Dr. Allen Sinai’s Economic Outlook for 2025

2025 has been filled with shocks to the economy, markets and investors. With dizzying speed, a bullish post-inauguration Trump stock market rally—driven by plans to invigorate the economy and reduce price inflation through tax cuts, deregulation and a new tariff policy—fizzled out. The White House turned economic policies in an aggressive, new direction, imposing tariffs on hundreds of countries. President Trump’s reasoning: Tariffs help remedy unfair trade imbalances, especially China’s predatory trade behavior…boost domestic manufacturing and jobs…and create more wealth.

There are lots of truths here, but the US tariffs rollout disrupted the economy. US stocks sank into a correction, losing as much as $6.5 trillion before rebounding sharply in early spring on partial reversals in the worst of the initial tariff increases. The economy unexpectedly contracted 0.3% in the first quarter, much of that from frontloading imports to beat coming tariff-induced price hikes. Inflation has remained well above the Fed’s 2% goal and is likely to rise going forward.

How will this all play out? “Investors are right to feel like they are strapped in a roller coaster,” warns top economist Allen Sinai, PhD. “Hunker down and stay safe until the coast is clear.”

While Sinai believes the market and US economy will muddle through and reach new highs later this year, he expects the rest of 2025 to be chaotic and notes the ongoing risks of a bear stock market and a recession later this year and next. Bottom Line Personal asked him to explain his shorter-run warnings but still cautious long-run optimism…

“TRUMP SHOCK”

On April 2—so-called “Liberation Day”—the White House invoked the International Emergency Economic Powers Act of 1977 and upended nearly a century of global trade policies. President Trump imposed a 10% tariff on goods coming into the US and a 145% levy on most Chinese imports. Additional tariffs placed on trade partners such as the European Union and Japan were postponed until July and extreme tariffs on China eased while the Trump administration tries to secure bilateral trade deals with several countries, redressing standing trade imbalances and raising revenues to fund Trump programs. The use of these sweeping tariffs as a lever in global relationships has invited retaliations and reactions unfavorable to the US, likely causing damage to US businesses, ­workers and consumers. Here’s why…

Tariffs can ignite inflation

Not only do importers and retailers pass higher costs on to consumers, domestic producers hike prices when competition from imports is reduced. That could hurt the economy in the second half of the year.

Stagflation complications

Higher inflation puts the Fed in a bind. Its mandate to maintain price stability at 2% could limit its ability to reduce interest rates if it had to preempt a recession. Possible result: A kind of mini 1970s-style stagflation, with persistently high sticky inflation and rising unemployment.

Tariffs cannot restore US manufacturing glory

They may provide protection for certain US industrial sectors and encourage some reshoring of production, jobs and investment. But the overall impact will be mixed—raising costs for American manufacturers that rely on low-cost components from abroad.

Immigration and the workforce

Border security and deportation risk, reducing the supply of labor, can bring shortages and bottlenecks in consumer and business-based activities and services.

DON’T BET AGAINST AMERICA

The economy and markets most likely will make it through 2025. Risks for inflation and recession are higher, but there is a less-than-even chance of either recession or stagflation. The Decision Economics Baseline Forecast is a better-than-even 55% chance of continuing expansion and an equity bull market. Unlike past shocks that have roiled the economy, the current one is self-inflicted. The Trump Administration can—and likely will—strike deals with other nations to make tariff rates manageable and de-escalate trade tensions with China. The underlying good news…

The US economy remains resilient

Although gross domestic product (GDP) contracted slightly in the first three months of 2025, that was a distortion from a surge in imports as US businesses brought in foreign goods before tariffs kicked in. Serious economic weakness has yet to show up. The labor market has remained solid, and many firms topped first-quarter earnings expectations.

Falling oil prices are a stealth stimulus

It’s easy to overlook this year’s nearly 20% drop in crude oil prices. Cheaper energy lowers costs for businesses and gives households some relief at the gas pumps and extra income for spending.

Tax cuts are on the way

There likely will be a permanent extension of the 2017 Tax Cuts and Jobs Act, the tax bill passed during the first Trump presidency. Additional tax reductions would include a higher cap on state and local tax deductions…larger child tax credit…and reduction or elimination of taxes on tips, overtime pay and Social Security.

“Big T”—the positive Technology Shock—is alive and cooking

This five-to-seven-year external shock is ­lifting productivity and reducing costs, holding unemployment low, preventing inflation from going higher, and contributing to what has been stellar business profits and margins.

What to consider now: Anticipate a relatively weak but positive year for stocks based on continuing expansion, still no recession, and strong corporate profits. Volatility is likely to persist. Small investors should avoid aggressive bets or trying to time choppy markets and maintain safe long-term allocations. Short-term investments and cash accounts are an attractive place to hide out…as are short-term bonds and gold.

KEY ECONOMIC MEASURES

GDP: Real GDP growth of 1.8% in 2025 and 2.1% in 2026. This only modest expansion is due to weaker federal government outlays, large deficits in net exports and cautious consumer spending.

Unemployment: The unemployment rate likely will rise to 4.6% by year-end 2025, up from 4.2% in April…and reach 4.9% by mid-2026. Wage growth will continue to outpace inflation, however, a plus, up 5% this year and 5.5% next.

Inflation: As measured by the Consumer Price Index, inflation will stay on the high side, rising to 3.4% by the end of 2025, remaining sticky high and at a still high but lower 3.1% by year-end 2026.

Gold: An ounce of gold bullion has repeatedly hit all-time highs this year, viewed as a safe haven against the Trump Shock and its ramifications, and could reach $3,700 by year-end, with a weakening US dollar and due to continuing geopolitical tension with China and Russia.

OUTLOOK FOR STOCKS

Expect the stock market to produce modest gains by year-end, with the S&P 500 returning about 9% for all of 2025 and the Dow Jones Industrials to rise about 10% (including dividends). That would represent a big recovery from the February-to-April swoon, when the S&P 500 fell 19% from its high. The comeback will be driven mostly by strong corporate earnings growth, which, for the S&P 500, is forecast at 12% in 2025. Main reason: Technology and management efficiencies continue to help corporations achieve substantial bottom-line productivity gains. This would be reflected in quite-high profit margins and surprisingly strong earnings. Best areas of the market for 2025…

Technology—benefiting from the transformation of a labor-based economy to a technology-based one.

Consumer staples—especially companies that sell essential products to price-conscious consumers suffering from increased inflation and costs.

Health care and pharmaceuticals—driven by the aging population and big demographic surge in the 65-to-85 age group, with all the medical needs, pharmaceuticals, health-care innovations and service support that goes with it.

Overseas…Europe and Japan. GDP growth for 2025 of 2% to 2½% and 1%+, respectively. Their central banks face a manageable combination of slowing growth but with less inflationary pressure, which will allow interest rate reductions. Americans investing in European and Japanese stocks should benefit from a weaker US dollar against the Euro and Yen.

OUTLOOK FOR BONDS

The benchmark 10-year US Treasury bond yield is expected to finish 2025 near 5%, up from 4.3% in May. That’s due to expectations for higher inflation and the likelihood that the US debt problem won’t be addressed until after the 2026 midterm elections. Foreign investors are less likely to absorb increased issues of US Treasuries because of America’s unpredictability. The total bond market return likely will be negative.

For conservative income investors and savers, the outlook is brighter by staying in short-term bonds and deposit accounts with the Fed likely keeping short-term interest rates in a 4%-to-5% range.