5 Headwinds For The Stock Market In 2025: Will There Be A Crash Under Trump?

Last year, the stock market managed to deliver strong returns following an impressive delivery in 2023. The broader benchmark U.S. S&P 500 Index delivered a 23.31% return in 2024, while the index increased 24.23% in 2023. In total, the two-year winning gain adds up to 51.19%.

In December 2024, the Dow Jones Industrial Average was down 5.27%, however, the index managed to end the year with a 12.88% return. The tech-heavy Nasdaq Composite was bursting at the seams, delivering a 29.6% return, while the Nasdaq 100 was up 25.9% by the close of last year.

The Magnificent Seven, a collection of seven selected high-performing tech companies, gained 67.3% on the stock market in 2024 and contributed more than half of the benchmark S&P Index’s performance. Impressively, the market capitalization of these seven tech companies now makes up more than one-third of the total value of the S&P 500.

However, after two consecutive years of strong gains, Wall Street is starting to wonder whether the headline-worthy performance will continue in 2025, or whether the market should brace for upcoming turbulence.

Analysts at Goldman Sachs project that U.S. equities will gain a 9% price yield, and a 10% return including dividends. For 2025, earnings are projected to increase by 11%, while a modest return of 7% is expected in 2026.

A series of major economic, political, and international events will shape the outlook for the market in the year ahead. However, much of the current uncertainty is centered around President Donald Trump and his administration’s anticipated economic policies.

Wall Street is signaling headwinds up ahead, and it’s time to buckle up and prepare for upcoming turbulence.

Trump Tariffs

President Trump has officially taken office. In the days leading up to his inauguration, and throughout his presidential campaign, Trump has been vocal about his tough trade tariffs being a cornerstone for his economic agenda.

Trump plans to introduce a 25% trade tariff on imports from Canada and Mexico, and an additional 10% on imports from China. In 2022, these three countries were among the biggest importers of goods and services to the United States.

Imports from Canada totaled $436.6 billion, Mexico $454.8 billion and China totaled $536.3 billion. In addition to this, these countries provided billions of dollars in foreign direct investment (FDI) for various industries in the U.S. during the most recent recorded period.

Economists, along with Wall Street analysts are keeping a close eye on how the president will navigate a challenging economic environment while prompting talks over tariffs. This comes at a time when consumer confidence continues to dwindle following several years of eyewatering inflation, and rapidly rising costs of goods and services.

Trump’s trade tariffs are central to his administration’s economic policies, but introducing more tariffs alongside tax cuts could create further implications for inflation, and long-term economic sustainability.

Inflationary Pressure

Inflation continues to sit above the U.S. Federal Reserve’s 2% target despite prices stabilizing, and inflation coming down from its peak of 9.1% in June 2022. At the close of last year, the Consumer Price Index (CPI) rose 0.4%, above the forecast of 0.3%, and the CPI advanced 2.9%, which was in line with broader expectations.

Despite conditions improving, inflation is still too hot for comfort, and market watchers expect the fight to remain an uphill quest for the Federal Reserve which could be extending its rate cut pause until March of this year.

There’s more to the picture than just rising prices. A run-up in Treasury yields, with the 5-year Treasury yield at 4.38%, the 10-year Treasury yield at 4.25%, and a stronger-than-expected dollar will create further headwinds in the market, which could backtrack growth of equities.

The Federal Reserve has given minimal indication on how it plans to approach its fight against inflation this year. There’s a lot of work still ahead for the central bank, and with three 25-basis point rate cuts on the books for 2025, it’s unclear how the Federal Reserve will navigate the waters while having to consider the possibility of tariff-fueled inflation on the horizon.

Housing Affordability Crisis

Housing affordability continues to deteriorate. The income needed to purchase a new single-family home is now twice the household equivalent of housing costs in 2019. The average annual income needed to afford a single-family home sits at $107,700 as of the third quarter of 2024, up from $99,456 in 2023, and nearly twice that of $57,888 in 2021, according to the National Association of Realtors.

Based on these current estimates, only one-third of U.S. households earned enough to comfortably afford a new home, as of the last quarter of 2024. Industry data shows that the median home sales price has increased 1.4% quarter-over-quarter in the last six months of 2024.

The median sales price was at $414,500, which was an increase of $5,900 from the second to third quarter, but $15,000 lower compared to the same period in 2023. Across the country, housing markets have been shaken by strong demand and supply chain bottlenecks.

While it’s not yet certain whether we can expect to see how a housing affordability crisis will affect the stock market in the months to come, previous research has found that housing activities often hurt the stock market, which can cause greater market participation, and leading to a rise in illiquidity of housing prices, and formal assets associated with the property market.

Soaring Mortgage Rates

Last year, for a brief moment, mortgage rates managed to reach their lowest level in over a year. The 30-year average mortgage rate dipped to 6.08%, while the short-term 15-year average reached a low 5.16%, in September 2024. The last time mortgages were this low was in January 2023, according to data provided by Freddie Mac.

However, the good times were short-lived. In the weeks and months following the steady improvements, mortgage rates started to climb, despite the Federal Reserve announcing a jumbo rate cut of 50 basis points in early September last year, and another two separate rate cuts.

Still, mortgage rates have been on the upward trend for much of the last quarter of last year, and heading into 2025. The average 30-year mortgage rate is 7.16% and the 15-year rate is 6.40%, as of January 16, 2025.

Despite lower interest rates, mortgage rates are not set by the Federal Reserve, and are instead closely tracked by investor demand for inflation-resistant assets such as 10-year Treasury bonds. Average mortgage rates, such as the 30-year rate, have a close correlation with the yield of 10-year Treasury bonds.

When uncertainty looms over the market, investors look towards Treasury bonds to provide them with more buoyancy. Another four years of Trump will bring increased uncertainty, as higher deficits will put investors in a position to buy up Treasury bonds, and in turn, push mortgage rates ever so higher.

Geopolitical Tension

This year, more people anticipate that domestic and international instability will generate economic turbulence, including the risk of short-term pessimism regarding economic outlook and growth opportunities.

In total, around 52 percent of those surveyed by the World Economic Forum (WEF) feel that global risks have not changed since 2023, and many expect this to remain the same in the next two years.

Additionally, 31 percent of respondents expect bigger turbulence, while 5% foresee greater global catastrophic risks. Across all three categories, pessimism among respondents has increased by 4% compared to 2023.

The correlation between geopolitical events and the stock market remains fuzzy. Analysts found that geopolitical events typically do not have a lasting impact on large-cap equity returns, according to research by J.P. Morgan.

This does not mean that large-scale events have zero impact on stock markets. Investors remain bearish over the long-term outlook considering how geopolitical events have unfolded in recent years. Looking ahead, many could perhaps start taking a more practical approach to market dynamics, and instead seek to recession-proof their investments due to a higher level of risk and uncertainty.

Ending Thoughts

The current market climate remains volatile, and long-term developments in the political environment could create more risks for investors heading into 2025. The Trump administration’s business-friendly approach could bring a set of positive changes, but these are likely to be overshadowed by tariff-fueled inflation, a housing affordability crisis, and climbing mortgage rates, among other things.

As with previous years, 2025 will be another hard year for investors to navigate, and there are already plenty of obstacles standing in the way. Though it’s possible to witness a third-consecutive year of stock market gains, investors should keep expectations lower this year, as many moving parts could quickly cause more turbulence than they anticipated.