Despite uncertainty stemming from a possible recession, U.S. election, and geopolitical tensions, 2024 proved to be an impressive year for the economy and financial markets. At first glance, it appears the Federal Reserve has successfully navigated an elusive soft landing. But as we look ahead to 2025, it’s impossible to ignore the growing economic disparity shaping the American experience. The gap between the wealthiest Americans and the rest has never been more pronounced in the postwar era, with implications for both the economy and financial markets.

The Economic Divide

For the top 10%, and especially the top 1% of Americans, wealth has reached unprecedented levels. Real estate, stocks, and other assets have soared to record highs, fueling continued consumption even as inflation persists. These individuals typically have secure financial futures that allow for spending and investing with confidence.

In contrast, the bottom 90%, particularly the bottom 50%, are struggling under the weight of rising costs. Essentials like rent, insurance, and groceries have become increasingly unaffordable, making the American dream feel out of reach. This economic divide was a major topic leading into the 2024 election, with many questioning how an economy described as “strong” could feel so unstable for so many.

The juxtaposition of these realities—robust spending by the wealthy and economic strain for the majority—has created a unique market dynamic. The wealthiest Americans hold the bulk of investable assets, and their appetite for risk remains strong. This demand for assets has driven the prices of stocks and other investments to historical highs.

Valuations at a Crossroads

While U.S. equity markets experienced double digit earnings growth in 2024, it also saw double digit multiple growth. As we enter 2025, the S&P 500 trades at valuation levels only exceeded by the 1999 dot com bubble. Elevated valuations have historically signaled a high risk of lower returns over the following 5-10 years. Other asset classes such as real estate also remain near all-time highs, and speculative markets, like cryptocurrency and collectibles, continue to attract interest despite extreme volatility.

This isn’t to suggest a market crash is imminent—far from it. But history shows that markets can only defy gravity for so long. Investors should temper expectations for outsized returns and prepare for more normalized outcomes.

This environment underscores the importance of diversification and discipline. Concentrated exposure to overvalued assets can be risky, especially if the market environment shifts. Balancing portfolios with dividend paying stocks, high-quality bonds, and alternative investments can provide a hedge against volatility.

2025 Economic Outlook

For the broader economy, the gap in economic experience between the “haves” and “have-nots” presents a challenge. Consumer spending, the backbone of the economy, is increasingly bifurcated, with affluent households driving growth while many others struggle to pay debts.

Despite these challenges, the U.S. economy remains resilient. GDP growth is expected to moderate to around 2% in 2025, supported by strong labor markets, innovation in AI and manufacturing, and robust consumer spending from higher-income households. However, key risks loom:

Inflation and Interest Rates: While inflation has moderated, it remains a concern, especially if fiscal policies or tariffs reignite price pressures. The Federal Reserve’s rate cuts aim to stabilize growth, but the pace of further easing will depend on inflation trends.

Policy Uncertainty: The re-election of President Trump brings pro-business policies like tax cuts and deregulation but also the potential for disruptive tariffs and immigration reforms.

Global Pressures: International markets face headwinds, with Europe contending with trade uncertainty and China navigating property market struggles. Conflicts in eastern Europe, the Middle East and Africa remain unresolved.

2025 Market Outlook

Stocks: Positioned for Modest Growth

Stocks remain a key component of building long term wealth, but valuations near historical highs suggest caution is warranted. Mega-cap technology stocks, which led the market in recent years, may face headwinds as valuations catch up with fundamentals. Broader market participation in equity asset classes like dividend stocks, small caps and overseas offers opportunities for diversification.

Bonds: A Stabilizing Force

The bond market’s return to a more traditional environment presents an opportunity for income-focused investors. With cash rates expected to stabilize in a neutral range of 2.5% to 3%, high-quality bonds and income strategies that yield more than cash can provide reliable returns while mitigating risk.

Alternative Investments: Thinking Outside the Box

As traditional markets face valuation pressures, alternatives like hedged strategies, private equity, private credit, and commodities offer attractive diversification opportunities. These assets, which are less correlated to traditional capital markets, can help investors navigate volatility.

Final Takeaways

The economic and market environment in 2025 is poised for continued growth, but risks remain elevated. Optimism for a boom in productivity which could support current valuations must be balanced with the possibility that the current environment may be more analogous to 1999. In the latter scenario, a negative economic or geopolitical event could expose vulnerabilities within the market.

We address this uncertainty by balancing optimism with realism. Understanding where we are in the market cycle, diversifying across sectors and asset classes, and remaining disciplined is critical. By focusing on your long-term goals and resisting the temptation to chase speculative gains, together we will navigate 2025 with confidence.