US equities surged to new highs in 2024, with returns exceeding expectations and propelling the market higher than a decade prior. However, signs of economic tailwind momentum are waning for 2025 as monetary policy easing slows, inflation becomes more persistent, long-term interest rates rise, and US growth softens. From a sentiment perspective, spending on AI hardware is stabilizing after a significant rally in 2024.
Brian Colello, an equity strategist at Morningstar, noted that while AI-related expenses have been a key driver of recent gains, they are less likely to deliver the massive surprises seen in 2024. The market’s valuations remain elevated relative to historical averages, increasing pressure on US companies to meet earnings expectations.
The first quarter of 2025 will hinge on developments related to President Trump’s potential new tariffs on imports. Uncertainty surrounding his trade plans could significantly impact market dynamics and economic trends. Additionally, the broader implications of these tariffs, including which countries and products are affected, remain unclear.
Despite valuations being above fair value estimates, the US equity market is becoming increasingly cautious, with positioning playing a growing role in investor decisions. Small-cap stocks, for instance, trade at a 14% discount to their fair value. Meanwhile, real estate has become the most undervalued sector after struggling during 2024, while utilities are among the more overvalued due to their connection to AI growth.
These developments suggest that US equities will face headwinds in 2025, with both economic and political factors shaping market performance. Investors should closely monitor these trends as they unfold.
Source: https://portfolio-adviser.com/morningstar-trumps-tariff-plan-is-the-biggest-wild-card-for-us-equities