2025 Outlook recap: Moderating growth expected

Key takeaways:

• The U.S. economy continued to expand throughout 2024 with growth moderating but remaining solid. Nationwide Economics expects full-year GDP growth at a rate of 2.8%. 
• 2024 was a banner year for equities with the S&P 500^® Index recording its second-straight calendar year of gains over 20%.  
• Returns for fixed income were broadly positive within a more challenging bond market.  

01/17/2025 — The U.S. economy continued to expand throughout 2024 with the pace of growth moderating but remaining solid. Nationwide Economics expects full-year GDP growth at a rate of 2.8%, just slightly lower than the previous year. Much of the strength in the economy in 2024 came from the labor market, which remained resilient throughout the year and supportive of consumer spending. Unemployment did tick higher last year but remains low on a historic basis. This trend of positive but moderating growth is expected to stay in place for 2025, but much will depend on the policies enacted by the incoming Trump administration and how they may impact businesses and the economy.  

Inflation remains a sticking point

Inflation does remain a sticking point going into the new year, but there was good news in the progress made throughout 2024 in bringing consumer price growth under control. The inflation rate is still off from the Federal Reserve’s 2% target and it seems like the last mile will be the hardest to accomplish. But the improvement made in 2024 has meant the Fed was able to remove its previously restrictive monetary policy and adopt a bias toward easing rates in the year ahead. The central bank may be more cautious in enacting further cuts, taking a “wait and see” approach on the impacts of government policy shifts on tariffs and immigration.

Stock market volatility was subdued

For the stock market, 2024 was a banner year with the S&P 500^® Index recording its second-straight calendar year of gains over 20%. Earnings resilience and strength in company balance sheets supported the continuing bull market run. Equity investors faced headwinds from persistent inflation, rising long-term interest rates and uncertainty about the timing of Federal Reserve rate cuts and the outcome of the presidential election. Despite these obstacles, stock market volatility was mostly subdued throughout the year as investors largely stayed rational and avoided emotional reactions.

There’s good momentum for stocks

There’s good momentum for stocks heading into 2025 with companies displaying good fundamentals and the economy remaining in expansion mode, but we don’t expect the same stellar returns for stocks in the coming year. The primary reason for that is elevated valuations, which at year-end sit at levels last seen before the market crashes of the early 2000s and the Global Financial Crisis. However, most of the rise in market valuations is due to investor enthusiasm for technology stocks and anything AI-related. Outside of the “Magnificent 7” stocks, the rest of the market trades at below average valuations. That could set the stage for equity performance to broaden in categories that have lagged large-cap growth stocks, including small- and mid-cap stocks and international stocks outside of the U.S. Earnings will remain critical to support equity market gains, but the good news is margins are currently at record levels and easing interest rates should help rate-sensitive sectors of the market.

What about bonds?

It's been more difficult in the bond market, but returns for fixed income have been broadly positive. Yields for longer-term Treasuries moved higher later in the year despite shorter-term yields falling after the Federal Reserve began easing monetary policy in the fall. The rise in long-term rates has come as many bond investors shifted their expectations for future rate cuts and have become more concerned about the federal budget deficit. For the year ahead, bonds are positioned for a good year given the current level of interest rates and narrow spreads for investment grade and high yield bonds. With longer-term rates anticipated to fluctuate between 4-5%, bonds should maintain their status as good protection from equity market volatility.

For more on the 2025 outlook and 2024 review

For an in-depth review of the past year and outlook for 2025, please watch a replay of our December webinar with Nationwide thought leaders, including Kathy Bostjancic, Chief Economist, Chris Graham, Chief Investment Officer of Nationwide Funds, and Mark Hackett, Chief of Investment Research.