By Saqib Iqbal Ahmed

U.S. Investors Brace for 2025 Changes

NEW YORK (Reuters) – U.S. investors are preparing for a variety of changes in 2025, including tariffs, deregulation, and alterations in tax policy, as President-elect Donald Trump returns to the White House. A pressing question is whether the U.S. economy can maintain its strong performance.

The leadership transition in Washington could significantly impact stocks, bonds, and currencies in the coming year, prompting investors to reassess their portfolios.

Forecasts indicate that stocks will continue to thrive, the dollar will keep its strength, and Treasury yields are likely to rise.

Key Market Themes and Segments

U.S. Exceptionalism

Investors anticipate that U.S. economic exceptionalism will endure in 2025, bolstered by strong consumer spending and a solid labor market, giving U.S. growth a more stable foundation compared to many developed market counterparts.

Potential tax reforms, such as reducing the corporate tax rate, could further support the economy by enhancing company earnings and stock market sentiment. However, despite unexpected growth in the euro-zone economy, its outlook remains shaky due to anticipated tariffs from the Trump administration, escalating trade tensions with China, and low consumer confidence.

"We do expect U.S. growth to outperform the rest of the world in 2025, supported by potentially favorable monetary and fiscal policy," said Sonu Varghese, global macro strategist at Carson Group.

The Fed

A central focus for investors in 2025 will be the pace of U.S. Federal Reserve rate cuts. The Fed's recent cuts followed aggressive rate hikes, and while further cuts are anticipated, their pace may slow.

Stocks have been buoyed by expectations of easier monetary policy; however, rising benchmark Treasury yields could dampen this momentum.

King Dollar

The dollar has shown resilience this year, with most FX market strategists predicting its continued strength. Factors contributing to the dollar's 7% gain include robust U.S. economic growth and rising Treasury yields, with Trump's tariffs likely providing additional support.

Potential inflation could hinder the Fed's ability to keep pace with interest rate cuts, bolstering the dollar further. Getting the dollar's trajectory right is critical for investors, given its pivotal role in global finance. A strong dollar may adversely affect U.S. multinationals and complicate inflation management for other central banks.

"Another year of spectacular gains in the dollar might break something in the global economy… further outperformance could be difficult to achieve," warned Karl Schamotta, chief market strategist at Corpay.

Volatility Watch

Recent events have illustrated how quickly market stability can shift to turmoil. U.S. stocks dropped sharply after the Fed projected fewer rate cuts than anticipated amid looming concerns regarding a potential partial government shutdown.

While global financial markets may generally maintain stable trading conditions into the new year, analysts caution that a volatility shock is overdue. Analysts at BofA Global Research predict that the record-low stock-market volatility witnessed in 2017 is unlikely to recur.

FX markets may experience increased volatility as tariffs and central bank actions come to the forefront. "The shock absorber in financial markets is going to be foreign exchange next year," noted Fredrik Repton, senior portfolio manager at Neuberger Berman.

Crypto Fever

The speculative enthusiasm surrounding bitcoin and crypto-related stocks from 2024 is expected to continue into 2025. "2024 was a banner year for speculation, morphing into a self-fulfilling frenzy recently," stated Steve Sosnick, chief strategist at Interactive Brokers.

Despite occasional setbacks, particularly after the Fed's December meeting, investors remain eager to capitalize on dips. Bitcoin reached a record high above $100,000 in December, spurred by expectations of a favorable regulatory environment for cryptocurrencies under Trump's administration.