As we step into 2025, investors find themselves navigating a complex landscape shaped by recent market trends, macroeconomic factors, and historical patterns. While uncertainty is a constant, the overarching message is clear: 2025 is likely to be "more of the same," characterized by volatility, corrections, and opportunities for growth.
Market analysts widely agree that 2025 will likely extend many of the themes that defined recent years. Since the bull market began a few years ago, equity markets have enjoyed steady growth punctuated by short-term corrections.
We expect continued—but uneven—growth. Volatility is an inherent feature of financial markets, and 2025 is unlikely to deviate from this pattern. Factors such as rising interest rates, geopolitical tensions, and evolving fiscal policies will contribute to market unpredictability.
Historical precedent shows that volatility often accompanies periods of economic transition. For instance, during the 1990s dot-com boom, rapid technological advancements created opportunities for outsized gains, but also wild market swings. Similarly, as sectors like AI, renewable energy, and digital finance drive today’s growth, corrections remain a natural part of market cycles. Investors should brace for short-term uncertainty while keeping a long-term perspective.
The current bull market, which began in the wake of the pandemic-driven downturn, remains in its early stages compared to past cycles. On average, bull markets last about 6-7 years, with some extending well beyond that. For example, the post-World War II bull market lasted 14 years, while the post-2008 financial crisis rally ran for over a decade.
We believe there is room for further growth in today’s market. However, investors should remain cognizant of downside risks, such as overvaluation in specific sectors or potential economic shocks.
Market cycles often end in euphoria, when valuations are stretched and investors throw caution to the wind. By contrast, the current environment is marked by cautious optimism rather than overconfidence.
The American Association of Individual Investors (AAII) Sentiment Survey, a reliable gauge of market mood, has yet to show the extreme bullishness associated with market tops. Historical patterns, such as those observed during the 2007 peak or the late-1990s dot-com era, show that markets tend to overheat when sentiment reaches euphoric levels. The relative caution among investors today suggests that this bull market is not at its end.
Renowned investor Sir John Templeton famously remarked that "bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." This insight remains a valuable framework for understanding where we stand in the current cycle.
The post-pandemic recovery began amidst widespread pessimism about the global economy. Over the past few years, skepticism has gradually given way to guarded optimism. However, euphoria—a hallmark of late-cycle markets—has not yet emerged, reinforcing the notion that the bull market has room to grow.
Concerns about America’s trade deficit have often made recent headlines, but history suggests that these fears are overblown. The U.S. trade deficit has been a persistent feature of the economy for decades, yet the nation’s GDP has grown substantially during this time.
For example, the trade deficit reached $676.7 billion in 2020, but GDP grew at an annualized rate of 6.7% by the second quarter of 2021, driven by strong consumer spending and technological innovation. This pattern underscores a key point: the U.S. economy’s ability to innovate and adapt far outweighs the significance of trade imbalances. Investors should focus on structural growth drivers rather than short-term trade data.
Lastly, the recent election of Donald Trump for a second presidential term introduces both unique headwinds and tailwinds for the markets over the next four years. Trump’s hallmark unpredictability makes it difficult to forecast which policies will take precedence and what their ultimate economic impact will be.
For instance, his first term saw significant tax cuts and deregulation that spurred economic growth, but also trade wars that created uncertainty for businesses. A similar mix of pro-growth policies and potential disruptions could define his second term. Investors should remain vigilant, as the unpredictability of policy shifts could contribute to market volatility while also presenting opportunities in sectors favored by the administration.
As we move through 2025, it’s essential to remain grounded in historical perspective and disciplined in an investment approach. The year will likely bring a mix of opportunities and challenges, but by understanding the dynamics of market cycles and maintaining a long-term view, investors can position themselves for success.
Note: Interlaken Advisors does not offer investment or portfolio management services.
Nothing herein is intended to be investment advice. All investments involve the risk of loss, including the loss of principal. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.