By Rob Foss
Chief Investment Officer
EdgeRock Wealth Management

Another day, another lap around the sun, another EdgeRock Outlook.

It feels too soon to start compiling thoughts for 2025 (as it feels like we just yesterday penned our 2024 Outlook), but then again? We’re in the business of looking ahead. The very nature of investing requires a consistent eye toward the horizon. An unrelenting gaze upon that which is both unknown and inevitable. That’s our promise to EdgeRock clients: That we’ll use the best available information to help you make the most advisable decisions about your financial plan—and this will never change.

So what are we looking looking at headed into next year? Many of these themes might feel a bit similar, as many of the same basic market conditions persist. But it’s often the case that the longer a theme stays relevant, the more scrutiny it requires.

Here’s what we’re tracking headed into 2025:

• What’s next for monetary policy 
• AI-powered market performance
• Ongoing geopolitical concerns
• Preparing for the year ahead

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The good fight against inflation continues

In September and October, the FED began its widely anticipated easing cycle by cutting interest rates by 50 and 25 basis points. 

This marked the first time since 1998 that FED easing was not initiated in response to an economic or financial crisis. To many, this was an acknowledgment that restrictive monetary policy reached peak efficacy rather than a complete victory over inflation. 

Core PCE, the FED’s preferred measure of inflation, registered 2.65 percent as of the previous release. While this is a vast improvement over the headline numbers of 2022, it is still not quite near the FED’s target of 2 percent. The fact that this metric has not changed since May, has some worried that inflation could still be troublesome going forward.  

The question remains: Where will rates go from here? 

As always, the future is difficult to predict. However, the short answer is probably lower but not zero like they were for much of the aftermath of the Great Recession. The FED’s dot plot, a quarterly chart that records each official’s key short-term interest rate projection, shows a possibility of one more rate cut in 2024, followed by about 125 bps of cuts in 2025. 

This could bring the target rate to a range 3.25–3.5 percent or even 3.0–3.25, which is a significant reduction from the 5.25–5.50 range in the summer of 2023. This implies a “soft landing” is well within reach.

Our clients know we are always looking to where risks may present themselves. While much of the risk conversation revolved around a hard-landing scenario, we believe there is a risk of a “no-landing” scenario in 2025. This is a situation where the U.S. economy keeps growing and inflation reignites. The fact that market pundits—and even major banks—are giving it credence most likely reflects that this risk is growing. If a no-landing scenario appears, we agree that areas of the public equity and fixed-income markets could be volatile.

AI-powered market performance

Last year, and even this year, the “Magnificent Seven” comprising Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla are all the rage. These businesses significantly influence the stock market via investing in artificial intelligence (AI) infrastructure and hardware. Year-to-date, these businesses achieved an average return of 51 percent, which is more than double the return of the S&P 500 over the same period.

The question on everyone’s minds is whether this trend continues.  

Collectively, these companies are projected to spend over $200 billion on AI-related capital expenditures in 2025, doubling their 2021 spending, which was before the advent of ChatGPT. This surge in investment underscores their commitment to AI as a driver of future growth.  

Nvidia, in particular, has experienced remarkable sales growth with AI-related chips despite some pressure on margins. Analysts predict strong sales and earnings growth for these companies over the next few years, rendering these stocks a meaningful part of any equity allocation. 

We see no reason to doubt the projected spending on AI infrastructure, making semiconductor companies clear winners. What is still in progress is how the businesses spending greatly on AI hardware and infrastructure (think Alphabet, Microsoft, etc.), will use AI to increase the demand for their products and services and recoup their investment. We know that AI is shrinking the time and cost of creation, which has the potential to lower barriers to entry, disrupt “per-seat” pricing models, and significantly lower switching costs. We are in the very early stages of an AI-driven revolution and with any new technology, we will most likely see the rise of new businesses and the fall of incumbents. It is still premature to guess exactly where and how the chips will fall.

Global Economic Divergence and Geopolitical Developments

The U.S. economy is projected to maintain robust growth in 2025, while Europe may experience slower expansion. The only economies that are projected to grow faster are China and India. This fact, in combination with two major regional wars, will likely keep our home bias intact for the foreseeable future.  

Regardless of which political party is in power, we still believe that the United States is the global leader in economic and financial systems via the scale and depth of its capital markets, reserve currency status, cultural emphasis on innovation, and strong institutional frameworks through rule of law and regulatory oversight. This makes the United States a global haven, the status of which is unlikely to change soon.  The conclusion of the election cycle provided financial markets with the certainty they usually desire to forge ahead. The new administration’s proposals for less regulation and lower taxes could boost risk assets and encourage merger and acquisition activity. However, it is unclear to what extent current proposals will ultimately make it through both Houses of Congress.

Protectionist policies like tariffs will have negative effects on some import-oriented businesses and could produce unintended consequences.

What to look for in 2025

The S&P 500 is on the verge of advancing greater than 20 percent for two consecutive years, the first time this century. 

Momentum is a real phenomenon in financial markets, so as much as we disdain to prophesize, it’s probable that 2025 will be another good year for financial markets. This outlook is supported by Wall Street banks raising their price targets on major indices. 

We expect large-capitalization technology and growth companies to continue their run of good performance, mostly for reasons acknowledged. However, we are encouraged by the recent outperformance of overlooked areas, such as value and small capitalization companies, as it’s hard for one group of the equity market, albeit a significant one, to hold up market rallies indefinitely.

We believe that small capitalization companies are set up to do well. First, smaller companies tend to have more variable rate debt so continued interest rate reductions will enable managers to reinvest more into their business or return capital to investors. Tensions with China have multinational corporations rethinking the location of their supply chains and considering moving them home or closer to home. 

This could be a boon to the smaller companies that typically contract for this type of work. Lower interest payments and increased economic activity should drive earnings growth within the category. Another reason we are paying attention to small capitalization stocks is their valuation, which remains relatively attractive. 

We admit that valuation is not a good short-term investing tool, but ultimately investment returns are based on purchase price. In other words, valuation matters over intermediate and long-term time horizons.  Even with recent performance, the forward price-to-earnings multiple of the S&P 600 is 17x, which still compares favorably to 23.5x for the S&P 500. 

Although we are approaching a new year, our message remains the same. Well-thought-out allocations that have exposure to numerous asset classes, both public and private, and contain both passive and active strategies should do well in any environment.