Investment prospects may not be good in 2025 after years of high returns.

In 2025, various asset classes are expected to face greater challenges in terms of market valuations. With generous monetary and fiscal policies, injecting trillions of dollars into the economy through measures like debt moratoriums, stimulus checks, PPP loans, childcare tax credits, and employee retention assistance, all asset classes saw significant increases.

Car and housing prices soared, stocks, bonds, cryptocurrencies—almost all assets achieved high returns. However, the current situation is different.

During the pandemic, most liquid assets have been depleted, and asset classes seem to have reached or are close to their peak, at a turning point. If your portfolio holds a significant amount of these assets, you may need to consider reducing your holdings. Let’s take a look at some categories worth monitoring.

The US stock market has shown strong performance for two consecutive years, raising caution as the likelihood of a third year of strong performance is low. By almost any measure, its valuations have reached historical highs.

Paul Jackson, Global Head of Thought Leadership and Asset Allocation Research at Invesco, stated, “Although the stock market generally performs well in an economic upswing, the strong performance in 2023 and 2024, coupled with the high valuations in the US, make global stock market returns a challenge.”

Uncertainties exist regarding the fiscal and trade policies to be implemented by President Trump. 70% of the US GDP growth comes from consumer spending, while another major component is government spending. Both need to slow down due to excessive debt associated with seemingly out-of-control expenditures.

Elon Musk is set to co-head the Department of Government Efficiency, promising cost reduction, spending cuts, and downsizing of government personnel. Consumer credit card debt has exceeded $1 trillion, with increasing delinquencies. As GDP growth stagnates, corporate revenue and earnings will also slow down.

Currently, the S&P 500 Index’s Price/Earnings (P/E) ratio exceeds 30 times, roughly twice the historical average and median.

The Buffett Indicator, measuring the relative value of the US stock market to the overall US economy, has reached its historic peak. Its normal or benchmark value is 100%, but currently stands at over 200%. This calculation is based on a total market value of $60.9 trillion and a GDP of $29.2 trillion.

To bring stock prices closer to historical average levels, given the current stock prices and GDP, the market would need to drop by 50%. However, if the economy slows down, considering excessive national, corporate, and household debts, the adjustment could be more severe.

The best way to evaluate high-yield bonds is by looking at the “spread.” The high-yield bond spread is the difference in yields between high-yield bonds and investment-grade bonds (like government bonds). Since high-yield bonds entail higher default risk, they offer higher yields.

Currently, the spread is far below historical average levels. As of January 15, the high-yield bond spread was 272, at least the lowest level since January 2020, far below the peak of 108.7 in March 2020, second only to a similar low point in mid-November 2024.

Gold had a stellar performance in 2024, with its price on commodity exchanges rising over 21% to date.

Despite strong performance in 2024, if inflation is controlled and interest rates stabilize, gold may face resistance. The ongoing strength of the US dollar makes it more expensive for holders of other currencies to buy gold.

If the US economy grows rapidly, interest rates may be higher, making interest-bearing assets more attractive compared to gold. Conversely, an economic slowdown may lead to the sell-off of overvalued assets. Typically, in an economic recession, the first assets to be liquidated are the so-called “risky assets,” like speculative assets such as gold and cryptocurrencies.

If the US economy experiences rapid growth, we might see higher interest rates, which, in turn, could make interest-bearing assets relatively more attractive than gold. Conversely, perhaps counterintuitively, an economic slowdown may result in the liquidation of inflation-linked assets. In general, in an economic recession, the first assets to be monetized (sold) are the so-called “risky assets,” such as gold and cryptocurrency speculations.

If inflation is controlled, the demand for gold as an inflation hedge may decrease. Gold is usually seen as an inflation hedge, but the Consumer Price Index (CPI) has been decreasing. From 9.1% in June 2022, it is now close to the Federal Reserve’s 2% target.

If the economy ultimately slows down in 2025, the Federal Reserve may cut interest rates. In such a scenario, the price of gold could be negatively impacted. Market sentiment changes toward speculative investments could also affect gold negatively.

Bitcoin and other cryptocurrencies recently experienced parabolic surges due to excitement over new Bitcoin investment tools and Trump’s support for Bitcoin as a strategic reserve, pushing Bitcoin to unprecedented heights.

Bitcoin soared from around $69,000 on election day to over $100,000 on December 4, hitting historical highs and fluctuating around this level.

These factors might lead to a decline in the price of gold in 2025. As Eren Sengezer of FXStreet noted, “If geopolitical tensions in the Middle East ease, or if the Russia-Ukraine crisis is resolved, the price of gold could see a significant pullback, as these conflicts have had a significant driving force on precious metal prices throughout 2024.”

These stocks are most sensitive to economic downturns, and if the economy slows down, they are likely to perform poorly. Many low-quality growth stocks have seen massive price appreciation, but now their market value appears too high relative to their earnings and growth potential. Therefore, at this stage, they have little room for further growth. In fact, a few quarters of poor performance are enough to trigger selling of these stocks.

From the trillions in monetary and fiscal stimulus during the pandemic to today’s wave of “free money” being nearly depleted, consumer spending is increasingly reliant on credit cards and depleted savings. Two-thirds of Americans live paycheck to paycheck, “one paycheck away from bankruptcy” in case of an unexpected event.

Although employment is stronger than at any time in half a century, future unemployment rates can only rise. Debt interest payment will erode capital and funding for production. Higher interest rates are taking a toll on the government (with $1 trillion in annual interest) and consumers (average credit card rates at 22.5%).

Almost all reputable financial analysts predict that 2025 will largely continue the bull market performance of the past two years.

While most viewpoints expect each asset class to soar in 2025, few hold a different perspective. However, some analysts have a pessimistic view on stimulus programs, foreseeing an economic recession next year.

I belong to the minority in this matter.