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SUMMARY
- We believe the bull market will remain intact in the new year.
- However, we expect inflation to remain a key controversy that will keep returns modest and volatility higher.
- We remain overweight stocks relative to bonds, with a preference for US over international.
Riverfront's Investment Team is proud to present our 2025 Outlook. Our Outlook is a visual chart pack designed to walk investors through our investment views and predictions for the upcoming year. In today’s Weekly View, we have created a concise synopsis of the Outlook’s conclusions, along with a few selected visuals that encapsulate a number of key takeaways.
2025 Outlook: ‘Goldilocks’ Wins Over the ‘Two Bears’, But Not Before Some Inflation Controversy
In 2025, the ‘Goldilocks’ backdrop for stocks that has characterized the past year- economic expansion fueled by a combo of easy Fed and business policies - will likely be tested by the ‘Two Bears’ of economic cycle maturity and reflation pressures. Our Base Case (see table below) is that the bull market will survive to see another year, with a major rotation into cheaper and smaller-cap US stocks gaining strength. Tail ‘risks’ and ‘opportunities’ are more significant in either direction this year, increasing our probabilities assigned to both ‘Bear’ and especially the ‘Bull’ cases relative to our past forecasts.
Riverfront’s Base, Bear and Bull Case Forecasts for 2025

CHART 1: ‘A Little Too Hot” ...US Inflation has Stopped Decelerating
Inflation in the US, while significantly lower than two years ago, appears to have stopped decelerating for the time being. This will likely remain a source of market anxiety in ’25, as a benign inflation picture remains the general catalyst for further Federal Reserve interest rate cuts. Rate cutting cycles, as we discuss in the Outlook, are historically a backdrop that tends to be positive for stock market returns.

However, our view on inflation becomes more sanguine given the mild implied future inflation expectations implied from various segments of the US bond market. In addition, the economic weakness in regions like China – where consumer and producer prices appear to be in deflation – actually may aid in the Fed’s inflation fight, by easing global inflation impulses further. For these reasons, we do not think it’s time to panic on inflation...but we admit inflation trends could be a key source of volatility for markets in ’25, especially after two straight years of strong stock returns.

CHART 2: ‘…But Not Too Cold’…US Economy Remains Exceptional
We spilled a lot of ink in ’24 discussing what we have termed American ‘Economic Exceptionalism’. We believe the US economy’s exceptional performance will continue in the new year. The employment market is solid, consumers are feeling good, and small and medium-sized businesses are increasingly optimistic about their futures. Highlighting this constructive backdrop, forward-looking data such as recent ISM Purchasing Manager Index (PMI) surveys – (chart 2, below) suggests to us that GDP growth should remain solid in the US as we head into ‘25. We have a higher-than-consensus view of US GDP growth next year, though we do not share the same level of enthusiasm for international economies such as Europe and China.
CHART 3: Hopefully ‘just Right’ in the End – Earnings Should Remain Strong in ‘25
This reflationary backdrop of economic tailwinds and slightly higher-than -average inflation described above should be a recipe for a continuation of the positive corporate earnings cycle we have seen throughout ’24, in our view. Riverfront’s investment team’s S&P 500 earnings forecast remains higher than the consensus view, which helps us remain constructive on stocks even as we expect higher volatility and lower returns than last year (see chart, below). Our view is supported by strength in PMI survey data in the services economy, which we believe will help give investors some insight into the direction of earnings over the subsequent six months.

CONCLUSION: Portfolio Implications of our 2025 Outlook
We believe the cyclical bull market will remain intact in the new year but returns going forward may be more modest and volatility higher. American ‘Economic Exceptionalism’ should keep recession risk at bay and corporate earnings growing, but may also keep inflation from moderating as much as the Fed would like. Thus, ‘A Little Too Hot…But Not Too Cold’ is our market mantra for 2025.
We remain overweight stocks relative to bonds, with a preference for US assets over international. Favored sectors include high free-cash-flow technology and energy. For longer-term focused clients, we see opportunities in smaller-capitalization companies, where valuations relative to large-caps are attractive and the reflationary backdrop may spur revenue growth.
Risk Discussion: All investments in securities, including the strategies discussed above, include a risk of loss of principal (invested amount) and any profits that have not been realized. Markets fluctuate substantially over time, and have experienced increased volatility in recent years due to global and domestic economic events. Performance of any investment is not guaranteed. In a rising interest rate environment, the value of fixed-income securities generally declines. Diversification does not guarantee a profit or protect against a loss. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Please see the end of this publication for more disclosures.