According to the Chinese zodiac1 , 2024 was the Year of the Dragon. The Dragon is considered to be the most powerful and auspicious animal, symbolizing, among other things, prosperity. Financial markets aligned with these expectations, as risk assets performed strongly, with stocks reaching several new record highs over the course of the year.

Risk assets started 2024 strong, with several equity indexes reaching all-time highs driven by rising expectations for a soft landing and AI optimism. However, this momentum gave way to mixed performance as investors focused on risks, including fewer anticipated Fed rate cuts due to lingering inflation fears. While risk assets resumed their strong performance in the second half of the year, volatility persisted due to disappointing earnings results from large tech companies and concerns about weak economic data. Markets eventually rebounded as Chair Powell signaled the Fed’s pivot to start the rate-cutting cycle, US economic data improved, and China announced additional stimulus measures.

Leading up to the Fed’s September meeting, the S&P 500 Index advanced by nearly 20%, with gold delivering even stronger returns. EAFE stocks posted moderate gains while the Bloomberg US Aggregate Index, which saw increased volatility throughout the year, rose modestly. In contrast, gains in China equities and commodities were meager (Figure 5).

The equity market rally continued following the September Fed meeting and was further fueled by the re-election of President Donald Trump with a clear mandate (Figure 6).

However, while US equities maintained momentum, fixed income and EAFE stocks retreated amid concerns about tariffs and deficits. In the final stretch of the year, Chinese stocks posted strong gains, bolstered by policy measures outlined by government aimed at supporting the economy and markets, especially in anticipation of potential tariffs from the incoming US administration. To extend the zodiac theme, 2025 is the Year of the Snake, which symbolizes transformation. So, will 2025 live up to this expectation or will we continue to see more of the same? Our base case for the macro environment during 2025 and into 2026 remains benign and supportive of risk assets. Resilient economic growth has kept the US economy on track for a soft landing. PGIM Quant’s US recession sentiment indicator is well above its August 2024 lows, when recession fears were rising, suggesting a low probability of recession. However, January’s Presidential inauguration likely brings both opportunities and challenges for financial markets. While the details and the timing of the Trump administration policies remain uncertain, we anticipate a combination of tax cuts, deregulation, and supportive financial conditions to bolster risk assets throughout 2025.

Source: PGIM Outlook 2025