Fidelity analyst unveils market forecast for 2025 todayheadline

Fasten your seat belts; it’s going to be a bumpy year.

Of course, we hope not, but some analysts are seeing some unsettling signs as the new year gets underway.

Related: Analyst reboots Fed interest rates forecast after surprising inflation data

The U.S. will be heading a new direction on Jan. 20, when Donald Trump is sworn in as president for a second term. 

Thierry Wizman, global foreign exchange and rates strategist at Macquarie, said that what Trump says, or doesn’t say, about certain topics could move markets.

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“Of course, detailed policy details are unlikely to emit on Monday, as that might risk restricting Trump’s room for negotiations with Congress and foreign counterparts later,” he said. 

“But the topics that are touched upon, and the tone used, could signal near-term priorities, which could be pounced on by traders to inform market direction.”

Wizman noted that “there are many ways that Trump’s inaugural address and the things that it emphasizes can move yields, [foreign exchange] and even commodity prices on Monday.”

Trump’s efforts and remarks can move markets

“That’s especially true,” he said, since Trump can put his proposals into place via executive action in the administration’s first few days and weeks.

Wizman said the rhetoric could send oil prices lower — unless there’s an emphasis on Russia sanctions — and could send the dollar higher, especially if Trump’s emphasis on immigration control and tariffs on imports is renewed and rearticulated.

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In addition, Wizman said that Trump’s remarks could send bond yields higher, especially if traders can’t assign much credibility to the efficacy of deficit-reducing measures until they actually see the effects take hold.

Fidelity analyst is bullish on stocks despite volatility 

Jurrien Timmer, Fidelity’s director of global macro, said that rising long-term rates could be a recurring source of volatility for the market in 2025. 

“The market has lost momentum and breadth as prospects for more rate cuts in 2025 have dimmed,” Timmer wrote in a recent research note. “Last week, investors watched good news become bad news, as a stronger-than-expected jobs report sparked a market dip.”

The Bureau of Labor Statistics said on Jan. 10 that 256,000 new jobs were created in December, well ahead of Wall Street’s 164,000 forecast and the downwardly revised 212,000 reading from November.

The news caused the Dow Jones Industrial Average to tumble by about 700 points, while the S&P 500 fell 1.5% and the tech-heavy Nasdaq lost 1.6%.

Related: Surprising December retail sales report upends inflation bets

“The market’s fears, of course, are that such a strong jobs picture gives the Fed even less leeway to cut interest rates further,” Timmer said. “Long-term interest rates ticked up that same day, with the yield on 10-year Treasurys climbing increasingly close to that 5% [mark, which] has spooked stocks in recent past years.”

On Dec. 18, the central bank announced its third and final interest rate cut of the year, reducing its benchmark Federal Funds Rate by 0.25 percentage points to between 4.25% and 4.5%.

“While I continue to believe we are in a bull market — with rising earnings poised to pull the weight of the market still higher — this recent volatility could be a sign of things to come,” the analyst noted. “Later stages of a bull market tend to be more volatile.”

Analyst highlights yields, valuation, momentum shifts

Timmer said it didn’t take as much to disrupt the market’s mojo when valuations like price-to-earnings multiples are as high as they have been. 

“But moreover, I believe the interest-rate angst that’s been weighing on the market isn’t likely to go away anytime soon, and could be a recurring feature of the year ahead,” he said.

Timmer said that one of the big market stories in the second half of 2024 was the broadening of stock choices, as market leaders seemed finally to pass from the Magnificent 7 tech titans to the rest of the market. A wide and varied range of stocks finally participated and helped drive broad market gains, he said.

“Yet since mid-December (around when the Fed came out with reduced expectations for further rate cuts in 2025), the market has experienced a notable loss of momentum and breadth,” Timmer said. 

“As of last week, only 24% of stocks were trading above their 50-day moving averages, and only 29% of S&P 500 stocks were outperforming the index,” he added. “This was not what investors wanted to be seeing.”

Timmer said the employment data confirmed that the economy remained strong and the labor market remained tight.

Related: Veteran fund manager buys 4 stocks during market tumble

“This allows less room, if any, for the Fed to cut rates, and the market is now pricing in only one additional rate cut for this cutting cycle,” he said. “Personally, I would not be surprised if the Fed is done easing.”

At the same time, Timmer said, the yield curve has been steepening — meaning the difference between long-term rates and short-term rates has been widening — as 10-year Treasury yields have been rising.

“There are times when the stock market doesn’t pay too much attention to rates,” he said. “But in periods of relatively high inflation, stocks and bonds tend to become positively correlated.”

While 2024 was a Goldilocks year of rising earnings and rising valuations, Timmer said, this year might see those forces pit against each other, with earnings growing but rising long-term rates pressuring valuations.

“The main question for 2025 is where the opposing forces of growing earnings and rising rates may lead the market,” he said.

Related: Veteran fund manager issues dire S&P 500 warning for 2025