Market briefs
Breaking insights on the economy, market volatility, policy changes and geopolitical events
Are interest rate cuts off the table this year?
INVESTORS EXPECTING A PAIR OF INTEREST RATE CUTS by the Federal Reserve (the Fed) in 2025 are now adjusting to the prospect of a single cut — or none. A surprisingly strong labor report released January 10 showed the economy adding 256,000 jobs.1 While good news for workers and the economy, the report intensifies ongoing concerns over sticky inflation.
“With inflation likely averaging around 3%, rather than the 2% target, the Fed has shifted from a rate-cutting approach to a wait-and-see, watching from the sidelines approach,” says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank. “Any future cuts will be driven by data rather than by market hopes and expectations.” Based on current data, BofA Global Research now believes the Fed could put cuts on hold for 2025, Hyzy notes.
Here's our take on what this means
The delays are a major disappointment for investors who originally expected up to four additional cuts in 2025.2 Lower rates reduce the cost of borrowing for businesses and consumers — a boon for rate-sensitive industries like housing, automobiles and small businesses. Yet after a years-long battle with inflation, the Fed is wary of cuts that could prompt a new spike in prices. They’ll be closely monitoring economic data such as inflation, housing prices and unemployment, as well as financial markets. Some reason for cautious optimism: Core inflation and wholesale prices both rose by a lower-than-expected 0.2% in December from the previous month.3
The outlook for investors
Rate uncertainties have contributed to recent stock market weakness, Hyzy notes. “After historic gains in 2023 and 2024, the equity ‘fizzle’ that started in December could extend into February, with periodic volatility.” At the same time, “investors should avoid reading too much into the timing of individual cuts,” Hyzy believes. “As the year progresses, we expect markets to refocus on the fundamental strengths of the U.S. economy, such as consumer spending, innovation and, especially, corporate earnings,” he adds. “We still expect double-digit earnings growth for 2025 into 2026.” Investors should look for potential buying opportunities amid early-year volatility and emphasize diversification across and within asset classes.
1CNN Business, “Job growth skyrocketed in December, boosting one of the strongest labor markets in US history,” Jan. 10, 2025.
2Yahoo Finance, “Fed cuts rates by quarter point, scales back cuts for 2025,” Dec. 19, 2024.
3CNBC, “10-year Treasury yield pulls back after core inflation is light in December,” Jan. 15, 2025; CNBC, “Inflation watch: Wholesale prices rose 0.2% in December, less than expected.” Jan. 14, 2025.
Could the bull stumble? 5 potential risks to watch
STRONG CORPORATE EARNINGS, DISRUPTIVE INNOVATIONS and resilient consumers: It all adds up to a favorable environment for U.S. equities and investors in 2025 and beyond. So, what could go wrong?
“Markets are never linear,” says Joe Quinlan, head of Market Strategy in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. “Even when things look bullish, it’s important to consider risks that could cause the bull to stumble.” Below are five possible scenarios to keep an eye on.
Put these possible scenarios on your watch list
1. Higher-than-expected inflation delays and derails rate cuts, rattling the market near-term. Inflationary expectations have shifted higher in early 2025, triggering a rethink and reset about U.S. monetary policy. The market is now pricing in one rate cut this year,1 while BofA Global Research economists expect the Fed to pause altogether in 2025.
2. Gridlock thwarts policies. Many expect single-party control in Washington to bring market-friendly tax and regulation changes in 2025. Still, enacting legislation is complex, especially with a slim House majority, and the shape and timing remain fluid.
3. AI payoff takes a while. Amid massive capital investment in artificial intelligence (AI) infrastructure, just 6% of U.S. firms currently use AI to boost productivity and produce goods and services.2 While the transformative benefits are real, an open question is how quickly AI will drive substantial economic growth.
4. Relations with China worsen. With the U.S. and China already at odds over trade, technology and Taiwan, tariffs and retaliations could deteriorate a relationship still vital to both economies.
5. Deficits unnerve markets. A dynamic economy and global appetite for U.S. Treasurys have so far enabled the federal government to manage its finances despite surging budget deficits. Without budget reforms, though, growing deficit concerns could disrupt markets.
Investor Rx: Take a balanced approach to risk
“Be aware of risks but don’t be constrained by them,” Quinlan advises. “Investors should expect ‘chop and churn’ and stay invested as these forces play out. Given the underlying positives, market pullbacks may offer opportunities to add high-quality assets that fit with your long-term strategy.”
