2025 stock market outlook: What will happen now that the election is over?

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Since the election, the stock market has breathed its historically typical sigh of relief from the lifting of election uncertainty.

As usual, this sigh has been followed by good post-election growth. Between election day and Thanksgiving week, the S&P 500 index of large company stocks rose nearly 5%. Looking ahead at the next couple months, the market period between election day and inauguration day (January 20) has usually been pretty good.

And this time around, there are sanguine indications for overall performance in the months following the inauguration, with existing nonpolitical drivers of the bull market still strong.

Dave S. Gilreath, CFP

And historically, when the S&P 500 is in an uptrend on election day, positive performance usually follows, with average growth of 7% over the ensuing six months. (Conversely, when the trend is negative on election day, that negative performance continues post-election.)

In this election, a challenger was elected president over the candidate from the incumbent administration – an outcome the market has historically liked. Though Vice President Kamala Harris had never been president and Donald Trump had, this was nevertheless basically a case of a nonincumbent challenger versus an incumbent.

All these circumstances indicate continued strong performance by a bull market now in its third year, with a resilient economy indicating continued growth in 2025. Of course, there will probably be pullbacks and/or corrections along the way, as market growth is characteristically halting – three steps forward, two steps back.

Simmering flavors

Overall, various ingredients are now coalescing in ways that should make the market a tasty stew that should draw investors to the table well into next year. Seasonings and herbs making this stew quite flavorful include various economic and market factors: 

Prospects for less regulation. Extensive regulation is the bane of businesses both large and small. The Republican sweep of the White House and both chambers of Congress holds significant potential for a trend of decreasing regulation – at least until the mid-term congressional election in 2026. Inconvenient and costly for big corporations, excessive regulations are especially burdensome to small businesses, which don’t have the resources of large companies to achieve compliance. Less regulation will likely mean higher profits and higher earnings for publicly traded companies.

Low chances of higher taxes, and high chances of lower ones, which would reduce a major expense for public companies of all sizes. With businesses, as with individuals, it’s just not what you earn but what you have left after paying taxes. Lower taxes on companies means higher profits and, often, higher earnings – the most significant component of a stock’s value, and the most attractive one for investors.

Declining inflation. A couple years ago, domestic inflation hit a 40-year high of about 8%, spiking from factors including high post-pandemic consumer demand and low supply. Production has since caught up with demand. This, and two years of elevated interest rates – raised by the Federal Reserve board to cool a red-hot economy and suppress price appreciation – have tamped annual inflation down to well under 3%, and falling. (This reality is contrary to popular belief, as many consumers confuse still-elevated prices with inflation. But disinflation is different than deflation.) Declining inflation is a huge positive for companies, as rapidly escalating costs are dreaded albatrosses. It means higher cost of materials and often, higher wages for workers, forcing companies to raise prices on products and services, perhaps after absorbing some of these costs, dinging profits.

Stable interest rates. Rates may not come down as much next year as appeared likely in September, when the Fed cut rates for the first time in four years. This cut was widely assumed to be the first in a fairly tight series, with regular cuts to follow into the new year. But some lingering embers of inflation, particularly in housing, now suggest that this assumption may have been wrong and that rates may remain higher for longer than expected. Some analysts predict more cuts next year, though not as many as they anticipated earlier. (Predicting the pace and amounts of cuts months in advance is extremely difficult because the Fed bases this decision on up-to-date economic data.)

Despite all this uncertainty, the good news is that rate increases are highly unlikely for the foreseeable future, meaning companies’ cost of capital probably won’t rise.

High productivity. Productivity is a measure of economic output relative to the input required to get it. Basically, it reflects the degree of efficiency with which an economy produces goods and services. Productivity has been quite strong for the past couple years, and various factors point to further strengthening, says renowned market economist Ed Yardeni, who calls high productivity the economy’s “secret sauce.”

Yardeni has for months advanced what he calls a potential Roaring 20s (2020s) scenario of strong industrial and economic growth over the remainder of the decade. His anticipation of this scenario has become keener from the election’s outcome.

High productivity tends to keep strong economic growth amid low unemployment from pushing up inflation. This is like having your positive economic cake and eating it, too.

Declining energy costs. This is a real money-saver for businesses. Thanks to much lower industrial energy consumption in China stemming from its severe economic decline, global energy supplies are higher and their cost, lower.

Headwinds

All these factors amount to strong market tailwinds. Yet, there are some potential headwinds that shouldn’t be overlooked. 

These include the chances that Trump will keep his campaign promise of unilaterally imposing widespread, hefty tariffs on foreign imports. This, along with likely retaliatory tariffs that would hurt American exporters, would significantly damage the U.S. economy, 23 Nobel-Prize winning economists warned before the election.

Yardeni and other well-known market bulls acknowledge this risk. But, taking a wait-and-see approach, they suggest that Trump’s eventual tariff policy may be far less extreme than promised, and impacts far more muted than what the Nobel laureates warn.

Economists have also said Trump’s campaign promise to deport millions of illegal immigrants could be recessionary if carried out at the vast scale he promised or anything close to it, as this would probably lead to labor shortages. But again, analysts are waiting to see what Trump actually does. 

A headwind to market growth that’s long been present is high stock valuations – the prices investors must pay for the earnings growth they’re getting. Yardeni acknowledges this as a distinct risk but believes “valuations can be sustained as long as the economy is growing, as long as there’s no recession.”

Whether – and if so, how much – these headwinds end up impeding market growth may depend to a large degree on a critical yet somewhat abstract factor: investor sentiment.

Animal spirits

Optimistic about the market before the election, many investors are even more so now, on the cusp of a period Yardeni calls Trump 2.0. In his various commentaries and media interviews, Yardeni frequently mentions an increasing level of “animal spirits.”

This is a phrase used by British economist John Maynard Keynes in his 1936 book, “The General Theory of Employment, Interest and Money,” to describe how emotions drive investors’ financial decisions. Keynes derived the term – which originated in Latin, spiritus animalis – from aspects of ancient Greek medical theory. Today, the term is generally used to refer to zealous bullishness among investors.

The level of animal spirits among investors was already high before the election. The market’s reaction since shows that, if anything, these spirits have become more enlivened. This positive investor sentiment, along with economy-driving positive consumer confidence, seems poised to persist with economic growth.

As this growth is quite strong, the simmering market stew will likely be highly flavorful well into 2025.

Dave Sheaff Gilreath, CFP,® is a founder and chief investment officer of Sheaff Brock Investment Advisors, a firm serving individual investors, and Innovative Portfolios,® an institutional money management firm. Based in Indianapolis, the firms are managing assets of about $1.4 billion, as of Sept. 30.