Tech’s Ascent, Tariff Tensions, and the Fed’s Pause: What to Expect in 2025

What’s in store for 2025? Tech dominance, financial stock challenges, Fed policies, and Trump’s influence are all on the table. Some thoughts in the closing days of 2024.

Comfy thoughts. You see me in my starched collars and bowties on the regular. If you haven’t, just Google me. 😉 Your first thought is probably, “wow, that looks uncomfortable.” First off, you must understand that the bowtie is nothing new for me and it has been my trademark on and off Wall Street for over three decades, so I am kind of used to it. Here is a little secret, getting dressed up for work helps keep me focused on well… my work. As I am almost always working, I am almost always dressed for work, except for the period between December 24^th and January 2^nd. It is during that time that I take liberties with my wardrobe. In complete contrast to my normal appearance, you can find me in my home office wearing flannel pajama pants emblazoned with the logos of mine and my kids’ alma maters, topped with soft T-shirts, and the consummate finance bro Patagonia vest (aka Patagucci in Wall Street talk). Hopefully, you will forget that image, but first I will tell you why I make such a wardrobe choice.

This is an interesting time of year when most institutional investors are not in front of their screens, quite possibly not even in the country. The only folks left are the eager, the desperate, the neophytes, and… well, me. The eager cannot wait until 2025 to start building their portfolios for the first half of the year. They have well-formed theses, and they find little reason to wait. The desperate either lost so much money in 2024 or they sat on the sidelines waiting for an opportunity to get in only to watch the market climb higher and higher, missing many opportunities. The neophytes don’t know any better and a trading session is a trading session. And those neophytes, even if for the wrong reasons, are correct. There are around 252 trading days in the year, and there is no recognizable research that proves that anyone trading day is better than another. But they can be different. It is true that this week is almost always marked by low volumes, very little economic data, and a dearth of business news, because corporate life is also on ice this week.

For me, it is a week to get my bearings. Reflect and project. I have my thesis already. I am expecting a barrage of information starting on January 21^st (the day after inauguration) that will hopefully provide me some intel on just how much of the election season and Twitter/X banter was saber rattling and how much was real. I have already decided that even though trade restrictions may hamper it, it has had a great run, it has been somewhat shaky lately, that the broader tech sector is by far the sector that has the most potential upside in the next few years. Of course, that is driven by AI—the entire ecosystem. That’s right, from chips, to servers, to infrastructure, to security, to software, all the way up to agents—the whole darn thing. I know that there are many that expect earnings growth for these companies to slow in 2025, but their ability to grow beyond the rest of the market is what I am after. Now, to be clear, not all companies are equal, but there are plenty of standouts that have great potential upside.

I decided back in October that certain financial services sector stocks would certainly benefit from the incoming administration combined with the macro environment. Here too, not all stocks are created equal. Finding the best of the best takes some homework, though the big name-brand ones are poised to benefit the most, and unfortunately, they are legitimately expensive. Banks, unlike growth companies require a different type of analysis. Growth companies allow for more, let’s say, freedom to attribute unknowns to “growth potential,” where banks are more constrained by their balance sheets. Of course, there is plenty of room for growth and positive surprises, but not at the levels experienced by, say, an Alphabet or a Broadcom.

We all know that diversification is important to protect against idiosyncratic risk, also known as company-specific risk. If all you owned was Super Micro (SMCI) this year, your range of emotions would have been extreme, to say the least. If you owned a broader set of companies, SMCI would only be one of many, and its volatility and risk would be limited, only having a small effect on your overall portfolio’s behavior. HOWEVER, too much diversification may hold your portfolio back, causing you to underperform the market. There are eleven sectors, and each has good and… not so good stocks. You need exposure to all of them, though you may choose a few to tilt into—the ones with the most potential. Within these “other” sectors, the same rules apply. A good company which has the best potential for success is a good company. You know how to select those. It starts with doing your homework, and it ends with patience and focus, and above all, discipline.

