This will be “a year of living dangerously”, says Katie Martin in the Financial Times. After two successive years of 20%-plus gains, the Wall Street boom could be living on “borrowed time”. Incoming US president Donald Trump might deliver US tax cuts, deregulation and a Ukraine peace deal, allowing stocks to “party like it’s 1996”, says Henry Neville of the Man hedge fund. Alternatively, his tariff policies could cause an inflationary surge that unleashes a 2022-style stock and bond rout. “Fireworks lie ahead in either case.”
How returning inflation echoes a 1970s economy
An inflationary comeback is an “underappreciated risk for 2025”, says Tom Stevenson in The Telegraph. There are “echoes of the late 1960s and early 1970s”, with central bankers crying victory over price rises before the job is done.
What else lies ahead? The “dominance of US tech giants” looks likely to end, if for no other reason than that Trump’s “America first” programme should help smaller US companies instead. Finally, it’s unreasonable to hope for another year of double-digit stock gains. Such a “melt-up” would see us enter “full bubble mode”, with things certain to “end badly”.
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The real trouble may be coming in bond markets, where government overspending could cause an investor revolt, says The Economist. The US government’s ten-year borrowing costs have already spiked from 3.6% in September to 4.6% today. A “big fear” is that Trump’s immigration and tariff plans will fuel inflation, forcing the Federal Reserve to keep interest rates elevated.
Are there reasons for optimism in 2025?
Warnings of a “spiral into a global trade war” in 2025 are “overdone”, argues Neil Shearing of Capital Economics. There is little global appetite for a tit-for-tat protectionist battle with America, while floating exchange rates will help absorb some of the tariff strain.
While a “low probability/high impact” event such as a conflict over Taiwan can never be ruled out, 2024 was a reminder that geopolitical risks can also be exaggerated. The last 12 months brought a major Middle East conflict and “the closure of one of the world’s most important shipping routes”. Yet oil prices fell and trade continued to roll. For all the challenges that the world economy faces, 2025 might prove to be “a year of muddling through”.
There are reasons to be hopeful about 2025, agrees Mehreen Khan in The Times. For one thing, interest rates are now “steadily falling” worldwide, providing a supportive backdrop for asset prices. Lower borrowing costs should take the edge off concerns about large public debt piles. Moderating oil prices are another tailwind.
Even the long-suffering FTSE isn’t looking so bad, say Khan and Tom Howard in the same paper. British blue chips rallied 5.8% in 2024, their fourth consecutive annual rise and the best run since the 2000s. It would have been even better were it not for a sterling rally that ate into the value of the FTSE’s predominantly international earnings – the pound was “the second-best performing major currency in the world after the US dollar” in 2024.
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