The US stock market’s record-breaking performance could face a sharp reversal in 2025, according to Moody’s Analytics. Chief economist Mark Zandi highlights high asset valuations and potential risks stemming from proposed Trump policies as key factors contributing to this looming correction.
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US equities are vulnerable to a significant correction due to inflated asset prices and two major policy risks, according to Mark Zandi, chief economist at Moody’s Analytics. In an interview with The David Lin Report, Zandi expressed concern about historically high valuations across various asset classes, including stocks, cryptocurrencies, housing, and gold. He warned of a “growing risk” of these elevated prices unraveling in a sustained decline, carrying significant macroeconomic implications. Zandi’s concern intensifies with each day of continued market gains, emphasizing the potential for a substantial correction.
The uncertainty surrounding proposed Trump policies further amplifies this risk. Zandi specifically identified two policies that pose a considerable threat to the stock market: tariffs and mass deportations.
Tariffs and Their Potential Impact on US Markets
Trump’s proposed tariffs on imports from China, Mexico, Canada, and BRICS nations are a source of concern. Economists suggest these tariffs could trigger higher consumer prices as businesses pass on the increased costs. This, in turn, could lead to higher inflation and rising interest rates. While Trump has dismissed the inflationary impact of his trade policies, citing his previous term, economists argue that the current proposals are far broader in scope, hence the differing inflation forecasts. Zandi expressed his reservations about broad-based tariffs, stating that while targeted tariffs might have minimal impact, widespread tariffs would be a “big deal.” A Republican National Committee spokesperson, Taylor Rogers, countered this view, asserting that Trump’s tax cuts and energy policies would offset any price increases on goods.
Mass Deportations and Their Economic Consequences
Trump’s promise of mass deportations, potentially affecting nearly 12 million migrants according to the Center for Migration Studies, presents another significant risk. The economic implications of such a large-scale removal of immigrants are uncertain but potentially severe. Economists speculate that sectors heavily reliant on immigrant labor, such as construction and agriculture, could be significantly impacted. Zandi emphasized the scale of deportations as the determining factor, suggesting that while deporting 50,000 immigrants might be manageable, 500,000 would be a “big deal,” potentially causing significant economic disruption.
Reduced workforce numbers could force employers to raise wages to attract talent, further contributing to inflationary pressures. Zandi highlighted the US economy’s reliance on immigrant labor, similar to Canada, and warned that mass deportations could exacerbate labor shortages, accelerate wage growth, and ultimately prevent the Federal Reserve from cutting interest rates.
Market Outlook for 2025 and Beyond
Despite the growing risks of a market downturn, Zandi anticipates a “sideways” market trend, with stocks remaining relatively “flattish” over the next three to five years. He projects corporate earnings growth between 4% and 6% for the coming year. This cautious outlook contrasts with more optimistic predictions from Wall Street firms like Goldman Sachs and Bank of America, which forecast a 10% gain for stocks in 2025.
In conclusion, while market optimism persists, Moody’s cautions investors to remain vigilant in 2025. The combination of high asset valuations and the potential economic consequences of proposed Trump policies, particularly tariffs and mass deportations, creates a significant risk of a market correction. While Zandi anticipates a relatively flat market in the near term, the potential for disruption underscores the need for cautious investment strategies.
