The past year saw a significant expansion of the economy: inflation fell, as did interest rates. Unemployment rates remained low and the S&P 500 rose by more than 20%. But what will 2025 bring, with a new incoming government, changing financial policies and an ongoing recovery from the pandemic?
Check out our predictions for next year and how it could impact your personal finances.
A few months ago, many people expected mortgage rates to fall in 2025. As economists respond to uncertainty about how markets will respond to Trump’s presidency, the outlook for interest rates is less optimistic. Experts from Zillow, Redfin, Fannie Mae and the Mortgage Bankers Association predict that interest rates will remain above 6% through 2025.
Read more: When will mortgage interest rates go down? A look at 2025.
Inventory and prices of homes
Unfortunately, consumer demand for housing still far exceeds supply. According to Freddie Mac, about 5.8 million new homes have been built in the U.S. 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 shortage, and it will probably take another decade to get out of it,” said Rob Dietz, chief economist for 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 owners acquiring equity, but difficult news for buyers trying to find affordable housing.
Dig deeper: Housing market 2025: is it a good time to buy a house?
The coming year promises to be interesting for investors. In the US, a business-friendly government, lower interest rates and possible corporate tax cuts could support earnings growth. But the high valuations have many investors on edge.
The S&P 500 should deliver modest returns through 2025, with some volatility going forward. Marta Norton, chief investment strategist at pension provider Empower, expects large caps to benefit from improving macroeconomic conditions and continued adoption of artificial intelligence.
Norton calls appreciation 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 profits – usually in expectation of strong growth. If growth is disappointing, volatility may arise.
Small and mid-cap stocks in 2025
Small- and mid-cap stocks may outperform the S&P 500 in 2025. The driving force will be the outsized benefits that smaller companies should experience from lower interest rates and potential corporate tax cuts.
According to David Rosenstrock, director at Wharton Wealth Planning, small- and mid-caps are more likely to rely heavily on variable-rate debt, while larger companies prefer fixed-rate facilities. Variable rate borrowers benefit immediately from interest rate cuts as their obligations are quickly reset. Existing fixed-rate debt does not adjust to the lower interest rates until it is refinanced.
Tax cuts could benefit small- and mid-caps because most of their revenues tend to be earned in the US. Rosenstrock explains, “Reducing the corporate tax rate could provide greater relief for these asset classes than for large caps, whose geographic revenue sources are more diversified.”
Read more: Stock market prospects for 2025: four experts weigh in
When it comes to banking, experts say consumers can expect changes in the new year, especially when it comes to the Federal Funds Rate.
“We expect the Fed to take a more gradual approach to easing next year, first moving to a 25 bp (basis points) cut at every other meeting before pausing mid-year. We forecast that the Fed will cut by 25 basis points in both the first and second quarters of 2025, bringing the Fed Funds target rate to 3.75% to 4.0%, and thereafter we expect the Fed to continue until the end of the year will pause,” said Sophia Kearney-Lederman. senior economist at FHN Financial.
“Our 2025 Fed Funds rate forecast is based on two key assumptions: inflation will rise by the middle of next year due to one-time rate pressures, and the unemployment rate will fall due to changes in immigration policy, including smaller-scale deportations. then presented on the campaign trail. This combination of upside inflation risk and downside unemployment risk is what we expect will give the Fed pause in the easing process in 2025.”
If the federal funds rate does indeed fall as expected, the interest you earn on savings, money market accounts, high-yield savings accounts and CDs could also fall.
Read more: A look at the Federal Funds Rate over the past fifty years
Since the Federal Reserve began lowering its target federal funds rate range earlier this year, we’ve already seen a number of credit card interest rates drop. In the new year, experts expect the Fed to cut rates further, but we’ll have to wait and see how quickly they do that and how low rates will go.
Related: How does the Fed affect your credit card interest rate?
At the 2024 Yahoo Finance Invest conference in November, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said the Fed “will have to wait and see what the data says” to determine its 2025 interest rate decisions. Recently, some expert forecasts say that the frequency of interest rate cuts may decrease in 2025.
If the Fed cuts rates even further, you’ll likely see credit card interest rates continue to fall as well. But just like 2024, that doesn’t mean you’ll see a significant difference in your APR. The average credit card interest rate is still over 21%. Even if the Fed’s target interest rate range drops by a full percentage point or more, don’t wait to start paying down your balance. That won’t make a significant difference in your APR, and if you wait, you could get even higher interest rates. rising debts.
Read more: What credit card holders need to know for 2025
