The Four Biggest Forces Shaping the Stock Market in 2025

As 2025 approaches, Wall Street analysts identify four dominant themes that could determine the trajectory of the stock market. Despite expectations for an 8% rise in the S&P 500, these themes highlight potential opportunities and risks for investors in the coming year.

1. Trump’s Trade Policies: Trade Wars or Economic Stimulus?

President-elect Donald Trump’s tariff rhetoric is poised to play a significant role in shaping the market. His plans for a 25% tariff on imports from Canada and Mexico could trigger a trade war, leading to:

• Higher Inflation: Tariffs on imports could raise consumer prices.

• Economic Risks: Trade disruptions and potential mass deportations could reduce growth.

• Global Recession Concerns: Analysts like Peter Berezin warn that a full-blown trade war could push the economy into recession.

However, if Trump prioritizes tax cuts and deregulation instead of aggressive trade actions, the stock market could benefit. Investors are closely watching how Trump balances protectionism with pro-business policies.

2. The Federal Reserve’s Role: Rate Cuts vs. Inflation Fears

The Fed is expected to implement two 25-basis-point rate cuts in 2025, continuing its easing cycle. Analysts believe lower rates will support the market, but inflation could complicate this outlook:

• Fed “Put” in Place: Many expect the Fed to step in if markets falter, bolstering investor confidence.

• Potential Hawkish Shift: Inflationary effects of Trump’s tariffs or rising wages could prompt the Fed to adopt a more aggressive stance, pressuring stock prices.

Strategists from Fundstrat, UBS, and Morgan Stanley agree that lower rates will be a crucial factor in sustaining the bull market. However, surprises in inflation or economic data could disrupt these expectations.

3. AI’s Next Chapter: Revenue Growth or Bust?

The artificial intelligence boom has been a cornerstone of the market’s gains, with stocks like Nvidia (up 170% YTD) and Palantir (up 329%) leading the charge. However, 2025 will demand results:

• Revenue and Profit Growth: Companies investing heavily in AI infrastructure must demonstrate returns to justify high valuations.

• Productivity Gains: Broader economic benefits from AI adoption could fuel further market gains.

• Volatility Risk: If AI investments fail to deliver, the tech sector—which has driven much of the bull rally—could face sharp corrections.

As Ted Mortonson from Baird notes, Wall Street is asking, “Where is the return on invested capital?” The market’s future depends on how well AI investments translate into tangible outcomes.

4. Economic and Consumer Resilience

The U.S. economy defied expectations of a downturn in 2023 and 2024, with GDP growing nearly 3% annually. Analysts believe continued strength in the consumer sector, corporate profits, and the broader economy is essential for further market gains:

• Bullish View: UBS projects an S&P 500 target of 6,600 by year-end 2025, driven by solid economic growth.

• Bearish Scenario: BCA Research warns that Trump’s policies could undermine consumer balance sheets, driving inflation higher and cutting into spending power.

As long as the consumer remains resilient, the bull market could stay intact. However, any cracks in consumer confidence or corporate earnings could signal trouble ahead.

Conclusion: Navigating 2025’s Crosscurrents

The stock market in 2025 is set to be shaped by competing forces:

• Trump’s trade and economic policies.

• The Fed’s rate decisions and their inflationary implications.

• The ability of AI investments to deliver on their promise.

• Continued strength in the consumer and economy.

While Wall Street forecasts gains, risks from trade wars, inflation, or AI setbacks could challenge the bullish outlook. Investors should remain vigilant and diversified to navigate the opportunities and risks of 2025 effectively.