In this season of January forecasts, we seldom expect many predictions to hit their mark. After all, in 2023, the nearly universally expected U.S. recession never came, and in 2024, the consensus on interest rates was completely wrong. Still, expert predictions do force us to think about risks, and that may be their real purpose.
The list of worries today is long – it always is. When people set their minds to thinking about all the things that could go wrong, they can really get carried away. But there still are plenty of optimists today. We are entering 2025 in good economic shape; deregulation, a revival of animal spirits, and strong corporate profits are potential positives. On the other hand, President Trump brings an element of unpredictability to policy making, and we’ve all been primed to expect a sea change in the way the U.S. engages with the rest of the globe.
We’ve reproduced here two lists covering the waterfront of 2025 risks. One is from Torsten Slok, Chief Economist of Apollo Global, who sees strong U.S. economic growth, but also potentially higher inflation and interest rates. The other, from Ian Bremmer of Eurasia Group, makes for some truly grim reading on geopolitics – but remember, he’s paid to think of anything and everything that could go wrong.
One worry that is top of mind today revolves around rising long bond rates, inflation, and federal debt (for more on this, see Anne’s writeup on page 3). It is highly unusual for the 10-year Treasury rate to be rising while the Fed is cutting rates on the short end. That suggests that higher inflation is on the way – which isn’t good for businesses or stocks – or that a lot of people are worried about our federal debt, which is growing faster than GDP. The U.S. consumer and corporations may be flush with cash, but not the federal government. In fact, one reason the U.S. economy has been so strong is probably ample fiscal largesse. Eventually, a costly reckoning may have to come.
Another area of focus is how much longer the U.S. stock market can continue defying expectations. We’ve been in a momentum-driven, low volatility market, and the S&P 500 has just had two years of back-to-back +25% returns. Since 1928, that has only happened three other times, and a three-peat would require a stretch of the imagination. Yet expectations remain high, especially for AI-driven stocks and other pockets of the market. The median forecast for U.S. stock returns in 2025 is still a healthy gain of 12%.
The geopolitical front is probably the most difficult sphere for making predictions. All of us know the narratives on U.S. global disengagement and China, but perhaps it’s best to leave item numbers one and two on our top 10 list of risks blank. That would be an acknowledgement that something totally unanticipated could come at us from left field.
Finally, let’s prepare to be surprised. Who knows? We all are expecting tariffs to rock our world, but if they are used mostly as a negotiation tool, as they were during Trump’s first presidency, maybe the hype will quickly fade away.
