After Years of Outsized Returns, Investments Are Likely to Underperform in 2025

Several asset categories will be facing increased challenges in terms of market valuation in 2025. Nongasimo/Shutterstock

This year, several asset categories will be facing increased challenges in terms of market valuation.

When monetary and fiscal generosity—in the form of debt hiatus without adverse credit-reporting consequences, stimulus checks, forgivable Paycheck Protection Program (PPP) loans, special childcare credits, employee-retention assistance, and many other like-minded programs—sent waves of trillions into the economy, all asset categories went up. Way up.

Car and home prices inflated. Stocks, bonds, crypto—everything—enjoyed outsized returns.

But that was then, and this is now.

Pandemic-era liquidity has for the most part dried up, and asset categories appear to be close to or at topping out, and at a tipping point. Let’s look at a few of the categories where you might want to consider lightening up, if they are present in your portfolio to a significant extent.

US Equities

U.S. equities had two back-to-back strong years. That fact alone should give us pause, given the low likelihood of a third consecutive strong year. Valuations are at record highs by almost any measure. “Although equities normally perform well in economic upswings, they have already shone in 2023 and 2024 and stretched U.S. valuations make it hard for us to be optimistic about global equity returns,” said Paul Jackson, global head of asset allocation research, global thought leadership at Invesco.

There is also much uncertainty surrounding what fiscal and trade policies will be implemented under President-elect Donald Trump. Seventy percent of GDP growth comes from consumer spending, and another large contributor is government spending. Both will need to slow as the debt associated with seemingly runaway spending has grown too high.

Industrialist Elon Musk, incoming co-head of the proposed Department of Government Efficiency, promises to cut costs, reduce spending, and lay off government workers. Consumers are topped out at more than $1 trillion in credit card debt that is increasingly going delinquent. As GDP growth stalls, so will corporate revenue and earnings slow.

The benchmark S&P 500 Index’s price-to-earnings (P/E) ratio today is over 30 times, about twice both the historical P/E mean and the median.

The Buffett Indicator, a measure of the value of the U.S. stock market, relative to the overall size of the U.S. economy, is now at a record high. Normal or baseline for this indicator is 100 percent, but today it has rocketed to over 200 percent. This calculation is based upon a total market value of $60.9 trillion, compared to a GDP of $29.2 trillion.

For the stock price to normalize more toward historical averages, the market would need to fall 50 percent at present stock prices and current GDP. But if we do slow economically, given excessive national, business and household debt, the correction could conceivably be even more severe.

High-Yield Bonds

The best way to assess high-yield bonds is by looking at “spreads.” A high-yield bond spread is the difference in the yield on high-yield bonds compared to investment-grade bonds such as Treasury bonds. High-yield bonds offer higher yields, given they’re at higher risk of default.

Spreads today are far tighter than historical averages. The high-yield bond spread for January 15 was 272, its tightest since at least January 2020, and far tighter than a high of 108.7 in March 2020, with the exception of a similar low in mid-November, 2024.

Customers are seen leaving a Starbucks in New York City on Jan. 14, 2025. Wall Street stocks mostly fell early on Jan. 13, 2025 as Treasury bond yields lingered at a high level while markets looked ahead to earnings and economic data releases. (Photo by Angela Weiss/AFP via Getty Images

Gold

Gold had a great run in 2024, and as of today gold is up on the Commodities Exchange more than 21 percent.

Despite its strong performance in 2024, gold may face headwinds if inflation remains under control and interest rates stabilize. The continued strength in the U.S. dollar makes gold more expensive for holders of other currencies.

If the U.S. economy grows fast, we could experience higher interest rates, which in turn make interest-bearing assets more attractive relative to gold. Conversely, and perhaps somewhat counterintuitively, a slowing economy could lead to liquidations of inflated assets. Generally, in a recession the first assets to be monetized (sold) are the so-called “risk-on” assets, such as speculations in gold and crypto.

If inflation is kept under control, the need for gold as a hedge against inflation diminishes. Gold is generally viewed as a hedge against inflation, but the Consumer Price Index has been coming down. From 9.1 percent in June 2022, it is now getting closer to the Federal Reserve’s target of 2 percent.

Source: Bureau of Labor Statistics

If the economy finally does slow in 2025, the Federal Reserve likely will cut interest rates. In that case, we would expect a negative impact on gold prices. A shift in general market sentiment in terms of speculative investments also could fare badly for gold.

Bitcoin and, lately, other crypto coins have moved parabolically as excitement for new Bitcoin investment vehicles and the support by Trump for a Bitcoin Strategic Reserve has taken Bitcoin to unprecedented levels.

Bitcoin shot from around $69,000 on election day to an all time high of over $100,000 on Dec. 4, and remains close to that level.

These factors could lead to gold trading down in 2025. “A de-escalation of geopolitical tensions in the Middle East and/or a resolution to the Russia-Ukraine crisis could trigger a sharp downward correction in gold prices, given how much the precious metal benefited from these conflicts throughout 2024,” according to Eren Sengezer of FXStreet.

A Bitcoin chart is displayed on a laptop screen in Austin, Texas, on Nov. 12, 2024. Brandon Bell/Getty Images

Lower-Quality Growth Stocks

These stocks are the most sensitive to economic downturns and are likely to underperform if the economy slows. Many of the lower-quality growth stocks enjoyed huge market price interest and stock price gains, and they now appear expensive in relation to their earnings and growth potential. That’s why there’s not much room to keep going up at this stage. And, in fact, a raft of bad quarters would be all it takes to precipitate stock selling.

Summary

From monetary and fiscal waves of trillions during the pandemic to today, the tsunami of free money has all but been spent at this stage. Consumer spending is increasingly coming from credit cards and depleted savings. Two out of three Americans are living paycheck to paycheck—one emergency away from bankruptcy.

With the employment picture stronger that at any time in a half century, the unemployment rate has only one direction it can move—up. The debt service will cannibalize otherwise productive use of capital and funds, and with relatively higher rates, we are seeing the crushing impact it is having on government ($1 trillion in interest per year), and consumers (22.5 percent average credit card rates).

Almost all the credible financial analysts are today predicting that 2025 will largely be a bullish continuation of the past two banner years.

As I researched asset categories, most opinions projected that every asset category would go up markedly in 2025.

Those who disagree are few and far between. However, some analysts are bearish on stimulus checks and believe we are heading into recession next year.

Count me among those few.

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