First Quarter 2025 Review

By nearly every fundamental metric, the U.S. economy had a stellar year in 2024. Latest estimates suggest real GDP likely grew 2.8% last year (which is above trend), inflation fell to 2.4% year-over-year in November (PCE Price Index), productivity in the private sector increased by more than 2%, and S&P 500 operating earnings increased by 9%.

The economy enters 2025 on solid footing, but stocks also started the new year trading at 22x expected 2025 earnings. Optimism and ‘animal spirits’ are also on the rise, which we think means that any policy missteps, perceived economic weakness, or earnings misses could have an outsized effect on downside volatility.

The good news is that if the new administration keeps focus on implementing pro-growth policies—deregulation, full extension of tax cuts, etc.—we expect a significant boost to business investment and profitability. This could stimulate the business cycle, lead to higher-than-expected economic and earnings growth, and provide more upside in equity markets.