For regular updates on potential risks and opportunities throughout the year, tune in to the CIO’s Market Update audiocast series, and follow Merrill on Instagram and Facebook.
3 New Year’s Resolutions for investors
AS AN EVENTFUL 2024 WINDS DOWN, 2025 is shaping up to be a pivotal year for investors, believes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Resilient U.S. corporate earnings, ongoing interest rate cuts (though likely at a slower pace than previously expected, as the Federal Reserve indicated when they announced their third cut of the year this week), a return to a more normal bond market, disruptive innovation and an emerging ‘asset-light’ economy should combine to create a powerful launchpad for a new era of potential growth,” he says.
For many useful suggestions on how you can prepare, tune in to the 2025 Year Ahead Outlook webcast, “Get ready for what’s next,” if you haven’t already watched it. Another good way to ring in the New Year, financially? Consider making the following three investing resolutions.
1. Invest steadily
“Some investors look for the perfect time to enter or re-enter markets,” Hyzy says. “The best approach is to invest steadily.” Past performance is no guarantee of future results, of course, but since early 2023 the economy has proven far more resilient than economists expected.1 Equity investors who stayed out of the markets fearing a possible recession would have missed S&P 500 gains of 24% in 20232 and more than 26% in 2024 (as of Dec. 11)3.
“We expect continued economic and market growth in 2025,” Hyzy adds. “But there are risks, and short-term swings are unpredictable. Those uncertainties only reinforce the importance of a disciplined strategy built around your personal goals.” Dollar cost averaging — investing a fixed amount at regular intervals, no matter what the markets are doing — can help smooth the effect of ups and downs.
2. Diversify, diversify, diversify
“We talk a lot about the need to diversify across and within asset classes. That’s especially important for stock investors in 2025,” notes Marci McGregor, head of Portfolio Strategy for the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. “While the seven largest companies in the S&P 500 currently represent about 30% of the index’s market capitalization,4 improving fundamentals among the other 493 on that list could potentially create broader opportunities,” McGregor says. “Diversifying your stock portfolio could help you weather volatility and capture new areas of growth,” she adds.
3. Go longer in your bond holdings
Investors lately have enjoyed attractive cash and short-term bond returns thanks in part to a relatively rare, inverted yield curve with short-term yields outpacing long-term yields. “We expect the yield curve to normalize in 2025 with long-term rates steepening relative to short-term rates,” says Matthew Diczok, the CIO’s head of Fixed Income Strategy. “You may find that longer-duration bonds offer returns above inflation while helping to mitigate volatility risks in your stock portfolio.”
A LOOK BACK: TEST YOUR 2024 MARKET KNOWLEDGE
Tap + to select correct answer and learn more
How many record-high days has the S&P 500 experienced in 2024?5
1The New York Times, “Economists predicted a recession. So far they’ve been wrong,” Jan. 26, 2024.
2MarketWatch, “Stock Market today: S&P 500 ends slightly lower but posts 24% 2023 gain,” Dec. 29, 2023.
3MarketWatch, “S&P 500 Index,” Consulted Dec. 11, 2024.
4Chief Investment Office, Viewpoint, December 2024.
5As of Dec. 6. Reuters, “S&P 500, Nasdaq hit record closing highs; Lululemon gains, data supports rate cut view,” Dec. 6, 2024.
Fed rate-cut forecast takes markets by surprise
IN A WIDELY EXPECTED MOVE, THE FEDERAL RESERVE (the Fed) announced their third and last rate cut of the year yesterday — another quarter-point drop. While the announcement was expected, remarks made by Fed chair Jerome Powell indicating a slower pace of cuts, from an expected four to two in 2025, poured cold water on the equity markets. By market close, the three major stock indices were down 2.5 to 3 percent or more for the day, while Treasury yields climbed.1
“Based on the latest data on inflation, the economy and the job market, the BofA Global Research team was already forecasting only two cuts for 2025,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Clearly, many market participants expected more.”
Why did the markets react the way they did?
Investors have been looking forward to the potential for continued strong economic growth, healthy corporate profits and premium stock valuations in 2025, says Hyzy. The Fed’s data-driven forecast, based on uncertainty around the future path of inflation and the labor market, pushed the yields on Treasurys higher and affected equities, particularly in sectors most sensitive to high interest rates, negatively. High-growth equities and shares in sectors sensitive to high rates led the market declines, notes Hyzy.
