Key Points
- Conflicting policies under President-elect Trump could create market volatility.
- Rising bond yields threaten the sustainability of elevated equity valuations.
- Musk and Ramaswamy’s budget cuts could trigger economic deflation.
- AI investment profitability remains uncertain, challenging market optimism.
Jefferies strategists caution that the US stock market could encounter significant challenges in 2025, driven by conflicting elements of President-elect Donald Trump’s policy agenda, rising bond yields, and uncertainties around AI monetization. While deregulation and tax cuts have fueled optimism, inflationary measures like tariffs and immigration restrictions could create volatility, complicating market dynamics. Elevated equity valuations may also face pressure as bond yields continue to rise.
Strategists highlighted a contradiction in market sentiment, with hopes for an AI-driven, deregulation-fueled productivity boom clashing with the inflationary risks of tariffs and restricted immigration. Following a “bullish frenzy” at the close of 2024, the S&P 500’s price-to-sales ratio reached 3.15x, approaching record highs. US equities represented 66.6% of the MSCI All-Country World Equity Index. Despite this optimism, Jefferies warns that the market’s ability to disregard rising bond yields may not last.
The structural bear market in Treasury bonds persists, with the 10-year Treasury posting losses in three of the past four years. A refinancing risk looms as 55% of US Treasury debt matures by 2027, and government spending on net interest payments and entitlements consumed 95% of receipts in 2024. This financial strain has intensified uncertainty.
The appointment of Elon Musk and Vivek Ramaswamy as co-heads of the newly formed Department of Government Efficiency (DOGE) adds complexity. Tasked with cutting $2 trillion from the federal budget by 2026, their efforts could trigger significant economic consequences. Jefferies anticipates that such measures might rally Treasury bonds and the US dollar but could cause a deflationary shock to the real economy, negatively affecting equities.
AI monetization is another concern. While hyperscaler capital expenditures are projected to reach $222 billion annually by the end of 2024, Jefferies questions whether these investments will yield sustainable profits. The expected AI-driven upgrade cycle for consumer devices, including smartphones and PCs, has yet to materialize, leaving corporate productivity gains as the primary focus. However, the tangible benefits remain uncertain, casting doubt on the market’s AI-driven growth narrative.
