While it’s impossible to predict exactly what the future holds, it’s wise to consider the key factors that might influence the market’s direction over the next year.
Not so long ago, I explored the anticipated influences set to shape 2025. Among them were hopes for deregulation and tax reform initiatives by the Trump administration, potentially lower borrowing costs thanks to the Federal Reserve’s interest rate cuts, and improved profitability for publicly listed companies.
Recently, however, the possibility of lower borrowing costs has become uncertain, as the Fed has paused further rate cuts for the time being.
Another angle to consider when evaluating market prospects is to examine historical trends. One such trend currently shedding light is the presidential market cycle. This cycle examines stock market performance across the four years of a presidential term and has shown remarkable consistency throughout America’s history.
Historically, from 1928 to 2021, the market has tended to do significantly better in the second half of a president’s term compared to the first two years.
Interestingly, the pattern has also held during former President Joe Biden’s tenure. The S&P 500 only inched up 2.2% during his initial two years but then surged over 50% in the last two years.
### Uncertain Ambitions
Why do markets typically perform better in the latter half of a president’s term?
New presidents often enter the White House with ambitious agendas for domestic and international policy, stirring both hope and disruption in financial markets. With Trump’s return, often referred to as Trump 2.0, his administration is among the most ambitious, aiming for bold moves both within and outside the country.
His aspirations include acquiring territories such as the Panama Canal, Greenland, Canada, and the Gaza Strip, through various means. These notions are significant, as the last major U.S. territorial additions—Alaska, Hawaii, and Puerto Rico—date back to the 19th century, with few small exceptions since.
Domestically, Trump aims to reduce taxes and deregulate, aligning with typical Republican policy. Yet, he plans even broader changes, like restructuring the federal government and deporting millions of immigrants. Notable, and potentially troubling for corporate interests, are his threats and actions around imposing substantial tariffs on major trading partners and sectors such as steel and aluminum.
These tariff strategies are notably unsettling economic activities and the stock market. Recent unusual behavior in bond yields suggests investors fear the tariffs might spike inflation, prompting the Fed to reconsider raising interest rates.
Moreover, stock analysts are adjusting their earnings forecasts downward due to the prospect of tariffs and the price hikes they might trigger. According to Goldman Sachs, a 5-percentage-point increase in the U.S. tariff rate could slash S&P 500 earnings per share by up to 3%. Meanwhile, Bank of America predicts tariffs on China, Canada, and Mexico could reduce earnings by 8%.
### The Pattern May Hold
Given these dynamics, I suspect the four-year presidential cycle may persist, at least until markets gain more insight into Trump’s strategies.
Looking ahead to 2025, expect a rollercoaster of volatility. Brace yourselves.
