Do This to Prepare Your Portfolio for 2025

The big investment firms are rolling out their stock forecasts for 2025, and most are bullish on the US markets heading into the new year.

Morgan Stanley and Goldman Sachs have each issued analyst notes calling for 10% growth for US stocks in 2025. Analysts at both firms cite stable revenues, stronger profit margins, and higher share growth tied to the Federal Reserve's pivot to lower interest rates in the second half of 2024, a trend that should continue into the new year. All told, Morgan analysts anticipate that 2025 will see a robust 13% earnings-per-share growth rate.

Even so, there are significant hurdles for the market to clear next year.

Here’s how to position your portfolio for 2025’s risks and opportunities.

Citigroup analysts also shared a mostly positive outlook for stocks in 2025 in a December 6 research note. Standing at 6,075 as of December 11, Citi market seers are calling for the S&P 500 to land at around 6,500 in 2025, with a 6,900 best-case scenario and a 6,100 worst-case outlook.

Like Morgan Stanley and Goldman, Citi’s largely bullish S&P 500 call points to good earnings growth, a solid US economy, and expanding demand for US stocks.

Even so, Citi also cites headwinds in the form of higher stock valuations, Fed rate policies, a new administration in Washington, D.C., and growing pains for AI, which could crimp market performance. "Ongoing soft landing and Artificial Intelligence tailwinds now interact with Trump policy promises and risks," Citi analysts stated in the December note.

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Market mavens seem to broadly agree with investment banks’ bullish 2025 outlook—but not on everything. Here are the big issues facing stock market investors in 2205 and what those issues could mean for their portfolios.

Team Trump is in power. A changing of the guard on 1600 Pennsylvania Avenue should bode well for stock market investors, but there are some caveats.

"The S&P 500's advance of 28% year to date (through November) is the second strongest 11-month start to a calendar year since 1997 and one of the best of all time," says Scott Glasser, chief investment officer at ClearBridge Investments. "With a trailing 12-month return of 34% – the 95th percentile of one-year rolling returns since 1989 – it's hard to describe this run as anything but spectacular."

The incoming Trump administration shouldn't get in the way of more market growth.

"With Donald Trump expected to bring a potentially lower tax and lighter regulatory touch to his presidential second term, the market expects a rise in productivity and unleashing of capital investment over the next several years," Glasser says.

That touch should aid some stock sectors more than others.

"In our view, the initial impacts of Trump's victory will likely mirror 2016, where value, small capitalization, and cyclical stocks were prioritized," Glasser says.

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A "wave" of new stock issues. In 2025, a wave of M&A and IPOs will be sound for markets generally and also create liquidity for shareholders, says Rebecca Kacaba, CEO at Toronto, Canada-based Dealmaker. " Additionally, I anticipate that more companies will capture the power of what retail capital can mean for their business," Kacaba says. "In 2024, we saw examples of this with Reddit's Direct Share Program (DSP) to the company's power users."

Kacaba also likes long-term market plays that investors routinely favor in bull markets.

"I'm bullish on growth stocks with a high percentage of retail shareholders because many of those investors are driven by community, affinity, passion, and purpose to the brands they invest in," she says. "We consistently see the community nature of retail capital to be extremely powerful."

Rising threats. Other market gurus see potential threats ahead, with some leading economic lights potentially hindering a booming S&P 500.

"Heading into 2025, I see a lot of bullish sentiment in the markets, but some undercurrents of trouble in the economy," says Jason DeLorenzo, founder of Volland, an options market data services firm. "The FOMC is trying to pivot to a dovish cutting cycle to try to head off an increase in unemployment before it impacts economic growth (also known as a soft landing)."

For that reason, DeLorenzo thinks the markets can start on a bullish note in 2025. However, as Trump’s policies of tariffs, a shrinking government, and deportation contract the economy and raise labor prices, 2025 can end on a sour note. "Additionally, private, corporate, and public debt can cause liquidity issues in bank reserves," he adds.

AI is in the limelight. Artificial intelligence stocks may transition down the sector food chain in 2025, with smaller industry up-and-comers shining.

"While AI stocks are a bit overvalued at this time, AI is a technology that can revolutionize humanity," DeLorenzo says. "Large-cap AI companies like NVDA are a bit overvalued and need to pull back some as competition eventually enters the market."

DeLorenzo believes AI startups and innovative AI companies "can increase swiftly "in value as large caps look to stay on the cutting edge "of the AI revolution.

Stock valuations are increasing, which isn't helping stocks, but that's usually a bearish signal. "Inflation has caused a massive rise in stocks, and something that is not going away in the beginning of 2025," he adds.

Wither the Fed? Everyone on Wall Street – and across the fruited plains, for that matter – wants to know what the Federal Reserve will do with interest rates next year. Almost certainly, any pivots or pullback on rates should roil the markets.

"The biggest issue influencing the stock market in 2025 is likely to be the same issue that is dominating the markets today, and that is Federal Reserve monetary policy and interest rates," says Robert R. Johnson, PhD, CFA, CAIA, professor of finance, Heider College of Business, Creighton University. "Conventional wisdom is the Fed is going to continue to lower rates in 2025, and that is a tailwind for stocks."

Johnson points to The CME Group, which compiles interest rate views via its Fed Watch Tool based on Fed Funds futures contract prices, as a beacon of information right now.

"According to the CME's FedWatch Tool, the probability of the fed funds rate being at least 75 basis points lower at year-end 2025 than today is 76.6% in early December," Johnson says. "The probability that the fed funds rate will be at least 100 basis points lower at year-end 2025 than today."

Most stock analysts say the Fed will cut rates substantially during 2025, but nobody knows for sure, maybe even FMOC members.

"Having said that, this Fed has exercised great caution over the last few years — both in raising and in cutting rates, and I believe that philosophy will continue," Johnson notes. "If the proposed Trump tax cuts and increased tariffs serve to exacerbate inflation, this Fed would likely change course and exercise more caution."

Here are some stock sectors that market experts like in 2025

Technology and robust retail plays draw high marks from market experts.

"At the beginning of 2025, tech stocks can continue to grow after a pullback,"  DeLorenzo says. "But towards the end of 2025, I like defensive stocks and energy transportation stocks. Large-cap health care will be a good sector to be in, as well as commodities since many imported commodities will rise in price when tariffs are implemented."

Companies with a high percentage of retail shareholders, such as Tesla, should excel, too. "That's because these companies have fervent communities, and that's a big driver of the stock," Kacaba says.

To curb risk if events get volatile in 2025, Kacaba advises an alternative approach.

"While diversification is usually what everyone advises, I suggest considering private offerings as part of that strategy," she says. "These investments often come with lower market valuations and longer time horizons, which can help balance the volatility of growth stocks and create a more resilient portfolio."

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