LPL Research
Presents Outlook 2025: Pragmatic Optimism

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Pragmatic Optimism

Looking back, 2024 clearly echoed many of the themes from the prior year. By and large, the economy continued to defy expectations and surprised once again to the upside. Stocks continued their strong performance, driven by powerful trends in artificial intelligence and technology. On the other hand, the bond market experienced another lackluster year amid policy ambiguity and uneasiness over rising debt levels.

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 asset returns are not expected to be as robust in 2025, the investment environment should prove to be favorable for investors.

We leverage the expertise of the LPL Research leadership team, who identify potential risks and opportunities. For 2025, new fiscal and regulatory policies will need to be digested, and relatively rich valuations may get tested. For the time being, this backdrop favors a constructive, but also a conservative and balanced approach, when it comes to tactical stock and bond allocations.

LPL Research is committed to supporting our financial advisors, our institutions, and their clients throughout every market cycle. We remain incredibly grateful for the confidence bestowed upon us.

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"We’re cautious because no market environment is ever permanent, yet optimistic since constructive long-term technology trends are in place."

Marc Zabicki, Chief Investment Officer

LPL Research

LPL Research Outlook Highlights

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Economy

The economy has experienced significant shifts over the last few years, including aggressive rate hikes followed by a pivot to rate cuts. The economy will likely downshift throughout 2025 as consumer spending begins to moderate, though pent-up demand for business capital expenditures, favorable tax policy, and likely deregulation could help offset some of the softening. Inflationary pressures may re-emerge as new policies are digested, so upticks in inflation could lead to changing narratives and a slower pace of Federal Reserve (Fed) rate cuts than expected. The labor market continues to show signs it is slowly shifting and remains key to how the economy ultimately lands.

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Geopolitics

Despite a geopolitical landscape increasingly punctuated by military skirmishes, armed conflict, and clearly defined war, markets have been able to navigate around the risk. Given the military turbulence in the Middle East and Europe, markets in the U.S. have performed with distinction as the underpinning of a bull market and solid economic backdrop stand in stark contrast to the images and consequences of war.

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Stocks

Expect modest stock market gains in 2025, supported by a stable economy, solid corporate profits, a Fed that is no longer hawkish, and some potential deregulation tailwinds. With stocks pricing in a lot of good news, positive surprises may be tougher to come by, so a repeat of 2024’s performance is unlikely. With the bull market another year older, interest-rate risk rising, valuations elevated, and still significant geopolitical threats, be prepared for bouts of volatility in 2025, and consider buying equities on market pullbacks. Our S&P 500 fair value target range for 2025 is 6,275 to 6,375.

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Commodities

Demand for a broad assembly of commodities will be crucial for new infrastructure projects globally, and continued renovation of aging infrastructure. The buildout of data centers is poised to require an abundance of commodities. For investors, commodity exposure should remain a small portion of a portfolio that’s diversified across the commodity complex. In addition, investors should consider infrastructure opportunities previously mentioned in the Alternatives section.

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Bonds

Bond yields are expected to remain elevated, with the 10-year Treasury yield likely to remain between 3.75% and 4.25%. Over the next 12 months, we see roughly equal upside and downside risks to yields as the markets grapple with the true impacts of budget deficits, increasing Treasury supply, and the scope of the Fed’s current easing cycle. For fixed income investors, a focus on income generation and duration management is advised and we believe the most attractive opportunities lie in the five-year maturity range.

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Alternative Investments

Lower interest rates and potential policy shifts will impact markets differently, creating both opportunities and risks. Equity market-neutral, global macro, and managed futures strategies are well-positioned to capitalize on increased volatility and market dispersion. In the private market space, private credit and infrastructure remain attractive, albeit with some moderation in expectations. While challenges persist in private equity, opportunities should exist in the secondary market. Investors should be prepared for a more dynamic market environment in 2025 and consider the use of alternative strategies to further diversify and enhance portfolios.

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Currencies

The dollar has reigned across global currency markets. Solid economic growth, especially compared to other developed countries, has been a major driver of strength and stability. Developing uncertainty over the trajectory of inflation, expectations for gradual easing from the Fed, and positive interest-rate differentials have further supported the dollar. President-elect Trump’s proposed tariffs could elevate currency market volatility and stoke inflation fears, putting additional upward pressure on the dollar. Based on this backdrop, we believe the dollar will be well-supported in 2025. We expect limited downside risk, while meaningful upside could be capped by the gravitational pull of a less hawkish Fed.

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Disclosure

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

All index data from FactSet.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This research material has been prepared by LPL Financial LLC.

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