Last year saw a significant expansion of the economy: inflation fell, as did interest rates. Unemployment rates remained low and the S&P 500 rose more than 20%. But with a new administration incoming, changing financial policies, and continued recovery from the pandemic, what will 2025 hold for us?
Check out our predictions for the coming year and how your personal finances may be affected.
A few months ago, many people expected mortgage rates to plummet throughout 2025. Now, as economists react to uncertainty about how markets will respond to a Trump presidency, the outlook for rates is less optimistic. Experts at Zillow, Redfin, Fannie Mae and the Mortgage Bankers Association predict rates will remain above 6% in 2025.
Read more: When will mortgage rates go down? A look at 2025.
Home inventory and prices
Unfortunately, consumer demand for housing remains far greater than supply. According to Freddie Mac, approximately 5.8 million new homes have been built in the United States over the past four years, but demand has increased at about the same rate.
“It took us about a decade to get into this housing deficit, and it will probably take us about a decade to get out,” said Rob Dietz, chief economist at the National Association of Home Builders.
When there are more potential home buyers than homes for sale, the country is in a seller’s market, which tends to drive up home prices. This is good news for existing homeowners realizing home equity, but bad news for buyers trying to find an affordable home.
Go deeper: Real estate market 2025: is it a good time to buy a house?
Next year promises to be interesting for investors. In the United States, a business-friendly administration, lower interest rates and potential corporate tax cuts can support earnings growth. But high valuations have many investors nervous.
The S&P 500 should produce modest returns in 2025, with volatility along the way. Marta Norton, chief investment strategist at retirement plan provider Empower, expects large companies to benefit from improving macroeconomic conditions and the continued adoption of artificial intelligence.
Norton cites valuation as an “important countervailing force.” Valuation in this context refers to stock prices relative to earnings and other business fundamentals. When valuations are high, investors pay more for earnings, usually with the expectation of strong growth. If growth disappoints, volatility can ensue.
Small and Mid Cap Stocks in 2025
Small- and mid-cap stocks can outperform the S&P 500 in 2025. The driving force will be the huge benefits that smaller companies should reap from lower interest rates and potential corporate tax reductions.
According to David Rosenstrock, director at Wharton Wealth Planning, small- and mid-cap companies are more likely to rely heavily on variable-rate debt, while larger companies prefer fixed-rate instruments. Variable rate borrowers benefit immediately from rate reductions because their obligations change price quickly. Existing fixed-rate debt does not adjust to lower interest rates until it is refinanced.
Tax cuts may favor small- and mid-cap companies because the majority of their income is typically earned in the U.S. Rosenstrock explains: “Reducing the corporate tax rate may provide greater relief for these asset classes that for large caps, whose geographic sources of income are more diversified.”
Read more: Stock market outlook for 2025: 4 experts say
When it comes to banking, experts say consumers can expect changes in the new year, particularly when it comes to the federal funds rate.
“We expect the Fed to take a more gradual approach to easing next year, initially transitioning to 25 bp (basis point) cuts every other meeting before pausing mid-year. We anticipate that the Federal Reserve will cut 25 basis points in both the first and second quarters of 2025, placing the target federal funds rate between 3.75% and 4.0%, and then we anticipate that the Federal Reserve will a pause until the end of the year,” said Sophia Kearney-Lederman. senior economist at FHN Financial.
“Our 2025 federal funds rate forecast is based on two key assumptions: inflation will rise in the middle of next year, reflecting exceptional tariff pressures, and the unemployment rate will fall due to changes in immigration policy, including deportations on a smaller scale. than suggested in the electoral campaign. This combination of rising inflation risk and falling unemployment rate risk is what we expect will cause the Fed to pause the easing process in 2025.”
If the federal funds rate falls as expected, the interest you earn on savings accounts, money market accounts, high-yield savings accounts, and CDs could also decrease.
Read more: A look at the federal funds rate over the last 50 years
Since the Federal Reserve began lowering its federal funds rate target range earlier this year, we’ve already seen some credit card interest rates drop. In the new year, experts expect the Federal Reserve to cut rates further, but we will have to wait and see how quickly they will do so and how low rates will be.
Related: How does the Fed affect your credit card interest rate?
At the Yahoo Finance Invest 2024 conference in November, Federal Reserve Bank of Minneapolis President Neel Kashkari said the Fed “will have to wait and see what the data says” to determine its interest rate decisions. in 2025. Recently, some expert predictions say that the frequency of rate cuts could slow down in 2025.
If the Federal Reserve cuts rates further, credit card interest rates will likely continue to fall as well. But just like in 2024, that doesn’t mean you’ll see a significant difference in your APR. Average credit card interest rates remain above 21%. Even if the Federal Reserve’s target rate range falls by a full percentage point or more, you shouldn’t wait to start paying down your balances; That won’t make a significant difference in your APR, and waiting may leave you with even higher rates. growing debts.
Read more: What credit card holders need to know by 2025