The year 2024 was full of milestones. Bitcoin (BTC) crossed the $100,000 price threshold, firmly leaving behind the perception burden of “rat poison squared.” After a rapid rate hiking cycle to curb inflation, the Fed started cutting interest rates in September, decreasing from 5.33% in January to 4.33% in December.
The S&P 500 index crossed multiple all-time highs throughout the year, returning 23.42% value year-to-date. This is more than double the compound annual growth rate of 10.68% over the last 32 years.
On January 20th, President-elect Donald Trump will officially assume office in his belated 2nd term. From tax cuts and tariffs to deregulation and mass deportations, much is expected from Trump’s historic comeback.
But what factors will likely have the most significant effect on investor sentiment in 2025?
1. The Global Effect of Balancing US Inflation
On Wednesday, the Federal Reserve governors voted for another 25 bp rate cut (0.25%). Usually, this bolsters the market, but it had the opposite effect this time. Accordingly, the S&P 500 (SPX) tumbled by 3% over the week. This was the worst post-Fed announcement drop since 2001.
The problem is that inflation has become sticky, and it is not expected to hit the Fed’s 2% target until 2027. In other words, the forecast for rate cuts in 2025 is now halved from the expected four to just two. Moreover, there may be friction between the incoming Trump admin and Fed Chair Jerome Powell.
Although Trump appointed Powell in his 1st term, he somewhat regretted it later, having said in September 2019, “Where did I find this guy Jerome? Oh well, you can’t win them all!”
If Trump’s tariff policy ends up increasing inflation, as some studies have suggested, the Fed’s easing policy is then to become less likely. In turn, a more “hawkish” Fed would lead to tighter financial conditions globally. We have already seen this in play as Indian rupee and Brazilian real currencies hit record lows against the dollar this month.
This is happening because emerging markets have large USD-denominated debts. And with higher rates for longer on the horizon, a stronger dollar elevates the cost of servicing those debts. Conversely, this puts a strain on their economies.
Ultimately, less monetary easing will likely translate to higher US economic growth but lower growth globally.
2. The Shift from Semiconductors to SaaS
Over the last two years, we have seen massive expenditures to build the AI data center infrastructure. In May, Gartner forecasted $33.4 billion in AI chip revenue from compute electronics, accounting for 47% of total AI semiconductor revenue.
For the full 2024, the AI semiconductor revenue forecast is $71.25 billion, sandwiched between 2023’s $53.66 billion and 2025’s $91.95 billion forecast. This benefited shareholders who invested in Nvidia (NVDA), TSMC (TSM), Broadcom (AVGO), Credo (CRDO), and other semiconductor stocks.
However, although semiconductor revenue should still see substantial growth, it may face greater hurdles in 2025 if Trump implements tariffs to offset tax cuts. Semiconductor companies rely on delicate global supply chains for raw minerals. Tariffs would effectively start a trade war, which could turn to retaliatory measures.
In turn, the increased cost of goods sold (COGS) could lower demand for semiconductors as customers delay purchases. In early December, China made such a move by putting strict restrictions on rare critical metals exports such as gallium, antimony, and germanium to the US. The retaliatory move was somewhat expected after the Biden administration instituted more export controls on advanced semiconductors in China.
Most recently, the U.S. Department of Commerce asked Nvidia to find out how its chips keep making their way into China, according to an insider cited in The Information report.
Consequently, investors should expect more emphasis on software companies, particularly those following the Software-as-a-Service (SaaS) model. Some companies, like Broadcom, have already diversified to cover both sectors.
3. The Renewed Adoption of Nuclear Power
Despite decades of pushing renewables via wind and solar, it has become clear that these energy sources will not cut it in the AI data center era. Microsoft and Alphabet have made special arrangements to power their future AI rollouts with nuclear energy reactors.
China has been ahead in this critical infrastructure development, adding 34 GW of nuclear power in the last 10 years, with 23 reactors still under construction. In the meantime, Germany systemically de-nuclearized, leading to a prolonged recession, especially after the bombing of Nord Stream pipelines for cheap Russian gas.
The US is not likely to suffer the same fate. In an appearance on Joe Rogan’s podcast in October, Trump vowed to approve new pipelines, refineries and reactors on “day one”. This is not surprising given that Trump, in his 1st term, signed the Nuclear Energy Innovation and Modernization Act (NEIMA) for advanced reactor design.
However, instead of massive federal subsidies, Trump’s pro-nuclear policy will likely cut taxes and red tape.
In anticipation of pro-nuclear policies, as necessary for AI regardless of admin, VanEck’s Uranium and Nuclear ETF (NLR) tracked 17.55% performance year-to-date. The recent market correction somewhat diluted the returns in December, but investors should keep an eye for such dips in uranium and nuclear stocks.
If there is a major market correction in 2025, do you expect Bitcoin to enter negative or positive correlation with the S&P 500? Let us know in the comments below.
Disclaimer: The author does not hold or have a position in any securities discussed in the article.
About the author
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.
