What will cause stock market crash in 2025, the stock market operates within a complex web of economic forces, and certain risk factors make it vulnerable to significant downturns.
The S&P 500, one of the most prominent benchmarks of the stock market, continues its impressive climb as 2024 draws to a close, delivering a remarkable year-to-date return of 26.9% as of December 17. This stellar performance is a welcome gift for investors, fueling optimism that 2025 might mirror these exceptional results.
"We anticipate the global equities bull market will persist into 2025, with the U.S. likely to maintain its leadership in outperforming other regions," explains Arun Bharath, chief investment officer at Bel Air Investment Advisors in Los Angeles. Bharath attributes this outlook to the robust returns on equity and earnings growth projected across various U.S. industries and sectors, setting the stage for continued dominance of U.S. equities in global markets.
"Market prognosticators are trying to make a case for outperformance to come from non-U.S. equities, citing high valuations in U.S. stocks against significantly discounted international and emerging equities," Bharath notes. But he sees that scenario as unlikely: "Even at current elevated multiples, we anticipate U.S. stocks, which represent 64% of global equities, to outperform foreign stocks in 2025," he says. "Furthermore, U.S. companies are much further along in using AI and other advanced data science techniques in optimizing their business models."
Market analysts anticipate that inflation will continue to exceed the Federal Reserve's 2% target, persisting well into 2025. According to Michael Ashley Schulman, financial advisor and chief investment officer at Running Point Capital Advisors in El Segundo, California, this aligns with the concept of "stayflation" – a prolonged period of elevated inflation that stubbornly persists. Schulman warns that several risks, including geopolitical tensions, burgeoning deficits, and the potential for premature monetary policy easing by the Federal Reserve, could further complicate the economic outlook, creating headwinds for sustained economic stability.
Schulman doesn't see a downside crash in 2025, but it's best to be prepared. "A quick stomach-churning correction is always a possibility that you want to keep in mind," he says. "Having a preset financial plan can help guide one through such turmoil."
While stock valuations remain robust and are expected to stay elevated into 2025, many market experts believe that these high valuations alone are unlikely to precipitate a market crash. Instead, other critical factors could pose greater risks to economic stability. Peter Tanous, founder and chairman emeritus of Lynx Investment Advisory in Washington, D.C., expresses deep concern over the burgeoning cost of servicing the national debt.
"The cost of interest on our federal debt has spiraled out of control," Tanous warns. He highlights that this fiscal year, the government is projected to allocate over $800 billion to debt service—a staggering figure that rivals and may even surpass the $850 billion budget earmarked for the Defense Department. This alarming trend underscores the immense fiscal pressures facing the nation and the potential implications for economic policy and growth.
Tanous believes that amount will get worse. "I'm concerned that a point in time will come soon when buyers of our national debt, namely countries like China, Japan, the U.K. and others, will demand that the U.S. put its fiscal house in order before they agree to buy more U.S. bonds," he notes. "Of course, they will buy U.S. bonds, but they will likely demand a higher interest rate to reflect the growing deficit the U.S. is incurring."
That, in turn, could lead to a spike in interest rates overnight, which would spook the market and cause a major stock market crash. "I'm certain this will happen, but I don't know exactly when," he says.
Adam Coons, co-chief investment officer at Winthrop Capital Management in Indianapolis, identifies two significant areas of market risk for 2025. "Risks to the stock market in the short term are somewhat barbelled," Coons explains. On one side of the spectrum, a stronger-than-expected consumer could reignite inflation, prompting market disruptions as expectations shift and the Federal Reserve becomes unable to further cut interest rates.
Conversely, a decline in employment data and consumer spending beyond current forecasts could push stocks downward. "This scenario increases the likelihood of a hard recession, fueled by the Fed potentially waiting too long to lower interest rates," Coons cautions. These polarized risks highlight the delicate balancing act the market faces in navigating the economic landscape ahead.
As President-elect Donald Trump prepares to take office on January 20, trade tariffs are expected to remain a key focus of his economic strategy. This approach is consistent with his first term, during which he emphasized protectionist policies to bolster domestic industries. Notably, Trump's administration previously imposed tariffs on commodities such as steel and aluminum imports, signaling a commitment to reshaping global trade dynamics.
Looking ahead, Trump has proposed an ambitious plan for his second term, which includes a 25% tariff on imports from Canada and Mexico. Additionally, he has outlined intentions to implement a 10% tariff on goods imported from China. "President Trump's potential policies—higher tariffs, tax cuts, and immigration restrictions—continue to add significant uncertainty," says Schulman. These measures could have wide-reaching effects, influencing inflation, international trade relationships, and the long-term sustainability of fiscal policies.
The Federal Reserve has recently taken a proactive stance on monetary policy, marked by a series of interest rate reductions. Notably, it cut the benchmark federal funds rate by 50 basis points in September, followed by a further 25-basis-point cut in November. During its latest meeting on December 17–18, the Federal Open Market Committee was widely anticipated to enact an additional 25-basis-point reduction. However, this is expected to be the last rate cut for some time as the Fed adopts a cautious, wait-and-see approach to assess the economy’s trajectory under the evolving economic policies of the Trump administration in 2025.
"President Trump's victory could result in heightened inflation driven by the proposed tariffs and increased fiscal deficits, though it may also stimulate higher nominal GDP growth," explains Vuk Vukovic, founding partner at New York-based hedge fund Oraclum Capital. Many analysts echo this sentiment, emphasizing that the Federal Reserve must carefully weigh these risks alongside various significant geopolitical developments to ensure stability in the economic landscape.
While consumer optimism appears to be driving strong engagement during the 2024 holiday shopping season, the outlook for larger financial commitments, particularly in housing, is far less upbeat. According to a recent U.S. housing market report from real estate analytics firm Clever, 45% of homebuyers and 47% of sellers anticipate regional home prices increasing in 2025, fueling anxiety throughout the market.
Even more striking, 68% of prospective buyers fear that escalating home prices could force them to postpone purchasing a home next year. Mortgage rates are another significant concern, with 42% of respondents identifying current rates as a formidable hurdle and 41% expressing deep apprehension about qualifying for a new mortgage in 2025. This cautious sentiment reflects broader economic uncertainties, highlighting the complexities that potential homeowners face in navigating an evolving marketplace.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