I look at the Fed, who has basically signaled that it is done with the rate cutting completely until something bad happens. Like an economic downturn, a spike in the unemployment rate, some sort of extreme fiscal policy event, protracted trade war, etc. Inflation is not coming down anytime soon, because Housing and Healthcare inflation simply do not respond to restrictive monetary policy. The former will remain in suspended animation until short-maturity rates, like SOFR, come down significantly. That is in the hands of the Fed. The later requires some combination of regulation and deregulation that this incoming administration and Congress will surely tackle; that will not happen overnight. That all means that any more rate cuts will probably not happen until the second half of the year, if at all. If they do, it will be one or two 25 basis point cuts.

So much for the rebirth of the Fed Put, which has literally dissolved in our hands over the past several months. But alas, we will have the potential for a Trump Put, starting in late January. Don’t look at me like I just said something taboo. It is well known that the incoming President looks to the stock market as a personal scorecard. He has a job to do, he has committed to tackling some tough issues. He is not likely to put the market above his public agenda, though he has the ability to make measured moves and keep the market well-informed. He is likely to take this approach, and that is a positive thing for stocks. A put, maybe not, but positive for sure.

Will it be enough to keep stocks on their current, positive, secular trend? That is tough to say at this point. As I said earlier, at this stage, attempting to forecast what actual policies happen is a fool’s errand. We will just have to wait and see and respond accordingly when we see it. Will the Fed remain independent and alter policy in response to any negative policy moves? Thankfully, yes. The Fed did it in 2018 and it will likely do it again. This time around, with Fed Funds at 4.5%, still restrictive, the FOMC has lots of dry powder.

Unfortunately, the bull market has other detractors, even if the Fed and President Trump play along. There is a new breed of bond vigilantes who certainly have the ability to derail any rally, and they have proven it. Have you seen 10-year yields lately? That’s right, this morning they are at 4.6%. A year ago, they were lower, at 3.8%. Why are they higher if the Fed is in easing mode? That’s because the Fed does not control longer maturity yields, traders do. When they are expecting inflation or an increase in the national debt, they sell, causing yields to climb. The incoming administration is pledging aggressive stimulus (tax cuts) and aggressive tariffs, both of which are unquestionably inflationary. That’s two strikes. In order to provide the stimulus, the Treasury has to borrow more money. That supply increase in bonds drives prices down and yields higher. That’s three strikes—you’re out!

The original bond vigilantes from the 1980s pushed yields higher to protest high inflation and increase deficit spending. Today’s vigilantes do the same, but they can have a more pronounced impact on stocks. Valuations are unarguably stretched, and easily questioned, even if some are justified. These days, growth stocks are considered to be interest rate sensitive. It has to do with the theoretical value of a stock’s price based on the present value of cash flows. In the 1980s, only high dividend stocks and sectors were considered to be interest rate sensitive. They still are, but if you add growth stocks to the mix, well, that’s just about anything you would want to own.

To sum it all up, there is still much upside for tech stocks. Certain financial services stocks looks like they will have some legs but will have limited upside as they have already run up quite a bit. There are also plenty of other stocks and sectors that have upside but expect to go through a lot of pencils to paper to find them. Do not forget them, because you will need diversification to avoid sea sickness. The Fed will likely be in the slow lane until the first fruits of summer ripen. Respond accordingly to the policy NOT politics. And beware of the bond vigilantes; they may be boring and nerdy, but they can shut down the party quicker than you can say “what the %*#&?.” But wait, the year is not over yet! I have a drawer full of clean and comfy pajama pants. I still have an end of year report to write, and I promise you a “dos and dont’s” video for 2025. Stay tuned.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday in a low volume session which saw indexes competing in a tug of war between losses and gains. Checked out traders might have missed the weekly employment report show that Continuing Jobless Claims, which have already been in an uptrend since April, spiked higher yesterday, indicating that unemployed workers are struggling a bit more to get back to the plough. It is indeed a sign that the labor market is slackening; can you hear that Fed?

NEXT UP

• No releases today, but next week, we will get some more housing numbers and PMIs. Check back in on Monday for calendars and more details.

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