Investing.com — Jefferies strategists warn that the US stock market faces mounting risks in 2025, driven by conflicting elements of President-elect Donald Trump’s policy agenda, rising bond yields, and doubts over AI monetization.
The combination of aggressive deregulation and tax cuts with inflationary measures such as tariffs and immigration restrictions could create volatility, while elevated equity valuations may struggle to hold as bond yields rise.
“There is a fundamental contradiction between the hopes for a disinflationary productivity-driven boom driven by the AI and deregulation themes, which the US stock market has been celebrating since the presidential election, and the threat of tariffs and curbs on immigration,” strategists said in a note.
The US stock market ended 2024 in a “bullish frenzy,” buoyed by optimism over deregulation and AI-driven productivity.
By year-end, the S&P 500’s price-to-sales ratio climbed to 3.15x, nearing record highs, while US equities represented 66.6% of the MSCI All-Country World Equity Index. However, Jefferies cautions that “at some point the stock market will not be able to ignore rising bond yields,” even though it has managed to do so thus far.
Treasury bonds remain in a structural bear market, with the 10-year Treasury posting losses in three of the past four years. Strategists highlight the refinancing risk posed by the maturity of 55% of US Treasury debt by 2027, while net interest payments and entitlement spending accounted for 95% of government receipts in 2024.
Adding to the uncertainty is Elon Musk’s appointment as co-head of the newly formed Department of Government Efficiency (DOGE). Musk, alongside Vivek Ramaswamy, is tasked with slashing $2 trillion from the federal budget by 2026.
Jefferies warns that if this initiative progresses, the economic impact could be severe. If Musk actually slashes $2 trillion from the federal budget, “the market impact would likely be a big rally in Treasury bonds and a big rally in the US dollar,” strategists noted.
“But there also would be a severe deflationary shock for the real economy which in the first instance would surely be negative for equities,” they added.
This negative outcome could prompt President-elect Trump to reconsider such measures, given his previous inclination to gauge the success of his policies by the performance of the stock market during his first term.
Another point of concern for equity market performance in 2025 is AI monetization. While hyperscaler capital expenditures are forecast to reach $222 billion annually by the end of 2024, Jefferies questions whether these investments will translate into sustainable profits.
Moreover, strategists point out that the anticipated AI-driven boost to consumer devices, such as smartphones and PCs, has yet to materialize, dampening earlier hopes for an upgrade cycle.
As a result, the AI narrative now hinges on potential productivity gains for corporations, though the tangible benefits of these investments remain uncertain.