What’s next — and what can investors do?
“Equities have already begun to bounce back, but there’s little doubt that investors will continue to remain on edge, especially with a lack of clarity around a possible government shutdown causing more volatility,” notes Hyzy. But, amid the uncertainty, some things haven’t changed. “As always, it’s important to stay diversified and focused on your goals,” he adds.
“We still have high conviction in our themes of higher economic growth and profits for 2025, driven by increased productivity, a more normal yield curve, wider participation across the equity markets, a positive view on small- and mid-cap shares, and an emerging asset-light era that will benefit companies more resistant to interest-rate fluctuations.” In fact, he adds, “A short-term reset, such as we’ve just seen, only creates a stronger base from which to begin 2025.”
For more insights on how you can prepare for risks and opportunities in the year ahead, watch our Outlook 2025 program “Get ready for what’s next.” To learn more about this week’s Fed decision and resulting market volatility, read the latest Investment Insights report, “Fed flashes yellow.”
Get ready for the asset-light economy
IN THE INFORMATION AGE, CORPORATE DOMINANCE no longer necessarily means having the biggest factories and longest production lines. The financial edge increasingly goes to companies with fewer fixed assets and greater flexibility, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “As we look ahead to the new year, the asset-light economy is one of our key growth themes for 2025 and beyond.”
The asset-light advantage
“Compared with manufacturing and other asset-heavy industries, asset-light companies — many of them in the tech and healthcare sectors — generally are more focused on intellectual property than real-world assets, and they have more capital to spend on high-growth areas of their businesses,” Hyzy says. With less need for credit to finance fixed assets, they’re more resistant to interest rate fluctuations and they are often less labor-intensive. “An economy increasingly dominated by asset-light companies could help drive long-term growth and an extended bull market for investors,” Hyzy believes.
“The asset-light economy should gain momentum in 2025 and 2026, thanks to some economic bright spots we see developing,” he says. “The rapid advance of artificial intelligence and other technologies is already bringing greater productivity and operating leverage to companies across industries. And markets generally are rebalancing away from dominance by a small handful of companies, leaving more room for younger asset-light companies to grow.”
But, even as their share of the economy diminishes, asset-heavy industries will remain essential, notes Marci McGregor, head of Portfolio Strategy for the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. In fact, thanks to technology’s enormous need for energy and other resources, asset-heavy companies could even experience a boost as they help to meet the need for more infrastructure to power the asset-light economy.
How investors can prepare
“Big picture, asset light’s increasing dominance, with its potential to drive higher productivity and profits, is good for the economy and markets,” sums up Hyzy. But, notes McGregor, “Valuation of these companies can be a challenge, and that’s something investors need to think about in the lens of this new asset-light world.“ As always, it’s important to maintain a diversified portfolio.
For a deeper look at the asset-light economy and what it could mean for your investments in the year ahead, read the CIO’s December Viewpoint, “2025 Year Ahead: The Advancement of the Asset-Light Era.” And be sure to tune in to the Outlook 2025 program “Get ready for what’s next” for a full view of what to expect across sectors, industries and asset classes in the new year and beyond.
New political leadership and your portfolio
A NEW ADMINISTRATION IS POISED to take over the government in January, with one party controlling both the White House and Congress (with slim margins) and many major policy shifts, from taxes to tariffs and more, under consideration. So, naturally, investors have questions: Will there be new market winners and losers? Could the post-election rally last? And how might our resilient economy be affected?
The markets tend to care more about profits than politics, notes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. That said, he adds, “there’s no question that some of the policy changes being considered have the potential to benefit certain sectors and asset classes more than others.“ Still, he continues, “it’s important to remember that there are checks and balances in both the markets and government as money moves around the globe. Change is a constant, but we continue to believe that the market drivers are already in place for another extension of the bull market cycle over the next five to 10 years.”
The video above features Hyzy’s wide-ranging post-election conversation with Savita Subramanian, head of U.S. Equity & Quantitative Strategy for BofA Global Research, and Jim Carlisle, Public Policy Executive for Bank of America.
Watch it for insights on ways you can prepare for the potential changes ahead. And be sure to tune in to the Outlook 2025 webcast “Get ready for what’s next” on December 12 for more tips to help you navigate the markets in the new year.
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