The equity markets in 2025 may rebound hard, according to this scenario

There’s hope for equity markets in 2025

When the market is crashing as hard as it has been doing in the last few trading sessions, not many investors want to look too far out or think about upside scenarios in the medium term. And that is probably the case this time around as well with Trump’s tariffs announcements triggering fears of a global recession. However, we think there is a scenario in which Aussie investors might do alright in equity markets in 2025. And while you may be sceptical right now, because the market is depressed, we’ll share it with you anyway!

The Fed will be late to cut rates

When it comes to the US, we expect the US Federal Reserve (Fed) will not be eager to cut interest rates too quickly. Firstly, following Trump’s repeated calls for interest rate cuts, we believe the Fed will want to demonstrate to Trump that it is indeed independent.

Secondly, the near to medium term effects of import tariffs are higher prices. Even if not all tariffs that have been announced will be implemented at the announced levels, or will be implemented at all for that matter, some tariffs will. And this will cause price increases for American consumers and businesses. With US inflation at 2.8% in February 2025, it’s easy to see how near term flare ups of inflation due to tariffs will push inflation well above 3% again.

We believe this will keep the Fed on the sideline, at least for a little while, say into the second half of 2025. But the eventual economic slowdown (and potential recession) will likely mean rate cuts in the US later in the year, in our view.

What this means for Australia

Meanwhile, in Australia, with just 5-6% of its exports going to the US, the direct damage from the 10% tariff that Trump imposed on Australia is likely to be limited. However, there will be an impact on Australia’s biggest trading partners in Asia, mainly China that was just threatened to have its US tariff raised to 104%!

But other big trading partners, like Japan and South Korea, with their large exports of electronics to the US, will be impacted as well. Australian exports to these countries may suffer, negatively affecting the Australian economy.

But there is another effect. The new tariffs will certainly not divert all Asian trade flows away from the US as US importers, distributers, consumers and business will keep buying Asian products and just absorb the higher prices. However, these higher prices will certainly impact US demand for these products negatively, leaving Asian manufacturers with excess production that they need to get rid of.

These manufacturers may try to limit their production, but we expect the excess production will also try to find its way to low/no tariff destinations, like Australia, albeit at prices that are likely lower than what could have been received in the US. In other words, we believe there is a good chance these diverted trade flows may have a downward effect on import prices of a range of goods and may lead to lower inflation in Australia later in 2025. And keep in mind, Australian inflation is already in the RBA’s target 2-3% bandwidth.

The RBA cash rate could fall below 3% in the next 12 months

The financial markets were already expecting the RBA would be cutting interest rates two to three times in 2025, taking the cash rate down by about 75 basis points (bps). We’ve already had one rate cut in February, which brought the cash rate down to 4.1%.

However, against the new economic backdrop, we should expect more rate cuts in 2025 than the market previously assumed. Some pundits are now calling a 50 bps cut when the RBA meets again in May.  Following the Trump Crash of early April, the markets are now expecting the RBA’s policy rate can potentially go down to 3.1% by Christmas and even below 3% early next year.

By that time, we expect the Fed will have caved and US rates will likely have started to come down as well too due to the anticipated economic slowdown in the US. In other words, globally the price of money will be coming down substantially in 2025, in our view.

The Aussie housing market and higher risk stocks should benefit

Cheaper money will be good for the Aussie housing market. Case in point, the first rate cut in February already started to drive housing prices up in several major urban areas, like Sydney. And that was just one 25 bps cut. Imagine what a full percentage point cut may mean for buyers’ appetite in the next 12 to 18 months!

But it’s not just housing prices that will go up. While it may be hard to believe right now, with the markets down the drain, we expect the valuation of higher risk assets, including Technology and Life Sciences stocks on ASX, will benefit substantially from lower interest rates. So, we believe it’s not all bad news for equity markets in 2025.

Cheaper money to drive equities recovery

To summarise, once this initial period of uncertainty around the impact of the tariffs is behind us and the markets settle, we think we could be looking at a big equities boom driven by cheaper money trying to find a way back to the market.

And given that financial markets typically look 6 months ahead, the starting point for this massive rally could be the June/July timeframe of this year.

Of course, this is just one scenario and we’re only in the opening stages of what looks to be a global trade war full of uncertainties. But we’ve been around in the markets since the mid-90s and have seen strong recoveries following events that many thought would take years to recover from. So, equity markets in 2025 may rebound a lot harder than many investors think.

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