Market outlook 2025: fiscal adventures vs. the bond market
TIAA Wealth’s investment chief expects goings-on in Washington, D.C., to reverberate bigly on Wall Street this year.
Summary
- In his 2025 Outlook report, Niladri “Neel” Mukherjee, chief investment officer of TIAA Wealth Management, says he’s bullish on the long-term prospects for the U.S. economy and stock market.
- But compared with 2023 and 2024, he anticipates more modest returns for stocks in 2025, as valuations were already quite high entering the year.
- In the bond market, Mukherjee expects above-average volatility as fixed-income investors grapple with conflicting interest-rate signals tied to inflation, trade policy and government spending.
A positive long-term outlook—but not without bumps in the road
Long term, there is a lot to like about the economy and stock market in the United States, according to Niladri “Neel” Mukherjee, chief investment officer of TIAA Wealth Management.
The United States remains the innovation capital of the world, highlighted by its dominance in artificial intelligence (AI). Jobs are being reshored from overseas supply chains, supporting U.S. wages and employment. Government policies are funding upgrades in infrastructure and manufacturing. Demographic tailwinds—specifically, millennials entering their prime years for new household formation—are boosting demand for housing and investment products. Meanwhile, international competition is falling further behind, with economic outlooks for Europe and China now clouded by shrinking populations and labor forces.
That said, Mukherjee does see potential bumps in the road for 2025. Compared to 2023 and 2024, he anticipates more modest returns for U.S. stocks and greater volatility for bonds and interest rates. With Republicans sweeping last November’s elections and now controlling the White House as well as the U.S. House of Representatives and Senate, a new paradigm for the economy, public policy and geopolitics is starting to emerge. “The Republication trifecta creates opportunities and risks for the economy and investors," Mukherjee writes in a
Volatility will be more prevalent, with markets sensitive to the policy choices made by the new administration. In such an environment, it’s important, according to Mukherjee, for retirement savers to stay invested and remain anchored to their long-term asset allocations, as per their financial plans.
Stocks and bonds
Within the equity market, Mukherjee generally favors U.S. stocks. Trade tariffs, a cornerstone of President Trump’s economic agenda, are a key risk for international stocks. In many countries, domestic demand is too weak to fully absorb domestic production—which is why those countries rely on strong U.S. imports to support economic growth. Any escalation of trade tensions would disrupt this dynamic, dampening growth prospects for China and Japan, for export-oriented economies in the Euro Area, and for emerging markets, such as Mexico and South Korea.
Within the U.S. stock market, Mukherjee’s enthusiasm for the growth sector is tempered by high prices. Earnings growth should be strong in 2025 as the ongoing build-out of AI, paired with the potential for corporate tax cuts and business-friendly deregulations under Trump 2.0, should prove beneficial to corporate bottom lines. As of December, however, the S&P 500 was trading at a price-to-earnings ratio of 22 times forward 12-month earnings, above its five-year average of 20 times and 10-year average of 18. With valuations already stretched, the upside for stocks will likely be dependent on the materialization of earnings growth.
Expectations for interest-rate volatility are tied to goings-on in Washington, D.C. On one end of Constitution Avenue, the Federal Reserve seems inclined to continue cutting interest rates. Inflation reduction may have stalled north of the Fed’s 2% target, but there has still been significant improvement. As measured by the Consumer Price Index, the inflation rate has fallen from 9.1% in June 2022 to 2.7% in November 2024, giving the Fed solid justification for monetary easing.
On the other end of Constitution Avenue, meanwhile, the Republican-controlled Congress seems committed to enacting President Trump’s tax, trade and immigration policies, which could work against the Fed’s efforts to lower interest rates.
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Taxes and tariffs under Trump 2.0
On the campaign trail, President Trump suggested eliminating income tax on tips, overtime pay and Social Security benefits. He also proposed cutting corporate income taxes and renewing most of the tax cuts from the Tax Cuts and Jobs Act (TCJA) that will expire at the end of this year.
More tax cuts would lead to bigger budget deficits and increased bond issuance by the Treasury. This could raise hackles from bond investors, who would demand higher yields in an attempt to impose fiscal discipline on Washington. This exact scenario played out in the United Kingdom in 2022. So far, growing deficit spending funded by increased Treasury issuance has not generated much reaction from the U.S. bond market, but it is something Mukherjee and his team are keeping an eye on.
Trade policy could also have inflationary implications since higher tariffs on imported goods would likely be passed along to consumers in the form of higher prices. Curbs on immigration could be inflationary as well, with a trimmed workforce exerting upward pressure on hourly wages.
These competing forces—Fed policy pushing rates down, while tax, trade and immigration policies pull upward—could lead to increased volatility in interest rates and bond yields.
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