longer and range-bound interest rate environment, a focus on income generation is advised for bond investors.
• Balance between yield and risk. Considering the uncertainty surrounding future interest rate movements, now is not the right time to have above-benchmark exposure to bonds with longer maturities and a higher degree of sensitivity to interest rates. Intermediate-term maturities of five years or less are favored in the current environment and look the most attractive in terms of generating optimal yield and managing risk.

Don't Miss the Full Report and Webinar

This is just a snapshot of the market analyses and forecasts from 2025 Outlook: Pragmatic Optimism. The comprehensive report features so much more including insights and guidance on currencies and alternative investments — as well as LPL Research’s stock market sector recommendations. And of course, to join in as LPL Research leaders share their insights first-hand, register for the webinar today.

There’s a lot to take in, but then with over 400 years of combined investment experience, LPL Research has a lot to offer. As one of the largest research teams in the country, it’s all designed to deliver first-rate investment research that helps institutions best meet the needs of their clients and organizations with efficiency and ease.